# UNITED STATES
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, 2006

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: Ordinary Shares, nominal value 1.0 New Israeli Shekels per share
(Title of Class)

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

# Not Applicable

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

# Not Applicable

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:

# 42,016,674 ordinary
shares

Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.

|    |   
|--- | --
|Yes | No

---

If
this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.

|    |   
|--- | --
|Yes | No

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 | No

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer.

|                        |                   |                      
|----------------------- | ----------------- | ---------------------
|Large accelerated filer | Accelerated filer | Non-accelerated filer

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

|        |        
|------- | -------
|Item 17 | Item 18

If
this is an annual report, indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).

|    |   
|--- | --
|Yes | No

---

|         | Table of Contents                                                               | Page
|-------- | ------------------------------------------------------------------------------- | ----
|        
|         | International Disclosures Standards                                             | 1   
|Item 1   | Identity of Directors, Senior Management and Advisors                           | 1   
|Item 2   | Offer Statistics and Expected Timetable                                         | 1   
|Item 3   | Key Information                                                                 | 1   
|Item 4   | Information on the Company                                                      | 14  
|Item 4A  | Unresolved Staff Comments                                                       | 83  
|Item 5   | Operating Financial Review and Prospects - Management's Discussion and Analysis | 84  
|Item 6   | Directors, Senior Management and Employees                                      | 109 
|Item 7   | Major Shareholders and Related Party Transactions                               | 121 
|Item 8   | Financial Information                                                           | 124 
|Item 9   | Offer and Listing                                                               | 126 
|Item 10  | Additional Information                                                          | 128 
|Item 11  | Quantitative and Qualitative Disclosure of Market Risk                          | 140 
|Item 12  | Description of Securities Other than Equity Securities                          | 140 
|Item 13  | Defaults, Dividend Arrearages and Delinquencies                                 | 140 
|Item 14  | Material Modifications to the Rights of Security Holders and Use of Proceeds    | 140 
|Item 15T | Controls and Procedures                                                         | 140 
|Item 16  |                                                                                 | 142 
|Item 17  | Financial Statements                                                            | 143 
|Item 18  | Financial Statements                                                            | 143 
|Item 19  | Exhibits                                                                        | 210 

(i)

---

# 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, 2002, 2003, 2004, 2005 and 2006 are derived from our audited consolidated
financial statements of which the financial statements as of December 31, 2005 and 2006
and for each of the years ended December 31, 2004, 2005 and 2006, appear later in this
Form 20-F. The audited financial statements have been prepared in accordance with U.S.
GAAP.

1

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|                                              | Year Ended December 31                                           
|--------------------------------------------- | -----------------------------------------------------------------
|
|                                              | (U.S. dollars in millions except for share and per share amounts)
|Income Statement Data:                        |                                                                  
|Revenues                                      |                                                                  
|Cost of revenues                              |                                                                  
|Restructuring Expenses                        |                                                                  
|Gross profit                                  |                                                                  
|Research and development                      |                                                                  
|expenses, net                                 |                                                                  
|Marketing, selling, general and               |                                                                  
|administrative expenses, net                  |                                                                  
|In-process research and                       |                                                                  
|development write-off                         |                                                                  
|Operating income                              |                                                                  
|Finance expenses                              |                                                                  
|Other income (expenses), net                  |                                                                  
|Income before                                 |                                                                  
|taxes on income                               |                                                                  
|Taxes on income                               |                                                                  
|Equity in net earnings (loss) of              |                                                                  
|affiliated companies and                      |                                                                  
|partnership                                   |                                                                  
|Minority interest in losses   of subsidiaries |                                                                  
|Net income                                    |                                                                  
|Earnings per share:                           |                                                                  
|Basic net income per                          |                                                                  
|share                                         |                                                                  
|Weighted average number of                    |                                                                  
|shares used in computation of                 |                                                                  
|basis net income per share                    |                                                                  
|(in thousands)                                |                                                                  
|Diluted net income per                        |                                                                  
|share                                         |                                                                  
|Weighted average number of                    |                                                                  
|shares used in computation of                 |                                                                  
|diluted net income per share                  |                                                                  
|(in thousands)                                |                                                                  

_________________

* Includes acquired in-process
research and development write-off of $8.5.

2

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|                          | Year Ended December 31                                           
|------------------------- | -----------------------------------------------------------------
|
|                          | (U.S. dollars in millions except for share and per share amounts)
|Balance Sheet Data:       |                                                                  
|Cash, cash equivalents    |                                                                  
|and short-term            |                                                                  
|investments               |                                                                  
|Long-term deposits and    |                                                                  
|trade receivables         |                                                                  
|Working capital           |                                                                  
|Short-term debt           |                                                                  
|Long-term debt            |                                                                  
|Share capital             |                                                                  
|Shareholders' equity      |                                                                  
|Total assets              |                                                                  
|Outstanding ordinary      |                                                                  
|shares of NIS 1 par       |                                                                  
|value (in thousands)      |                                                                  
|Dividends paid per        |                                                                  
|ordinary share with       |                                                                  
|respect to the applicable |                                                                  
|year                      |                                                                  

_________________

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

3

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# 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, as amended, and Section 21E of
the U.S. Securities Exchange Act of 1934, as amended. 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:

| |  |  | terminate,
reduce or modify contracts or subcontracts if their requirements or budgetary constraints
change;
| | - |  | ------------------------------------------------------------------------------------------------------------

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

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| |  |  | shift
spending priorities into other areas or for other products; and
| | - |  | ---------------------------------------------------------------------

| |  |  | 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.

We depend on international
operations. We depend on sales to customers throughout the world. 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
are mainly for fixed periods of 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.

5



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Our contracts may be terminated
for convenience of the customer or for default. 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 under the applicable contract to reimbursement for our
incurred contract costs and a proportionate share of our fee or profit for work actually
performed. If, however, it is determined that we are not entitled to such compensation, it
could cause us to suffer corresponding losses. Moreover, if in the remote event that any
of our contracts would be terminated for default due to our failure to meet material
contractual obligations, we could face liability in certain cases in excess of the amounts
paid or payable to us under the applicable contract.

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
recognized. In addition, although we have extensive experience in these types of programs,
there is difficulty in forecasting long-term costs and schedules and the potential
obsolescence of products or components related to long-term fixed-price contracts,
particularly in contracts that contain extended warranty or logistic support obligations.

We sometimes participate in
risk-sharing contracts.  We sometimes participate in
risk-sharing type contracts, in which our non-recurring costs are only
recoverable if there is a sufficient level of production sales for the applicable product,
which level of sales typically is not guaranteed. If production sales do not occur at the
level anticipated, we may not be able to recover our non-recurring costs under the
contract.

We face fluctuations in
revenues and profit margins.  The level of our revenues may fluctuate over
different periods. These fluctuations may not relate only to changes in pricing or sales
volume, and 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 performance 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 of changes in estimating gross
profits that are recorded in results of operations on a cumulative catch-up basis. See
below  Item 5.

6



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Operating Financial Review and
Prospects  Managements Discussion and Analysis  General  Critical
Accounting Policies and Estimates. As a result, the overall profit margin in a particular
period is influenced by a number of conditions. These include the type, 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 usually 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.

We sometimes face currency
exchange risks.  As more of our revenues are generated in currencies other
than the U.S. dollar, mainly in Great Britain Pounds (GBP) and in Euro, our level of
revenues and profit may be adversely effected by exchange rate fluctuations if our
position is not fully hedged. Also, we may face exchange rate risks when our contracts
call for payments in New Israeli Shekels (NIS). See below Risk Related to Our
Israeli Operations  Changes in the U.S. Dollar NIS Exchange Rate and
Item 5. Operating Financial Review and Prospects  Management Review and Analysis
 Impact of Inflation and Exchange Rates.

We may not be able to
consolidate the financial results of some of our subsidiaries. One of our
subsidiaries currently is considered for accounting purposes as a variable interest entity
(VIE), and we are considered the primary beneficiary, enabling us to consolidate its
financial results in our consolidated financial statements. In the event that in the
future a company we hold as a VIE would not longer meet the definition of a VIE, or we are
deemed not to be the primary beneficiary, we would not be able to consolidate line by line
that entitys financial results in our consolidated financial statements.

We may experience production
delays or liability if suppliers fail to make compliant or 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 our sole source. If a supplier should stop delivery of such components,
finding another source 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, and 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

7



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customer may affect our ability to
obtain payments under our subcontract. This could have a material adverse affect on our
operating results.

We operate in a competitive
industry. The defense electronics and electro-optics, platform upgrade, C4ISR,
homeland security and commercial aircraft product markets in which we participate are
highly competitive and characterized by 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.

We are subject to the
increasingly restrictive publicly traded company regulatory environment.  As
a company whose shares are publicly traded both in the United States and in Israel, we are
subject to the increasingly restrictive regulatory requirements applicable to publicly
traded companies. These regulations, including the U.S. Sarbanes-Oxley Act and other laws
and regulations, impose new and stringent requirements, which we are in the process of
implementing in compliance with regulatory deadlines. Failure to timely implement such
requirements could adversely affect us.

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:

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

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

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

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

| |  | our
patents may expire, thus providing competitors access to the applicable technology;
|- |  | ---------------------------------------------------------------------------------------

8



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| |  | competitors
may independently develop products that are substantially equivalent or superior to our
products or          circumvent intellectual property rights; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | competitors
may register patents in technologies relevant to our business areas.
|- |  | --------------------------------------------------------------------------------

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. Moreover, it may be difficult for us to restrict our competitors from gaining
access to the expertise of our former employees who may be hired by those competitors.

We may face labor relations disputes or not be able to amend
collective bargaining agreements in a timely manner.A number of our
subsidiaries in Israel and other countries are parties to collective bargaining agreements
that cover a substantial number of the Groups employees. These agreements contain a
range of conditions that vary depending on the applicable company or professional group
and are for various periods of time. Disputes with trade unions or similar types of labor relations
difficulties as well as failure to timely amend or extend collective bargaining agreements
could lead to worker disputes, slow-downs, strikes and other measures, which could
negatively impact our results of operations.

Our industry has experienced
significant consolidation.  As the overall number of companies in the
defense industry has decreased in recent years, the industry has experienced substantial
consolidation, thus 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. Moreover,
several of our recent acquisitions involve companies with collective bargaining agreements
applicable to a significant number of the companys employees. In addition, we have
expanded and may continue to expand the scope and geographic area of our operations. We
believe this growth will increase the complexity of our operations and the level of
responsibility exercised by both existing and new management personnel. Failure to
successfully integrate and manage our growth may have a material adverse effect on our
business, financial condition, results of operations or prospects.

Our acquisitions are subject to
governmental approvals. Most countries require local governmental approval
of acquisition of domestic defense industries, which approval may be denied if the local

9



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government determines the acquisition
is not in its national interest. We may also encounter anti-trust issues in certain areas
as our operations expand. Failure to obtain such governmental approvals could negatively
impact our future business and prospects.

Our due diligence in
acquisitions may not adequately cover all risks. There may be liabilities
or risks that we fail or are unable to discover in the course of performing due diligence
investigations relating to businesses we have acquired or merged with or may acquire in
the future. Examples of these liabilities include employee benefits contribution
obligations, estimated costs to complete contracts, non-compliance with applicable
environmental requirements or infringement of third party intellectual property rights 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 with limited due diligence or without
performing due diligence at all.

10



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# 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. In the summer of 2006 Israel experienced a
war with Hezbollah militants in Lebanon. There is no assurance that the current political
situation with Israels neighbors will improve or, if it did, that the political and
economic situation in Israel would improve as a result. These political, economic and
military conditions in Israel could have a material adverse effect on our business,
financial condition, results of operations and prospects.

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 and with the war in Lebanon. However, no assessment can be made as to the
full impact of such requirements on our workforce or business if conditions should change

Israels economy may
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 and
could adversely affect our business.

11



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Changes in the U.S. dollar
 NIS exchange rate.  The exchange rate between the NIS and the U.S.
dollar has fluctuated in recent years. For example, at the end of 2004, 2005 and 2006, the
NIS/U.S. dollar exchange rate was 4.308, 4.603 and 4.225, respectively. This represented a
devaluation of approximately 6.8% in 2005 and an increase of approximately 8.2% in 2006.
During the first five months of 2007, the strengthening of the NIS against the U.S. dollar
continued, and the NIS/U.S. dollar exchange rate as of May 31, 2007 was 4.033. 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, which over the past year has undergone numerous fluctuations, 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 as well as funding for the development of technologies and products.
The benefits available under these programs depend on meeting 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.

Israeli law regulates
acquisition of a controlling interest in Israeli defense industries.  Recent
Israeli legislation regarding the domestic defense industry requires Israeli Government
approval of an acquisition of a 25% or more equity interest (or a smaller percentage that
constitutes a controlling interest) in companies such as Elbit Systems. This
could limit the ability of a potential purchaser to acquire a significant interest in our
shares. See below  Item 4. Information on the Company  Governmental Regulation
 Approval of Israeli Defense Acquisitions.

12



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Israel is enhancing its export
control regulations.  In 2006, the Israeli Government adopted regulations
regarding the export of dual use items, and a bill is currently pending before
the Knesset regarding enhanced defense export controls. Should government approvals
required under these regulations not be obtained, our ability to export our products from
Israel could be negatively impacted, including revocation of authorizations previously
granted, thus causing a reduction in revenues. See below  Item 4. Information on the
Company  Governmental Regulation  Israeli Export Regulations.

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.

13



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|Item 4. |  | Information
on the Company
|------- |  | --------------------------

Business Overview

Principal
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, including
unmanned vehicles, for defense and homeland security applications. We also perform upgrade
programs for airborne, land and naval defense platforms, often as a prime contractor.
Moreover, we develop and manufacture avionic and aerostructure products for the commercial
aviation market. In addition, we provide a range of support services.

Our
major areas of operations include:

| |  |  | military
aircraft and helicopter systems and upgrades;
| | - |  | ------------------------------------------------------

| |  |  | helmet
mounted systems;
| | - |  | -----------------------

| |  |  | electronic
warfare (EW) and signal intelligence (SIGINT) systems;
| | - |  | -----------------------------------------------------------------

| |  |  | commercial
aviation products;
| | - |  | -----------------------------

| |  |  | land
vehicle systems and upgrades;
| | - |  | ----------------------------------

| |  |  | military
communications systems and equipment;
| | - |  | ----------------------------------------------

| |  |  | C4I
and government information systems;
| | - |  | ---------------------------------------

| |  |  | unmanned
air vehicle (UAV) systems;
| | - |  | -----------------------------------

| |  |  | electro-optic
and countermeasures systems and products;
| | - |  | -------------------------------------------------------

| |  |  | homeland
security systems;
| | - |  | --------------------------

| |  |  | naval
systems; and
| | - |  | ------------------

| |  |  | technology
spin-offs and other commercial activities.
| | - |  | -----------------------------------------------------

14



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Many
of 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.

Principal
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. 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, unmanned
ground vehicles (UGVs), unmanned surface vessels (USVs) remote controlled systems, 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 continue to perform platform upgrades and
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 Ltd. was initially incorporated in the
State of Israel in 1966 as Elbit Computers Ltd. Then, in 1996, Elbit Systems was formed 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.

15



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In
2000, Elbit Systems merged with Elop Electro-Optics Industries, Ltd. (Elop). Following the
merger, Elop (currently known as Elbit Systems Electro-Optics Elop Ltd.) became a
wholly-owned subsidiary of Elbit Systems. Elop has 70 years of experience in the
electro-optics area. The merger enhanced our position as the largest non-government owned
defense company in Israel.

During
the last two years, in addition to smaller acquisitions, we acquired a 70% interest in
Elisra Electronic Systems Ltd. (Elisra) and a 100% interest in Tadiran Communications Ltd.
(Tadiran Communications). See below  Recent Acquisitions and
Divestitures. As a result of such acquisitions and internal growth we became
among Israels largest contractors in terms of defense revenues.

As
a corporation domiciled and incorporated in Israel, we operate under the Israeli Companies Law  1999.

Trading
Symbols and Address

Elbit
Systems shares are traded on the Nasdaq National Market (Nasdaq), as part of the
Nasdaq Global Select Market, 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.

# Major Activities

Military
Aircraft and Helicopter Programs and Systems. We supply advanced
airborne electronic and electro-optic systems and products to leading military 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, stabilized
line-of-sight payloads, aerial reconnaissance systems, store management systems, digital
video recording systems, laser 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
military airborne platforms including:

| |  |  | 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, B-2, Mirage, AL-X, AM-X, IAR-99 and AT-63 Pampa; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | helicopters
such as the CH-47, CH-53, Cobra, Puma, Super Puma, OH-58 Kiowa Warrior, AH-64 Apache,
Agusta 129, ARH, H-60 Blackhawk, S-70 Blackhawk, MI-8, MI-17, MI-24, Linx and EC225, as
well as the V-22 Osprey tilt rotorcraft.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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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.

EW
and SIGINT Systems. Through our 70%-owned subsidiary Elisra, we supply a range of
self-protection suites and systems for airborne platforms including advanced EW and
electronic countermeasure systems, communications jammer solutions, missile warning
systems, laser warning systems and radar warning receivers. Elisra also furnishes SIGINT
 electronic intelligence (ELINT), communications intelligence (COMINT) and direction
finding (DF)  systems designed for air, ground and naval platforms and applications.

Commercial
Aviation Systems. We design and manufacture a range of products and systems for the
commercial aviation and general aviation markets. Our commercial aviation product line
includes the Vision Based Cockpit  concept, incorporating our All Weather
Window®Enhanced Vision System (EVS), our General Aviation  Vision
System (GAViSTM), our Advanced Technology Head-Up Display (AT-HUD) and
Micro-ViS head-up display system, and our Advanced Flight Display System (AFDS). We
supply cabin pressurization systems, air data test equipment, air data processor/sensor
systems, head-up displays, EVS, moving map systems for helicopters and flight instruments
for the general aviation market. Our legacy products for commercial aircraft include
altimeters, pressure meters, cockpit indicators and avionics test equipment. Our
commercial avionics systems are employed on aircraft such as the Gulfstream 150, 200, 300,
350, 400, 450, 500 and 550, the Boeing MD-10 and MD-11, the Airbus A300 and A310, the
Cessna CJ 1, 2, 3 and 4 Bravo, XLS, Citation Mustang, ENCORE, Beechcraft/Raytheon Hawker
400XP and 800XP and King series, and on EC-725 helicopters. In May 2006, we acquired a 20%
interest in Sandel Avionics, Inc. (Sandel) which develops and produces flight instruments,
primarily for the general aviation market. We also produce avionic suites, including
electronic flight instrumentation systems and flight management systems for commercial
helicopters as well as produce aerostructure parts for commercial aircraft.

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, unmanned turrets, overhead remote control weapon
stations, battle management systems, FLIRs, gunners and commanders sights,
lasers range finders, laser warning systems, threat detection systems, reconnaissance
systems, displays, life support systems and hydraulic systems for tanks, personnel
carriers and other combat vehicles. We develop and supply unmanned ground vehicles and
robotic devices 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,
MTVR, AMX-30, SK-105, MK-109, ULAN, Pandur, LAV, Patria AMV and Piranha III.

17



---

Military
Communications Systems and Products. Our wholly-owned subsidiary, Tadiran
Communications, supplies military communications systems and products for a wide range of
customers worldwide. Specializing in radio communications, Tadiran Communications develops
and supplies solutions for voice, data and video (multimedia) applications in a broad
range of frequencies, starting at the VLF band though HF, VHF, UHF to the C-band and
further on in the mm wave band. The range of products and systems facilitate secured and
ECCM immuned voice and broadband data communications, covering the communication needs of
all levels of the military echelons. Military product lines include short and medium-range
VHF radio systems, long-range HF radio systems, multi-band VHF-UHF handheld/manpack
radios, line-of sight multi-channel radio systems, ruggedized computers/communication
terminals and personal digital assistance devices (RPDAs), integrated communications
systems combining wireless (radio) and wired (telephony) communications, military wireless
broadband systems based on WiMAX technology, IP/LAN/WAN networks and situation awareness
systems.

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, satellite
communication systems, wireless communication 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 C4I systems and products
for infantry soldiers. This includes our prime contractor role for the Israeli Future
Infantry Soldier 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.

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® and Skylark®
families of UAVs. 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.

Electro-Optic
and Countermeasures Systems. Through Elop, our wholly-owned subsidiary, we design and
manufacture a full range of electro-optics sensors and systems for space, air, land and
sea applications. Other of our subsidiaries are also engaged in the development and
production of electro-optic products. The range of electro-optics products includes space
cameras and telescopes and specialized sensors, airborne reconnaissance and observation
systems, ground integrated sights and robotic sensors, FLIRs for land, naval and airborne
applications, laser range finders and laser designators based on flash pumped and diode
pumped technologies used by infantry soldiers and 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. Elops
ISR related business activities  space cameras, airborne reconnaissance and
observation & surveillance  share a broad infrastructure of technologies that
provide imagery intelligence (IMINT), long-range

18



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observation solutions for space, air,
sea and land based sources. In the space area, Elop also maintains in-house Israels
national space electro-optics infrastructure and is currently a principal subcontractor
for the Israeli Ofek satellites. In addition, Elop supplies dedicated satellite payloads
for space research and advanced multi-spectral and high resolution pan-chromatic cameras
for commercial satellites.

Homeland
Security Systems. We design, manufacture and integrate a wide range of security
systems and products. These include integrated land, maritime and coastal control and
surveillance systems, airport and seaport security systems, border control systems, access
and border registration control systems, transportation security, C4I homeland security
applications, facility perimeter security products, electronic fences, electro-optic
surveillance systems and tactical mini-UAVs for defense, police, airport, border
patrol, coast guard, critical infrastructure protection and homeland security uses.

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, shipboard decoy countermeasure launching
systems and unmanned surface vessels.

Technology
Spin-Offs and Other Commercial Activities.We are engaged in spin-offs of our defense
technologies to commercial applications as well as other commercial activities. Our
spin-off and other commercial activities to date are in the areas of medical equipment,
commercial satellites, satellite communications for commercial aircraft, commercial
communications systems, commercial information technology applications, microwave
technology, night vision systems for automobiles and general manufacturing services.

# Revenues

The
table below shows our consolidated revenues for groups of major areas of operations for
the years ended December 31, 2004, 2005 and 2006:

|                                                       |  |  |                            | 2004 |  |   | 2005  |  |   | 2006  | 
|------------------------------------------------------ |  |  | -------------------------- | ---- |  | - | ----- |  | - | ----- | 
|                                                       |  |  |                            |      |  |   |      
|                                                       |  |  | (U.S. dollars in millions)
|Airborne Systems:                                      |  |  | $                          | 368  |  | $ | 421   |  | $ | 548   | 
|                                                       |  | 
|Land Vehicle Systems:                                  |  |  |                            | 199  |  |   | 117   |  |   | 318   | 
|                                                       |  | 
|C4ISR Systems:                                         |  |  |                            | 109  |  |   | 218   |  |   | 313   | 
|                                                       |  | 
|Electro-Optic Systems:                                 |  |  |                            | 200  |  |   | 242   |  |   | 223   | 
|                                                       |  | 
|Other (mainly non-defense engineering and production): |  |  |                            | 64   |  |   | 72    |  |   | 121   | 
|                                                       |  |  |                            |      |  |  
|                                                       |  | 
|Total:                                                 |  |  | $                          | 940  |  | $ | 1,070 |  | $ | 1,523 | 
|                                                       |  |  |                            |      |  |  

19



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The
following table provides our consolidated revenues by geographic region, expressed as a
percentage of total revenues for the periods indicated:

|              | 2004 | 2005 | 2006
|------------- | ---- | ---- | ----
|             
|Israel        | 26%  | 29%  | 27% 
|United States | 37%  | 37%  | 40% 
|Europe        | 13%  | 10%  | 15% 
|Others        | 24%  | 24%  | 18% 

# Systems and Products

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

Military
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 kits for guiding precision weapons launched from
aircraft.
| | --------------------------------------------------------------------------------------------------

| | Cockpit
Instrumentation altimeters, pressure meters, cockpit indicators and avionics
test equipment.
| | -----------------------------------------------------------------------------------------------------

| | Simulators  for
airborne and ground training.
| | ----------------------------------------------

20



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| | 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        for mapping of cockpits to enable accurate line of sight
alignment in a cockpit.
| | ----------------------------------------------------------------------------------------------------------------

| | Fast
Characterization Tool (FACT)        characterizing (mapping) electro-magnetic volumes
using advanced adaptive technologies for line of sigh alignment in a cockpit or
elsewhere.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EW
and SIGINT Systems

| | EW
Suites     advanced self protection integrated capabilities for various types of
combat aircraft, naval and ground platforms, covering multi-spectral bands (RF, Laser and
IR).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SIGINT
Systems        full electromagnetic spectrum, SIGINT (ELINT, COMINT and DF) systems
for tactical and strategic intelligence gathering for airborne, ground and naval
applications.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Electronic
Counter Measures (ECM)        wide range of systems for self protection and
electronic attack for airborne, naval and ground platforms including SPJ (Self Protection
Jammer), EJ (Escort Jammer) and COMJAM (Communication Jammer).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Counter
Improvised Explosive Devices (CIED)        a range of electronic jammer anti-bomb
products, including cellular selective jammer and protection systems from IEDs.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Data
Links and Video Dissemination Systems        smart data link solutions for unmanned
platforms, guided weapons and satellites and video dissemination for airborne, ground and
naval applications.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21



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| | Microwave
and Microelectronic Solutions        wide range of products including components,
super components and microelectronics for EW, radar and communication systems.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Spectrum
Management & Control Systems  for security and commercial government
requirements.
| | --------------------------------------------------------------------------------------------

| | Search
and Rescue Systems        advanced solutions for pilots and rescue teams for the
combat arena as well as personal search and rescue systems for non-combat situations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commercial
Aviation Systems

| | Vision-Based
CockpitTM     integrated cockpit concept utilizing real-time and
synthetic vision systems seamlessly integrated with new head-up and head-down displays
for the cockpits of the future.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Enhanced
Vision Systems (EVS)        for improving the capability of aircraft to execute
precision approaches, safely land in fog, rain snow and other reduced visibility
conditions thereby reducing CFIT accidents, and providing improved situational awareness
during ground operations aiding in runway incursion accident reductions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | General
Aviation Vision System (GAViSTM)        low-cost IR based vision system
that mounts like an antenna for general aviation aircraft to provide increased
situational awareness at night and in other low visibility conditions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advanced
Flight Display System        for assisting the air crew in flight and mission
management, navigation, and communication while reducing pilot workload and increasing
flight safety in both VFR and IFR flight conditions, and allows the display of all
primary flight information, navigation data, weather radar, or digital maps.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Head-Up
Displays        new technology LCD head-up displays for air transport, high-end
business aircraft and general aviation aircraft.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | Air
Data Computers and Sensors  aircraft air data computers, processors, probes and
sensor modules.
| | ----------------------------------------------------------------------------------------------------

| | Digital
Air Data Test Sets        digital flight line and shop repair testers.
| | -------------------------------------------------------------------------------

| | Cabin
Pressurization Systems  modern solid-state technology, automatic cabin
pressurization control systems designed to minimize cost, weight, and panel space, and
meet the needs of modern glass cockpits of business and commuter aircraft.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commercial
Helicopter Avionics  avionic suites, including electronic, flight
instrumentation systems and flight management systems for civil rotorcraft.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

22



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| | Cockpit
Instruments  altimeters, pressure meters and cockpit indicators.
| | -------------------------------------------------------------------------

| | Aerostructure
Products  composite material structural parts for commercial aircraft.
| | -------------------------------------------------------------------------------------

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.
| | ----------------------------------------------------------------------------------------------------------------

| | Unmanned
Turrets 25/30 mm and Overhead Remote Controlled Weapon Stations 7.62 mm and 12.7 mm 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 360o independent panoramic target location and
identification and gun-turret direction, using day and night vision systems.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Laser
Warning Systemsand Threat Detection Systems  for identifying and
pinpointing the angular direction of laser sources generated by laser range finders and
laser guided and laser beamrider missiles.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ground
Electronic Countermeasures (GECM) Systems      for protection of ground vehicles
and convoys from Improvised Explosive Devices (IEDs) and other threats.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unmanned
Ground Vehicles (UGVs)  dedicated autonomous vehicles, equipped with sensory
perception and artificial intelligence capabilities for various land based applications.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Robotics
 mini-robotic devices used by land forces for tactical missions.

23



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| | Simulator
and Training Systems        for tank and fighting vehicle training, based on optical
and computerized image generation technology.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Hydraulic
Systems  for vehicle fueling, braking, suspension and power pack operation.
| | --------------------------------------------------------------------------------------

| | Life
Support Systems  for environmental, climate and nuclear, bacterial and chemical
(NBC) protection and control.
| | -------------------------------------------------------------------------------------------------------------------

Military
Communications Systems

| | Tactical
Radio Systems  comprehensive HF, VHF and UHF radio communications solutions for
the maneuvering tactical forces and headquarters featuring secured and anti-jamming voice
and data communications capabilities to enable efficient and effective command and
control at all echelon levels.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Multi-Channel
Radio (MCR) Systems      ECCM-capable, anti-jamming MCRs, especially suited for
dense military communications conditions, providing broadband, yet frequency-spectrum
efficient communications between headquarters.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advanced
Power Amplifiers  RF power amplifiers for ground mobile, shipborne, airborne
and fixed-station applications, covering a wide range of frequencies and power levels,
and featuring advanced linearization techniques, high capacity data handling
capabilities, low power consumption and high spectral efficiency.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Tactical
Computers and Communication Terminals  advanced and small rugged
handheld/mobile computers providing the combat echelons in the battlefield with digital
messaging and navigation capabilities in support of C4I applications and Ruggedized
Personal Digital Assistants (RPDAs), with functionalities similar to those of civilian
PDA products, providing digital mapping, navigation, route planning, situational
awareness, tactical information sharing, mission planning and other digital battlefield
applications under combat conditions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Integrated
Radio Communication System (IRCS)  combines a diverse range of communications
networks including regular telephony, wireless communications and newer technology-based
networks such as IP and fiber optics into one integrated network.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Power
HF Communication System  a turn key, advanced high-power HF radio communication
system with optimized resource management and allocation facilities and automatic backup
for strategic fault-free, long-range operational needs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bro@dNet
Communication System  for point-to-multi-point, high-capacity broadband,
IP-based data, video and voice communications based on wireless broadband WiMAX
technology.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | AW@RENET
Communication System  a tactical situation awareness command, control and
communication system that enables the commanders and soldiers in the field to access and
share real-time tactical information via tactical radio networks by means of end-to-end
IP tactical internet connectivity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24



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| | Mobile
Net Communication System  compact and scalable, out-of-the-boxsecured
cellular mobile network solution for fast-deployment applications.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | MAXESS
Military Wireless LAN  immune wireless systems for wideband data transmission,
with high survivability in dynamic and noisy military environments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Combat
NG Artillery Fire Control and C4I Systems        for C4I applications among field
artillery units deployed from the platform to brigade levels, managing all aspects of
artillery operations, including for theater missile defense applications.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ----------------------------------------------------------------------------------------------------

| | Digital
Soldier Systems  for future digital soldiers, equipping individual soldiers
with computers, helmets, communication systems and weapon systems.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

25



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| | TORC2H® integrated
operational command control headquarters system that closes the sensor to shooter loop,
facilitates data collection and border patrol operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | MapCore  software
design kit providing mapping capabilities for application programmers, capable of
manipulating 2D maps, 2.5D maps (2D maps with elevation) and 3D maps (terrain
visualization) in the applications user window and serving as an infrastructure for
developing moving map, mission planning and debriefing, C4ISR and Simulator systems.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Enhanced
Tactical Computers (ETC)  tactical computers comprised of modular military terminals
designed to withstand military environments and operate for military field use.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PCMCIA  communication controller modem installed in an ETC, providing high level
connectivity.
| | -----------------------------------------------------------------------------------------------

| | Tactical
Battle Group Trainers  for training commanders and staff from company level to
battalion battle group and brigade-sized operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | TIGER  tactical
internet geographic dissemination in real-time system, providing real-time quality
decision making information to various levels of combined forces.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Information
Technology Systems     for crime prevention, information management, border control
and other governmental applications.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | Integrative
Component-based Exploitation (ICE) System       integrative component based
exploitation system designed to provide 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

26



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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®I  electrically
propelled man-packed close range UAV systems for Company Battalion level support
missions.
| | -------------------------------------------------------------------------------------------------------------------

| | Skylark®II
 electrically propelled and highly covert short-range UAV system providing
Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR) capabilities to
Company  Brigade tactical echelons.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------

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 solid state flash lamp and diode pumped
technologies, including eye-safe systems.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Laser
Radars  for helicopter obstacle detection and avoidance during flight.
| | -----------------------------------------------------------------------------

| | 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 ground and airborne applications.
| | ---------------------------------------------------------------

27



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| | Aerial
Reconnaissance Systems     for long-range and day/night IMINT 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 for commercial and military space IMINT,
supplying high resolution ground images and for scientific space research.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Homeland
Security Systems

| | Long
and Short-Range Observation Systems  various integrated day/night/laser
designated surveillance solutions covering 1  15 kilometer observation and
detection ranges for security applications.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Electronic
Fences  high and dual technology (tot-wire and vibration cable)
electronic fences for border and airport applications.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | Border
and Coastal Surveillance Systems  integrated, C4I based systems for maritime,
coastal and border guard control, including C4I tactical pictures based on radars, EO
observation systems, tactical UAVs and surveillance vehicles.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Surveillance
Vehicles  integrated mobile solutions for radar-EO surveillance operation in
border, perimeter and coastal applications.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | Airport
Security Systems  integrated security control for airports providing civil
aviation authorities means to control airport perimeters, access to/from the indoor
areas, cctv and EO surveillance over perimeter and runways as well as security control
centers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Access
and Border Control Registration Systems  integrated IT/biometric solutions for
national border gates passengers and vehicle integrated screening for access, including
automatic point of entry (POE) applications.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Tactical
Mini-UAVs  for border and critical site surveillance and threat assessment
activities.
| | ------------------------------------------------------------------------------------------------

28



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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
EW Systems        electronic support measurements (ESM) for threat identification and
electro-magnetic analysis.
| | ---------------------------------------------------------------------------------------------------------------------------

| | Shipboard
SIGINT Systems  for a range of sea-based electronic intelligence applications.
| | -----------------------------------------------------------------------------------------

| | Shipboard
Communication Systems  for a range of seaborne communication applications.
| | -------------------------------------------------------------------------------------

| | Shipboard
Decoy Countermeasure Launching Systems        sophisticated countermeasures
deployment of chaff and flair against missile threats.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Unmanned
Surface Vehicles        unmanned naval systems for various maritime applications that
adapt the capabilities and applications of UAVs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Satellite
Communication Systems        VSAT communication systems with high band rate data and
voice transfer for land and naval forces.
| | -----------------------------------------------------------------------------------------------------------------------------------------

29



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Organizational
Structure

Principal
Subsidiaries

Our
beneficial ownership interest in our major subsidiaries and investees is set
forth below.    Our equity and voting interests in these entities are the same as our beneficial ownership
interests.



30



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Elbit
Systems of America

We
conduct most of our business in the United States through the Elbit Systems of America,
LLC (ESA), a Delaware limited liability company, and its group of wholly-owned
subsidiaries, including EFW Inc. (EFW), Kollsman, Inc. (Kollsman) and International
Enterprises, Inc. (IEI). ESA was formally established as a legal entity in January 2007.
ESA provides products and system solutions focusing on U.S. military, commercial aviation
and homeland security customers. Elbit Systems holds its 100% interest in the ESA
companies through a Delaware holding company Elbit Systems U.S. Corp. (ESC).

EFW.EFW
is incorporated in Delaware and based in Fort Worth, Texas. It focuses           on
design, development, production and life cycle support of mission critical
          systems for U.S. and allied military tactical platforms. 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. Since then 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, Viper Strike smart munitions,
the AH-64           Apache helicopter, the UH-60 Blackhawk helicopter, the OH-58D Kiowa
Warrior           helicopter, the Advanced Reconnaissance Helicopter (ARH), the A-10
aircraft, the           F/A-18 aircraft, the C-130 transport aircraft, the B-2 bomber
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. In addition, 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 military aircraft.

Kollsman.Kollsman,
Inc. (Kollsman) is a wholly-owned Delaware subsidiary located in           Merrimack, New
Hampshire. Kollsman is engaged in developing and manufacturing           cockpit
instruments and enhanced vision systems for civil and military aircraft           as well
as electro-optically enabled observation and targeting systems for           soldiers,
land vehicles and aircraft. Kollsman has also recently begun           activities in the
U.S. homeland security market. Through its wholly-owned           subsidiary, KMC
Systems, Inc., Kollsman is also involved in manufacturing           medical
instrumentation. In May 2006, Kollsman acquired a 20% interest in           Sandel, a
company engaged in integrated display and other products for the           general
aviation market.

IEI.International
Enterprises, Inc. (IEI) is 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           manufactured by a
variety of original equipment manufacturers (OEMs) 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.

ESAs
Major Customers.    Major customers of the ESA companies include Lockheed Martin
Corporation (Lockheed Martin), the Boeing Company (Boeing), the U.S. Army, U.S. Navy
(USN), U.S. Air Force (USAF), U.S. Marine Corps (USMC), the IMOD, Bell Helicopter Textron
Inc. (Bell Helicopter), Northrop Grumman Corporation, BAE Systems Inc., Gulfstream
Aircraft Corporation,

31



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Federal Express, Honeywell
International Inc., Oto Melara S.p.A. and CMI - Cockerill Mechanical Industries S.A.
Diamond Aircraft Industries, Inc. and Cessna Aircraft Company.

ESAs
Recent Contracts.    Recent contract awards include development and supply of very
long-range observation systems for the U.S. Secure Border Initiative Program, hand-held
thermal imaging and laser systems for the USMC, supply of urgent Operation Iraqi Freedom
(OIF) equipment for the USMC, ongoing maintenance of F-16 head-up displays and various
other avionic components, digital video recorder for the USAF B-2, upgrade of the USMC
(LAV) Command and Control vehicle, Night Targeting System (NTS) depot maintenance contract
for the USMC AH-IW Cobra helicopter, design of a new gunner display unit (GDU), for the
U.S. Army MLRS and HIMARS vehicles, multi-year production of electronic system for the
U.S. Army Bradley A-3, development and supply to Bell Helicopter of the helmet display and
tracking systems, data transfer systems and rocket interface units for the U.S. Army Armed
Reconnaissance Helicopter (ARH), development and manufacturing of primary flight displays
for F/A-18 E/F aircraft, design of a new mission computer for the U.S. Army AH-64 Apache
helicopter, development and supply of Enhanced Vision Systems and head-up displays for
Federal Express wide body aircraft, cabin pressurization system for the new Diamond jet,
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, semi-active
laser seekers for JDAM munitions, form-fit-function replacements for antenna positioning
power amplifiers for USAF Global Positioning Systems (GPS) ground stations and the design
and development of a helmet operational level tester (HOLT) for the Apache Integrated
Helmet and Display Sighting System (IHADSS).  See below Current Business
Operations  Aircraft and Helicopter Systems  Helmet Mounted Systems 
Land Vehicle Systems and Electro-Optical and Countermeasures Systems.

FMF. The
ESA companies also act as contractors for U.S. Foreign Military Funding           (FMF)
and Foreign Military Sales (FMS) 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 Georgia have significant maintenance and
repair capabilities. See below Manufacturing and Customer Satisfaction
and Quality Assurance.

SSA..    ESA
(currently through 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 the ESA
          companies in performing U.S. Government contracts. The SSA allows the ESA
          companies to participate in classified U.S. Government programs even though,
due           to its ownership by Elbit Systems, the ESA companies are considered under
the           control of a non-U.S. interest. Under the SSA, a Government Security
Committee           of ESAs board of directors was permanently established to
supervise and           monitor compliance with ESAs export control and national
security           procedures. The SSA also requires ESAs board of directors to
include           outside directors who have no other affiliation with the Elbit Systems
Group.           ESAs board of directors also contains officers of ESA and up to
two inside           directors, who have other affiliations with the Elbit Systems Group.
The SSA

32



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requires outside directors and
officers of the ESA companies 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) each own 50% of
VSI. Founded in 1996, VSI acts on a world-wide basis on behalf of Rockwell Collins 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 Rockwell Collins each have
provided VSI with licenses to use their helmet mounted display technologies. In general,
VSI subcontracts product development and production to its owners on an approximately
equal basis. Each owner has equal representation on VSIs management.

VSI
is the prime contractor to Boeing and Lockheed Martin for the design and manufacture of
the Joint Helmet Mounted Cueing System (JHMCS)for the USAF, and USN and U.S. Air
National Guard (ANG) F-15, F-16 and F/A-18 aircraft. VSI also has contracts to supply
helmet mounted display systems for fighter aircraft to the Israel Air Force (IAF) and
numerous other international customers. VSI has developed a dual-seater version of the
JHMCS and is in full scale JHMCS production.   In addition, VSI is under contract
to Lockheed Martin to develop the helmet mounted display system for the U.S. F-35 Joint
Strike Fighter (JSF). See below Current Business Operations  Helmet Mounted
Systems.

Elop

Based
in Rehovot, Israel, our wholly-owned subsidiary Elop 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. Elop has a broad customer
base, both in Israel and internationally.

Elop
designs, engineers, manufactures and supports a wide range of advanced electro-optic air,
space, land, naval and space systems and products described elsewhere in this Annual Report.
These include IMINT solutions, such as airborne reconnaissance systems and spaceborne
reconnaissance systems, observation and surveillance stabilized payloads, laser systems,
head-up displays, thermal imaging systems, integrated sights and robotic sensors for
ground applications 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; 
Homeland Security Systems; and Naval Systems.

33



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Tadiran
Communications

Tadiran
Communications Ltd. (Tadiran Communications) is a wholly-owned Israeli subsidiary of Elbit
Systems. In April 2007, we increased our ownership interest in Tadiran Communications from
43% to 100% through a tender offer issued under Israeli law. As a result of the tender
offer Tadiran Communications ceased to be a publicly traded company. See below
Current Business Operations  Recent Acquisitions and Divestitures 
Tadiran Communications.

Located
in Petah Tiqwa, Holon and Kiryat Shmona, Israel, Tadiran Communications has over 40 years
of experience in military and civilian communications technologies, with expertise in the
fields of RF design and development in frequencies ranging from 1.5 MHz to 5 GHz and 50
GHz to 60 GHz, spread spectrum techniques (e.g. frequency hopping and direct sequence),
crypto algorithms, modems for high-speed wireless data transfer applications; error
detection and correction methods and techniques adapted to radio channels; advanced
synchronization techniques; communication control and networking protocols; and radio over
IP (RoIP) and voice over IP (VoIP) technologies. In addition to being the main supplier of
tactical communication equipment to the IDF, Tadiran Communications is active in the
global military and non-military communication markets. Tadiran Communications has a
worldwide customer base for which it provides advanced communications technology,
equipment, systems and solutions.

Tadiran
Communications wholly-owned U.S. subsidiary, Talla-Com, Tallahassee Communications
Industries, Inc. (Talla-Com) and Talla-Coms wholly-owned U.S. subsidiary,
Tallahassee Technologies, Inc. (Talla-Tech), both based in Tallahassee, Florida, serve as
Tadiran Communications U.S. development, production and marketing arm, concentrating
their activities in the areas of advanced RF power amplifiers, military tactical computers
and support for the legacy SINCGARS radios. Talla-Com also participates in FMS and FMF
projects. Talla-Tech operates under a SSA. Tadiran Communications wholly-owned (as
of June 2006) 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. Tadiran Communications wholly-owned
Israeli subsidiary, Snapshield Ltd., designs, develops, markets and supplies managed
security solutions for wired and wireless telecommunications for military and non-military
applications.

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 aerostructure  parts for civil and military           aircraft. Cyclone also
performs maintenance, integration of systems and upgrades           for aircraft and
helicopters. In 2005, Cyclone acquired the assets of Israel Military Industries Ltd. (IMI) Aircraft
Systems Division, which is involved in manufacturing weapons pylons and
          external fuel tanks for fighter aircraft. 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 USAF, Boeing, Lockheed Martin,
          Spirit AeroSystems Inc., 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.

34



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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.

ELSEC.    Elbit Security Systems Ltd. (ELSEC) (formerly Ortek Ltd.) is a
          wholly-owned Israeli subsidiary of Elbit Systems. Located in Sderot, Israel,
          ELSEC operates mainly in the fields of homeland security: EO surveillance
          systems, E-fences, border and coastal integrated security systems, aviation
          security systems, airport security systems and strategic perimeter sites
          security. ELSEC is participating in the coastal and border security programs in
          Israel, the U.S. and a range of other countries. See below Current
          Business Operations  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.

Elisra

Elisra
is a privately-held Israeli company located in Bnei Brak, Israel, held 70% by Elbit
Systems with the balance being owned by Elta Systems Ltd., a subsidiary of IAI. Elisra has
two principal wholly-owned Israeli subsidiaries  Tadiran Electronic Systems Ltd.
(Tadiran Systems) and Tadiran Spectralink Ltd. (Tadiran Spectralink), each located in
Holon, Israel.

Elisra
and its subsidiaries provide a wide range of EW, SIGINT and C4ISR technological solutions.
Elisra and its subsidiarys products are designed for naval, airborne and ground
platforms and applications. Their main business areas include EW suites, airborne warning
systems, SIGINT (including ELINT and COMINT) systems, electronic counter measures
(including ECM and COMJAM), C4I systems for theater missile defense and artillery (through
Tadiran Systems), spectrum management & control systems (through Tadiran Systems),
smart datalink solutions for UAVs, guided munitions and satellites, video dissemination
systems for naval, ground and combat aircraft applications (through Spectralink), search
and rescue systems (through Spectralink), counter IED solutions (through Elisra and
Tadiran Systems) and a range of microwave and microelectronic products.

U-TacS.    UAV
Tactical Systems Ltd. (U-TacS) is a British subsidiary, held 51% by           Elbit
Systems (through a wholly-owned holding company  Elbit Systems UK
          Limited), with the balance being owned by Thales UK Limited, a subsidiary of
          Thales S.A. (France). U-TacS main business is to perform a major part of
          the Watchkeeper Program and other related programs.See below
          Current Business Operations  UAV Systems  Watchkeeper
          Program.

35



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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. Kinetics develops technologies, systems and
          products in the field of advanced life support and environmental controls, such
          as climate control systems and nuclear, biological and chemical protection
          systems for combat vehicles. Also, Kinetics develops and manufactures other
          products for land vehicles, such as hydraulic, fuel, braking and suspension
          systems, an auxiliary power unit for land vehicle power pack systems and
          hydraulic systems for aircraft. Kinetics sells its products to the IDF, the U.S.
          Army and other customers. Kinetics wholly-owns Real-Time Laboratories, LLC. a
          company based in Boca Raton, Florida, engaged in the U.S. market in similar
          activities to those of Kinetics. See below Current Business Operations
           Land Vehicle Systems  Environmental Control and Hydraulic
          Systems.

SCD.    
          Semi-Conductor Devices (SCD) is an Israeli investee partnership equally owned by
          Elbit Systems and Rafael Armaments Development Authority Ltd. (Rafael). Located
          in Leshem, Israel, SCD develops and manufactures infrared detectors for thermal
          imaging equipment and laser diodes used in defense and commercial applications.
          See below Current Business Operations  Electro-Optical and
          Countermeasures Systems.

Opgal.    
          Opgal  Optronics Industries Ltd. (Opgal)is an Israeli
          investee company owned 50.1% by Elbit Systems and 49.9% by 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  Commercial Aviation Systems and
           Electro-Optical and Countermeasures Systems.

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

36



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# Recent Acquisitions
and Divestitures

During
the past year we continued to expand our capabilities through acquisitions and made a
divestiture.

Tadiran
Communications

In
April 2007, Elbit Systems completed a tender offer for the balance of Tadiran
Communications shares, increasing our ownership from 43% to 100%. Under the tender
offer Elbit Systems paid a price of approximately $52.32 per share, resulting in total
consideration paid by Elbit Systems under the tender offer and for the balance of the
shares remaining following the tender offer, of approximately $382 million. Such
consideration was paid in cash. As a result of the tender offer Tadiran Communications
ceased to be a publicly traded company. Tadiran Communications purchased the balance of
the outstanding stock options for the same consideration per share as paid by Elbit
Systems under the tender offer.

This
tender offer followed Elbit Systems purchases from 2004 through 2006 of a total of
approximately 43% of Tadiran Communications shares through purchases on the stock market,
and through private placements with Koor Industries Ltd. (Koor). For a description of
Tadiran Communications see above Principal Subsidiaries  Tadiran
Communications.

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

Soltam.    
          In December 2006, Elbit Systems sold its 10% interest in Soltam Systems
          Ltd., an Israeli company engaged in the development and manufacture of artillery
          systems and munitions. Elbit Systems sold its interest to Soltams
          principal shareholders for $5 million payable in 24 monthly installments bearing
          interest of Libor +1%.

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# 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.

Military
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 safety, 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.

As
further described below, our business activities for military aircraft and helicopter
systems include: aircraft avionics systems, aircraft upgrade programs, numerous programs
for F-16 aircraft, head-up displays and other electro-optic systems for aircraft, aerial
reconnaissance systems, helicopter upgrade programs, electro-optics products for
helicopters, precision guidance systems, flight simulators, logistic support services,
helmet mounted systems for fighter aircraft and helmet mounted systems for helicopters.

Aircraft
Avionics Systems and Upgrade Programs

IAR
99.    In 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. In January 2007, the contract
was increased to add logistic support elements. The project is being 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.

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F-18
Displays.    In 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 is providing Form, Fit,
Function and Interface (FFFI) replacements of the existing aircraft configuration in
support of the F/A-18E/F Multi-Year II program, taking 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 2004, with a second option awarded in April
2006.

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 equipment for production aircraft in 2004. In January 2007, the Brazilian
Government and Embraer exercised options for avionic systems for an additional 23 AL-X
aircraft. Deliveries are scheduled through 2009. The avionics system for the AL-X includes
an advanced mission computer, liquid crystal displays, head-up display, navigation system,
digital video recorder (DVR) and embedded GPS/INS radio altimeter (EGIR). In addition, we
are supplying simulators, planning mission stations and debriefing stations. Maintenance
and logistic support to the Brazilian Air Force are provided mainly through Elbit
Systems Brazilian subsidiary Aeroeletronica  Industria de Componentes
Avionicos S.A. (AEL), located in Porto Alegre, Brazil. Program funding is provided in part
through a financing arrangement between the Brazilian Government and commercial banks. The
contracts call for buy-back to be performed over a multi-year period. See below Buy Back.

Colombia
AL-X.    In July 2006, Elbit Systems received a contract from Embraer for the supply of
avionic systems for 25 AL-X Super Tucano aircraft to be supplied by Embraer to the
Colombian Air Force. Deliveries are scheduled to occur through 2007.

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. Our contracts for the program are with Embraer and the Brazilian
Government, with a total value of approximately $230 million to be performed over an
eight-year period. The contract with Embraer provides for an avionics upgrade, which
includes an EW suite, mission computers, radar, displays and other avionics products.Delivery of production aircraft began in 2005.  In January 2007, Elbit Systems
was awarded an additional order to integrate further advanced capabilities in the F-5
aircraft.  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 covering up to 90% of our financial exposure under the program, subject
to the policys terms. The program also includes buy-back provisions.

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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 2004. We anticipate completing
          deliveries during 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 USAF and other air forces.

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

In
recent years, EFW was awarded F-16 related contracts to develop and supply the commercial
central interface unit, color multi-function display systems (CMFDS) and a digital video
recorder. EFW also is supplying advanced air to ground, air to air and emergency jettison
remote interface units to Lockheed Martin for an F-16 customer and supplies commercial
data entry electronic units (CDEEU) for the F-16. In 2004, EFW was awarded a contract by
the USAF to provide more than 2,000 CDEEUs in support of the CCIP program for F-16 Block
40-50 aircraft and upgrade of pre-Block 40 F-16 aircraft. The contract is being performed
over a four-year period. Also, in 2005, EFW was awarded a five-year multiple products,
multiple quantity repair and maintenance contract from USAF for various F-16 avionics
components. In April 2006, IEI was awarded a five-year contract by the USAF to provide
depot level repair support for the Wide Angle Conventional (WAC) HUD.

Elop
was awarded a contract in 2001 to supply the head-up display for the F-16I. Elop also
supplies aerial reconnaissance systems for the F-16 both for oblique and vertical
photography.

Since
its 2005 acquisition of the assets of IMIs Aviation Systems Division, Cyclone
manufacturers pylons for F-16 aircraft. Also, for a number of years Cyclone has
manufactured the leading edge flap for U.S. Air Force F-16 aircraft. In January 2007,
Cyclone was awarded a contract by Lockheed Martin to supply structural components for F-16
aircraft ordered by the Hellenic (Greek) Air Force, including leading edge flaps
horizontal stabilizers, ventral fins, rudders and center line pylons. Deliveries are
scheduled through 2008.

As
of December 31, 2006 our overall F-16 related systems and components backlog,
which extends through 2009, totaled approximately $110 million.

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HALBIT
Joint Venture.    In May 2007, Elbit Systems, Hindustan Aeronautics Ltd. (HAL) and
MerlinHawk Associates Private Limited established HALBIT Avionics Private Limited (HALBIT)
as an Indian joint venture company. HALBIT, in which Elbit Systems holds a 26% interest,
was established to jointly market, design and integrate avionics and simulator products in
the Indian market and other agreed markets.

F-15 Structural Components

In
October 2006, Cyclone was awarded a contract by Boeing for structural components for
Boeings F-15 aircraft, including external fuel tanks, pylons, horizontal stabilizers
and gun access doors. Deliveries are scheduled to be completed in 2009. The pylons and the
external fuel tanks are part of the business acquired from IMIs Aviation Systems
Division in 2005.

Aircraft
Head-Up Displays.     Elop 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 and Mirage.

Aircraft
Electro-Optic Systems.    Elop supplies laser range finders for a range of airborneplatforms. Elop also has supplied laser designators for other airborne applications
such as the laser designator for the U.S. Apache and the French Tiger helicopters, the
USNs Nite Hawk pod and for pods of other customers.

Aerial
Reconnaissance Systems.    Elop supplies airborne reconnaissance systems for a range of
fighter aircraft including the F-16. In December 2005, Elop was awarded a contract by the
Republic of Korea Air Force (ROKAF) to supply real-time EO/IR long-range oblique images
systems for ROKAF F-16 aircraft. The contract is to be performed over a two-year period. A
program to supply airborne systems for the Turkish Air Force ceased in December 2006,
subject to mutually acceptable provisions, and Elop was invited to compete on a similar
program with updated requirements.

Helicopter
Upgrade Programs

Korean
Helicopter Upgrade.    In January 2006, Elbit Systems was awarded a contract by the
Korean Ministry of National Defense to perform portions of a large scale project for
helicopters upgrades. The contract is to be performed over a three-year period.

Bulgarian
Helicopter Upgrade Program.    In 2005, Elbit Systems was awarded a contract by the
Bulgarian Ministry of Defense to upgrade Bulgarian Air Force MI-24 and MI-17 helicopters
to comply with NATO standards. The contract was in the amount of approximately $70 million
and was to be performed over a three-year period. In March 2007, Elbit Systems announced
that we reached an agreement with the Bulgarian Government regarding cancellation of the
contract. The agreement recognizes that the cancellation is by mutual consent and is not a
result of breach of obligations by either party. Under the agreement Elbit Systems returns
to the Bulgarian Ministry of Defense part of the advanced payments received and delivers
equipment and items already produced in the performance of

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the program in consideration of the
balance of the payments to be retained by Elbit Systems. Elbit Systems management
believes that this matter will not have a material adverse effect on our results of
operations.

Romanian
Helicopter Upgrade Programs.    In 2005, Elbit System won two contracts to upgrade
helicopters to NATO standards for the Romanian Air Force and Navy. The contracts, which
are being performed in cooperation with the Romanian aircraft manufacturer IAR S.A.
Brasov, are being performed over a three-year period.

IAF
Mission Management System.    In 2005, Elbit Systems was awarded a contract to
provide the IAF 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
communications. 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 2004, EFW was selected by Boeing to design a new mission computer
for the Apache AH-64 helicopter. The contract is to be performed over a two-year period.
In March 2007, EFW received a follow-on master development and production contract for
integration of the mission processor on the Apache Block 3 program, with deliveries
scheduled through the end of 2007.

Turkish
S-70 Blackhawk.    In 2003, Elbit Systems received a contract from Turkish Aerospace
Industries for the modernization of the Turkish Armed Forces Command Sikorsky S-70
Blackhawk helicopters. We act as the avionics systems integrator and are developing and
supplying glass cockpit avionics and advanced mission equipment. The program
is being performed in two stages, development and production, over a four-year period.

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. Over the last several
years Boeing has awarded EFW V-22 related contracts for the development and supply of the
digital map system, a contract for the Active Matrix Liquid Crystal Multi-function Display
Upgrade Program, a series of interface units, redesign of the display electronic unit and
digital map and production orders for second generation digital map and display
electronics. In 2005, EFW was awarded a development contract for the second generation of
the V-22 primary flight display, and in 2006 EFW received additional production of orders
for various V-22 items, including interface units, digital maps, displays, display
electronics and head-up displays.

Digital
Maps and Displays for Eurocopter.    In 2003, we received a contract from Eurocopter S.A.
(Eurocopter) to develop and supply flight displays systems for French search and rescue
helicopters. Deliveries under orders received to date under this contract are being made
through 2007. This followed earlier contracts from Eurocopter for display development and
supply of digital map systems and displays.

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Electro-Optic
Products for Helicopters.    Elop 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, Elop was awarded a contract to develop and
supply its Laser Obstacle Ranging & Display Systems (LORD) for IAF helicopters, which
has successfully completed its advanced multi-functional flight test series. Performance
of the contract is through 2008. In 2005, Elops LORD system received Flight
Internationals Aerospace Industry Award in the Avionics and Electronics category.
Elop and Kollsman have completed the development of a common laser designator for both the
upgrade of the Gun-Ship C-130H aircraft and the TSS Hawkeye Cobra AH-Z helicopter. Elop
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 USMCs AH-IW Super Cobra helicopters. Elop
also supplies electro-optic payloads for a variety of helicopters, such as the Sea
King, Cheetah, Mi-17 and Mi-24.

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 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. The laser JDAM development program has been completed with a
          successful test conducted by the USAF. EFW has been notified of its selection to
          receive an initial production contract, which is expected to be awarded in 2007.

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
through 2006. These munitions are used in connection with the Hunter UAV, the Predator UAV
and the AC-130 gunship. New derivatives of this product are being modified for use on
other platforms.

Flight
Training Services

We
provide a range of aircraft flight training solutions and operation of training aircraft
on private financing initiative (PFI) and power by the hour (PBH)
arrangements.

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In
February 2007, Elbit Systems was awarded a contract to establish a training center for
Tzofit (King Air B200 Beechcraft) for the IAF. The training center operates
through a PFI program, with Elbit Systems providing the IAF a turn-key solution including
the establishment of the training center, its operation and the supply of simulators,
training services and maintenance for a ten-year period. The MOD purchases from Elbit
Systems flight training hours for the IAF. The center will be established on civilian
property, and for the first time in Israel such a training center will also serve civilian
pilots, providing them training in accordance with international aviation requirements
while using local flight simulators and facilities.

In
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 is
executed by providing flight hours on a PBH basis, Cyclone provides full maintenance
services to the IAF Bell 206 and Bell 209 Cobra AH-1A helicopters.

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 the first PFI program adopted 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
January 2006, Elbit Systems was awarded a contract by the IMOD to supply the avionics
simulation system, cockpit and visual system for the IAFs F-16I aircrew flight ad
system trainer. This contract is being performed in cooperation with Lockheed Martin and
is to be completed over a two-year period.

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.

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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. Cyclone also has a license to use another runway and facilities in Israel
for aircraft maintenance for the IAF. In May 2007, Cyclone assumed responsibility for
maintenance activities for the Israeli Police helicopters on a PBH basis for a two-year
period. The maintenance is done at the Police facilities and is subject to the Israeli CAA
rules and regulations.

At
IEI in Alabama and in Georgia, we repair and maintain electronic systems and components
for aircraft, helicopters and ground support equipment for U.S. and other customers. IEI
also assists customers in establishing the appropriate level of maintenance and repair
close to the user to improve operational readiness. At AEL in Porto Alegre, Brazil, we are
implementing a logistic support center for our aircraft modernization programs for the
Brazilian Air Force.

In
2006, our revenues from flight training services, services relating to training and
simulators and logistic support services were not significant.

Helmet
Mounted Systems

Fighter
Aircraft Helmet Mounted Systems

DASH.Our
pilot helmet mounted systems are in operation with a number of customers
          throughout the world. Over the last 20 years we have been designing and
          manufacturing Display and Sight Helmet (DASH) systems. DASH allows the pilot to
          target the weapons systems by looking at the target and also displays flight
          information on the helmets visor. The DASH system has been purchased by
          the IAF and other customers. In 2000, we were awarded a contract by Lockheed
          Martin to supply the DASH IV helmet mounted cueing system for the IAFs
          F-16I aircraft. Boeing previously awarded EFW a contract to supply the DASH as
          the helmet mounted display system for the IAFs F-15I aircraft.

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 USAF and ANG F-15 and F-16 and USN F/A-18
fighter aircraft and has been successfully flown in all three aircraft types. 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

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provides the pilot with first
look, first shot high off-boresight weapons engagement capabilities. The system
enables the pilot to accurately cue onboard weapons and sensors against enemy aircraft and
ground targets without the need to aggressively turn the aircraft or place the target in
the HUD for designation. Critical information and symbology, such as targeting cues and
aircraft performance parameters, are graphically displayed directly on the pilots
visor.

Starting
in 2004, VSI has been awarded several contracts by Boeing for Low Rate Initial Production
(LRIP) and Full Rate Production (FRP) lots for the JHMCS. Recently contracts totaling more
than $80 million were awarded in May 2006, to meet FRP Lot 3 requirements. These orders
fulfill U.S. Government domestic requirements for USAF F-15 and F-16, ANG F-15 AND USN
F/A-18 Single Seat and Dual Seat platforms, as well as FMS production and spare
commitments. As of May 31, 2007, VSI is supplying JHMCS to 16 countries. VSI is also
supplying JHMCS to numerous international customers. VSI also received direct contracts
from the USN and USAF for spares and test equipment in support of the JHMCS. The contracts
are to be completed through 2008. These orders bring VSIs total JHMCS production
quantity to more than 3,000 systems ordered, with approximately 2,000 systems delivered as
of May 31, 2007.

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 contract was increased in 2005 to a total of
          approximately $156 million.  VSI supported the successful JSF prototype
          flight test in April 2007, which included the helmet mounted display system and
          the majority of the development effort is scheduled to be completed in 2007 with
          continuing support activities through 2012. The JSF helmet mounted display
          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.

NVCD.    
          In 2006, VSI was awarded two contracts of the USN and USAF to supply Night
          Vision Cueing and Display System (NVCD) which includes Panoramic Night Vision
          Goggles (PNVG) for evaluation and test flight by USN and USAF tactical aircraft.
          The PNVG is based on the Quad Eye product developed by
          Kollsman.

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.

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In
2005, EFW was awarded a framework Indefinite Delivery / Indefinite Quantity (IDIQ)
contract by the DOD to supply ANVIS/HUD systems for U.S. Army utility helicopters and
other DOD rotary-wing platforms. Under this contract, the U.S. Army may place purchase
orders with EFW for ANVIS/HUD systems from time to time over a five-year period for up to
the aggregate amount of the contract. In 2006, the U.S. Army placed orders for the total
year quantity. Over the past fifteen years Elbit Systems and EFW have supplied more than
4,000 NVG/HUD systems for a variety of U.S. Army and other U.S. Armed Forces
programs.

The
NVG/HUD is operational in the IAF, having been integrated into various assault and attack
helicopters. 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.

ARH.    
          In 2005, EFW was selected by Bell Helicopter to provide the Helmet Display
          Tracking System (HDTS), also referred as Aviator Night Vision Imaging
          System/Head-Up Display for 24 hours a day (ANVIS-HUD 24), for the Armed
          Reconnaissance Helicopter (ARH) program for the U.S. Army. Under EFWs
          contract with Bell Helicopter, EFW will supply the HDTS for each ARH aircraft
          ordered by the U.S. Army from Bell Helicopter that contains an HDTS requirement,
          up to 500 aircraft. The ARH Program currently forecasts a production quantity of
          approximately 500 aircraft over a seven-year period. The Limited User Test has
          been rescheduled for late 2007. In November 2006, EFW was selected to provide
          two additional systems for ARH, including the data transfer system and the
          rocket interface unit.

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. The IEI Warner Robins Support
          Center (WRSC) provides depot level repair support for all IHADSS customers. In
          2002, Boeing awarded EFW the IHADSS 21 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 2004, EFW received a follow-on order to complete qualification and transition
          the new system to full rate production, which was completed in 2006. Transition
          to full-rate production is ongoing.

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EW
and SIGINT Systems

Through
Elisra, in which Elbit Systems acquired a 70% interest in 2005, we supply a range of
multi-spectral self-protection suites for airborne combat platforms, as well as modular
SIGINT (ELINT, COMINT and DF) systems for air, ground and naval platforms and
applications.

Multi-Spectral,
Self-Protection Suites for Airborne Platforms. Elisras airborne platform
self-protection suites combine defense and suites with electronic support measures. Its
multi-spectral self protection solutions include passive IR missile warning systems for
fighter aircraft, helicopters, transport aircraft and maritime patrol aircraft.
Elisras self-protection suites include EW payloads with radar warning receivers,
laser warning receivers and other measures. In January 2006, Elisra entered into a
contract in the amount of approximately $80 million to supply full EW Suites for fighter
aircraft for an international customer. The contract is to be performed over a multi-year
period.

Intelligence
Systems.    Elisra supplies SIGNIT (ELINT and COMINT) systems designed for air, ground
and naval platforms. These systems incorporate cutting-edge digital receiving, signal
processing and direction finding technologies. In September 2006, Tadiran Systems was
awarded a contract for the supply of EW systems to a European country. Deliveries are
scheduled for completion in 2008. For UAVs Elisra provides systems that detect,
identify and locate ground-based, airborne, ground and ship-based emitters.

Data
Links.    Elisras subsidiary, Tadiran Spectralink, develops and supplies advanced
data links for airborne platforms, including UAVs and mini-UAVs, based on generic modules
to conform to the full range of modern data payload systems and to support high rate
digitalized analog data communications. Tadiran Spectralink also supplies tactical video
links that download video and telemetry data from UAVs providing real-time video data to
ground, airborne and naval forces, to enable comprehensive video networks.

Search
and Rescue Solutions.    Tadiran Spectralink develops and provides advanced airborne
search and rescue systems, supporting the undetected, unimpeded first pass pick up of
downed pilots and special forces within enemy territory. Tadiran Spectralink also provides
personal search and rescue radio sets for non-combat use comprised of an emergency locator
transmitter and a personal locator beacon and a voice transceiver. In September 2006,
Tadiran Spectralink won a contract for the supply of the advanced PSR-43G/SV Personal
Survival Radio (PSR) to the German Air Force.

Microwave
and Microelectronic Products.    Elisra supplies a variety of microwave products for EW,
radar and communication systems and microelectronic products for a wide range of advanced
applications  modems, cellular, telephone systems, industrial robotics and
computerized control instrumentation.

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Spectrum
Control and Management.    Elisras subsidiary, Tadiran Systems, designs, develops
and provides advanced spectrum monitoring, detection, identification and location systems,
based on common, advanced and commercial hardware and software platforms with proprietary
algorithms. The systems simplify the tasks of wireless traffic supervision and measurement
of technical parameters pinpointing infringements and illegal transmission, thus providing
a real-time picture of spectrum usage.

Commercial
Aviation Systems

Several
of the companies in the Elbit Systems Group are engaged in the design, development and
manufacture of a range of systems and products for the commercial aviation market. This
includes products for business jets, very light jets, search and rescue and transport
helicopters and other general aviation platforms.

EVS

As
part of its Vision-Based CockpitTM concept, Kollsman designs and produces the
All Weather Window®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 standard equipment on Gulfstream-450 and 550 aircraft and is an option
on Gulfstream-300, 400 and 500 aircraft. EVS also is operational on the Gulfstream-400.
 In 2006, Kollsman was awarded additional follow-on orders for EVS by Gulfstream
for all Gulfstream large cabin aircraft models. 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 G150, G200, G400 and
G500.

During
2006, Kollsmans EVS was awarded the New Hampshire High Technology Councils
Product of the Year Award. During 2004, Kollsman was awarded the National Aeronautic
Associations 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. Also in 2004,
Kollsman was awarded Frost and Sullivans Year Top Technological Achievements
in the Aviation Industry Award for the EVS impact on aircraft safety.

In
2003, EVS was selected for installation on FedEx Express Boeing MD-10 and MD-11 and
Airbus A300 and A310 aircraft fleet. Certification is expected to occur in 2007, with
installations on aircraft beginning in 2008.

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AALC
Program.    In September 2006, Kollsman teamed with BAE Systems in support of the Air
Force Research Laboratory (AFRL) Autonomous Approach and Landing Capability (AALC)
program. The AALC program is a funded technology demonstration program by AFRL and
industry to develop a sensor, database and display system that provides Air Force Air
Mobility Command (AMC) aircraft crews the ability to land at prepared and semi-prepared
airfields in zero ceiling/zero runway visual range (RVR) meteorological conditions. The
meteorological conditions can include rain, fog, snow, dust, sand and other suspended and
blowing particles. Kollsman will be responsible for providing an integrated Short Wave
Infrared (SWIR) and Medium Wave Infrared (MWIR) sensor to be fused with BAE Systems
94 GHz radar image for the head-down display (HDD) and HUD.

Sandel.    
          In May 2006, Kollsman acquired a 20% interest in Sandel, a U.S. company engaged in the development and
          production of specialized integrated display systems and other products,
          primarily for the general aviation market. Sandels product line includes a
          Terrain Avoidance Warning System (TAWS) and an Electronic Horizontal Situation
          Indicator (EHSI), among others. Kollsman intends to integrate some of its new
          products such as GAViSTM, u-ViS HUDTM and
          ESViSTM with Sandels displays for the general aviation market.
          Cooperation with Sandel is anticipated to enhance distribution for the
          Groups product offering into the growing general aviation retrofit market.

GAViSTM.The
GAViSTM is a small, light weight, low cost, infrared based           vision
system for general aviation aircraft. It is a single aerodynamic unit           that
mounts like an antenna on the top or bottom of the aircraft and provides           the
pilot with increased situation awareness with a real-time video image on a           head
down display at night and in some other low visibility conditions. In June
          2006, at the Europe Business Aviation Convention (EBACE), Grob Aerospace of
          Germany announced that it has selected the Kollsman GAViSTMfor the
          Grob SPn light utility business jet, which is scheduled for certification in
          late 2007. The GAViS has been certified on a Citation 550 aircraft and
has           received product parts manufacture approval (PMA). GAViS is now in
full           production.

Commercial
HUDs.    In 2003, Kollsman entered into a contract with Honeywell International Inc. to
develop and supply, together with Elop, head-up display overhead projection units for the
Federal Express (FedEx) fleet. The contract calls for deliveries through 2012. In
addition, in 2006 Kollsman and Elop completed work on a cost sharing research and
development contract with the Maryland Advanced Design Laboratory to develop a low cost
solution for head-up displays for the general aviation market. The project was performed
for the U.S. National Air and Space Agency (NASA). Also, the NASA SATS (small aircraft
transportation system) project was completed in 2005 with a successful flight
demonstration of the u-ViS HUDTM installed in a Cessna 402. In 2005, the new
technology small HUD was also installed in and flown on the Kollsman Cessna 340 aircraft.
During 2007, the FedEx HUD is being certified on the FedEx aircraft fleet while the Micro
ViS HUD is undergoing final development for aircraft installation and certification.

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Cabin
Pressurization Control System.    In April 2007, Kollsmans next generation
autoschedule cabin pressurization control system, KAPS II, was selected by Diamond
Aircraft for its new D-Jet program. In March 2007, the KAPS II system was selected
by Cessna for its new CJ 4 aircraft program. In 2004, the KAPSTM II systems were
selected by Cessna for a multi-year contract for the Mustang aircraft.

Commercial
Avionics Instrumentation Products.    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.

Civil
Avionics Systems.    In October 2006, Elbit Systems was awarded a long-term contract to
supply civil avionics systems in an amount that is anticipated to be material over an
approximately ten-year period.

Avionics
for Commercial Helicopters.    Elbit Systems develops and supplies digital maps, displays
and other avionic products for commercial helicopters such as the EC-225 and others.

Maintenance
and Repairs.    Kollsman maintains a U.S. Federal Aviation Authority (FAA) certified
repair facility in Wichita, Kansas, for commercial avionics repairs. Cyclone also performs
maintenance for commercial helicopters.

AerostructureParts.    Cyclone manufactures structural parts based on composite
technologies for several types of commercial aircraft, including the Boeing 737 and 787
passenger jets.

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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 Elop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 unmanned turrets and 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.

Elop
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, Elop and Kinetics are supplying a significant number of systems for the
IDFs most advanced Merkava tank, the MK-4.

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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, 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 2004,
Elbit Systems was awarded orders by the IMOD to supply electronic and electro-optical
systems for the Merkava MK-4. The orders are being performed over a 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, 2006, we had a total of approximately $140
million in our backlog relating to Merkava orders, to be supplied through 2008.

Land
Vehicle Modernization Programs

Turkish M-60
Modernization Program.In 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. In May 2006, the Turkish Ministry of
Defense announced that the Prototype System Approval Tests of the tank were successfully
completed. The program is now in the serial production phase. 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. EFW completed production
deliveries in 2004 and is performing ongoing retrofit activities. In January 2006, EFW
received additional orders from Lockheed Martin for MLRS production systems as well as to
develop a new generation gunner display unit (GDU) for the MLRS. The equipment developed
for MLRS is also directly compatible with the HIMARS used by the U.S. Army and the USMC,
and in February 2006 EFW received an order for systems for the HIMARS.

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 (now BAE Systems), 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. Following completion of the development contracts in 2004, EFW
completed multi-year production contracts awarded by BAE Systems for those systems. During
2005 and 2006, EFW was awarded additional orders for Bradley systems for the U.S.
Armys ongoing operations in Afghanistan and Iraq.

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USMC
Vehicles

In
2005, EFW was awarded an approximately $70 million order from the USMC Systems Command to
develop, integrate, test, provide and install equipment into a variety of USMC vehicles.
This order is in support of urgent USMC operational needs and is to be completed during
2006. In April and June 2006, EFW received follow-on orders.

In
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
USMCs Light Armored Vehicle (LAV). The demonstration contract was completed in 2006.
EFW provided the mission equipment package for a new vehicle intercommunications system.
In May 2006, following completion of the demonstration program, Lockheed Martin was
selected by the U.S. Government to perform the development phase of the program. EFW is
participating in that phase as part of the Lockheed Martin team, and EFW is responsible
for the design, manufacturing and support of the LAVs complete mission equipment
package. The development phase is to be performed through 2007, to be followed by three
yearly production options.

USMC
Systems.    In June 2006, EFW was awarded by the U.S. Marine Corps Systems Command a
follow-on contract for the supply of military systems. This order was a follow-on order to
an order received by EFW in 2005 for similar systems.

Portuguese
Army Program.    In February 2006, Elbit Systems was awarded a contract to supply
unmanned turret systems, fire control systems and additional land systems to the
Portuguese Army. The contract, which is to be performed over a six-year period, was
entered into with STEYR Austria (STEYR), a member of the General Dynamics European Land
Combat Systems Group, the prime contractor for the Portuguese program. The systems to be
supplied by Elbit Systems will be integrated in STEYRs Pandor II 8x8 light wheeled
armored vehicles and will facilitate rapid force mobility and deployment by the Portuguese
Army. Under this program Elbit Systems will be providing a fully integrated configuration
for fighting/patrol/surveillance vehicles, including unmanned turrets equipped with
missiles, automatic 120 mm mortars, fire control and threat detection systems.

Belgian
Armored Infantry Vehicle Program.    In January 2007, Elbit Systems was awarded a
contract to supply unmanned turrets and electro-optic systems for the Belgian Armored
Infantry Vehicle Program. The contract is pursuant to a cooperation between Elbit Systems
and the Swiss company Mowag of the General Dynamics European Land Combat Systems Group.
The contract is to be performed over a five-year period. Mowag will be supplying its
Piranha III vehicles for the program. Elbit Systems portion of the program includes
the delivery of 30 mm unmanned turrets as well as several opto-electronic and electronic
subsystems.

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Thermal
Imaging and Electro-Optic Systems

During
the first part of 2007, Elop was awarded several contracts to supply Coral-type hand-held
thermal imaging systems for long-range observation and reconnaissance to the Canadian and
Israeli armed forces as well as for other international customers.

In
November 2006, Elop was awarded a contract by the Samsung-Thales Company to supply thermal
imaging kits for the gunner periscope sights of the Korean K1A1 Tank. The contract is to
be performed over a four-year period.

Also
in November 2006, Elop was awarded a contract to supply Portable Lightweight
Designator/Rangefinders (PLDR) and Coral thermal imagers to the German Armed Forces.
Deliveries are to be completed in 2008.

In
September 2006, Elop was awarded a contract in the amount of approximately $130 million to
develop and manufacture electronic land systems for a foreign customer. The project also
includes logistic support for the systems and is to be performed over a five-year period.

In
2005, Kollsman was awarded initial orders to provide high performance thermal binocular
system long-range thermal imagers (LRTI) for the USMC. The LRTI is a portable binocular,
hand-held battery-operated thermal imager for long-range observation and reconnaissance
and is based on an Elop design. The initial orders were placed by the USMC System Command,
under an IDIQ contract. Deliveries under the initial orders are to be made through 2007.
Under the IDIQ contract the U.S. Government may purchase up to 5,000 LRTIs as well as
spare parts, contractor maintenance and training items over a five-year period. As of May
31, 2007, Kollsman has received orders in an aggregate amount of approximately $60
million, with a potential for up to approximately $250 million under the IDIQ contract.

Elop
has sold close to 1,000 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 Elop has sold thousands of hand-held thermal imagers and thermal imager kits.

Laser
Warning Systems.    Elbit Systems is supplying laser warning systems for ground vehicles
to several European countries.

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 and ammunition conservation as well as 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 Appended
Tactical Combat Trainer Systems, Tactical Battle Group Trainers, Artillery

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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 Elop are involved in the development of robotic
unmanned ground vehicles (UGVs) for defense and homeland security applications. Elbit
Systems UGVs are deployed by the IDF for patrolling missions. In March 2007, the
Israeli Antitrust Commission approved the establishment of a joint venture by Elbit
Systems and IAI to develop a next generation UGV for various applications related to
security missions and border control.  In 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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Military
Communications Systems

Tadiran
Communications, a wholly-owned subsidiary of Elbit Systems, provides a range of tactical
communications solutions for armed forces throughout the world. See above Principal
Subsidiaries  Tadiran Communications.

With
over 40 years of experience in military communications, Tadiran Communications has
established expertise in a diverse areas of military communications. These include
advanced radio design, development and production in frequencies ranging from 1.5 MHz to 5
GHz, featuring high grade built-in crypto algorithms and electronic counter  counter
measures techniques (e.g. frequency hopping and direct sequence) for reliable
communications under severe battle environments. Tadiran Communications also provides
quality modems to serve the increasing demand for C4I data communications; multi-channel
line of sight frequency hopping wide-band radio equipment for reliable inter command posts
communications; tactical terminals/military computers and communication controllers; as
well as tactical internet based integrated communication systems providing seamless
communication from headquarters to any point in the battle-space for effective command and
control.

Tactical
Radio Systems

Tadiran
Communications supplies tactical radio systems to a wide range of customers throughout the
world. Examples of its recent contract awards in this area include the following.

In
2005, Tadiran Communications entered into an agreement with
an Asian customer to supply HF and VHF tactical radios. Deliveries are scheduled to be
completed during 2007. In May 2006, Tadiran Communications signed a contract with a Latin
American customer to supply advanced tactical radio communications equipment and system
elements, with performance scheduled for completion in 2007.

In
2004, Tadiran Communications U.S. subsidiary Talla-Tech was awarded a five-year IDIQ
contract from the U.S. Army CECOM, in an aggregate amount of $80 million, for the support
and improvement of SINCGARS radios. At the time of the award, the customer exercised
initial orders under the contract.

In
2002, Tadiran Communications was awarded a contract to develop the IDFs new
generation tactical radio system. In 2005 and 2007, Tadiran Communications was awarded
contracts from the IDF for the supply of new generation tactical radio systems. Deliveries
of the new radios are scheduled to begin in 2009, following completion of the development.

Bro@dNet
Communication System.    In 2005, Tadiran Communications was awarded a contract from the
IDF to supply a point-to-multi-point, high-capacity broadband, IP-based, data
communications system based on wireless broadband WiMAX technology. The implementation of
the system is scheduled to be completed during 2008.

USMC
Rugged Computers.    During 2007, Talla-Tech received purchase orders from the USMC to
supply its RPDA-57 Rugged Personal Digital Assistant. The RPDA is a rugged hand-held
computer, and will facilitate situational awareness to dismounted Marines.

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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). Our acquisitions in 2005
of Elisra (through its Tadiran Systems subsidiary) and in 2007 of Tadiran Communications,
strengthened our capabilities and product lines in the land C4I and military
communications areas. See above Principal Subsidiaries Tadiran Communications
and  Elisra.

Digital
Infantry Soldier.    In March 2007, Elbit Systems received an order to develop and
provide a battle management solution and full digital soldier combat suit for infantry to
be performed through 2009.

Israel
Digital Army Program.    In 2004, Elbit Systems was awarded a
contract by the IMOD for the Digital Army Program (DAP), in an amount of approximately
$200 million, which has since been supplemented by additional orders. The DAP, which
will also include an additional material amount of FMF funding, will be performed over a
ten-year period. Elbit Systems is the prime contractor for the DAP. Rafael and Tadiran
Systems are serving as our major subcontractors. Within the framework of the program, all
land forces operations are being computerized (command, control, and 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. As
of December 31, 2006, we had a total DAP backlog of approximately $281 million, to be
performed mainly through 2012.

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TORC2H®.    
          Elbit Systems TORC2H® border protection command and control system
          has been supplied to the IDF, and Elbit Systems has 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. In 2005, Elbit
          Systems fielded a TORC2H® version which was used operationally by the IDF during
          the disengagement from the Gaza Strip. We also received in 2005 an additional
          order under the TORC2H® program calling for deliveries through 2009.

Wireless
LAN.    In 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.

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 enables coordination among the IDFs main battlefield tanks, armored
fighting vehicles and infantry fighting vehicles. It provides 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 2008.

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.

Airborne
C4ISR

In
2004, Elbit Systems was awarded a contract in an amount of approximately US$300 million by
the IMOD to supply advanced systems. The contract is being 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. As of December 31,
2006, we have a backlog for the program of approximately $197 million to be performed
mainly in 2008.

Governmental
Information Technology and Information Gathering Systems

Governmental
Information Technology.    We develop and supply computerized communication systems,
information technology and image intelligence processing for 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 system was successfully fielded and is
currently operational by IMPA. The project is anticipated to be completed in 2007. The
project provides 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.

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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.

UAV
Systems

We
develop and manufacture 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, as well as the Skylark® UAV family of
Skylark® I and Skylark® II.

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® I and II and the
Seagull®. The Skylark® I is an electrically propelled and highly covert
short-range UAV system providing Intelligence, Surveillance, Target Acquisition and
Reconnaissance (ISTAR) capabilities to Company  Brigade tactical echelons. 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 and other customers 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. In addition, Tadiran Spectralink
supplies data links for UAVs.

UAV
Programs

Watchkeeper

In
2005, U-TacS, Elbit Systems 51%-owned UK subsidiary, was awarded an
approximately $500 million contract as part of the U.K. Ministry of Defences (UK
MOD) Watchkeeper program. U-TacS contract was awarded by Thales UK, the prime
contractor for the Watchkeeper program, and is to be performed over an approximately
eight-year period. U-TacS subcontracted with Elbit Systems for approximately one-third of
the value of U-TacS contract with Thales.

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The
Watchkeeper program will provide the U.K. Armed Forces with ISTAR capability based on Elbit
Systems Hermes® 450 UAV system and will be a key component of the U.K.s Network
Enabled Capability (NEC). The program calls for the delivery of equipment, training and
facilities, with the capability of coming into service starting in 2010.

Under
the Watchkeeper program, the U.K. Armed Forces will be provided with all weather day and
night surveillance in times of war, tension or during peace-keeping operations without the
need to deploy troops into sensitive areas or harmful situations. The Watchkeeper program
system can provide continuous 24/7 surveillance when needed, using UAVs
able to stay airborne for extended periods.

The
Watchkeeper program system consists of the WK450 UAV carrying a
stabilized payload incorporating day/night sensors and laser target designator connected
by a data link to a network of containerized ground control stations where operators will
control the entire mission and interface within a network enabled environment. High
resolution optical and radar imagery will be exploited and disseminated to provide
valuable intelligence for operational commanders. The system is capable of rapid
deployment and operations anywhere in the world.

In
2005, U-TacS selected Elop as the subcontractor, together with Thales UK Land and Joint
Systems, to supply Elops CoMPASS advanced observation system payload for the
Watchkeeper program.

As
of December 31, 2006, we had a backlog for the Watchkeeper program of approximately $480
million, to be performed mainly through 2012.

Lydian.    
          In June 2007, U-TacS was awarded an approximately $110 million contract to
          perform the U.K. MOD Lydian Program. The program provides service-based support
          to an ISTAR capability in two overseas theatres. The support is intended to
          include the provision of a Hermes® 450 UAV system, training of the U.K. MOD
          staff in use and maintenance of the system and the provision of contractor
          logistic support (CLS) and program management services.

IUP.    In 2005,
IUP, a partnership equally owned by Elbit Systems and IAI, was
          awarded an approximately $150 million contract to supply UAV systems for the
          Turkish TUAV Program. Under the contract IUP is delivering UAV systems
          including advanced payloads. IUP is subcontracting 50% of the work under its
          contract to Elbit Systems, which will supply ground control stations, data links
          and payloads, to be delivered over a four-year period.

Skylark

In
November 2006, the Skylark® II UAV received Popular Sciences 2006 Best of
Whats New Award in the Aviation and Space category.

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Recently,
the Canadian Army, the Netherlands Army, the Swedish Army and several other customers
placed orders for Skylark® systems, thus establishing a leading market position
globally in this class of UAVs.

In
2005, Elbit Systems was awarded a contract to supply six Skylark® mini-UAV systems for
rapid deployment by the Australian Army. The deliveries were made during 2006, and in
April 2007 the Australian Army placed orders for additional systems.

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 an operational evaluation phase.

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, 2006, we had a backlog for
the program of approximately $43 million, to be performed mainly through 2009.

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Electro-Optical
and Countermeasures Systems

Electro-Optics

Elop
has 70 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, ground integrated sights, robotic sensors, 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 2005, Elop was selected to supply its CoMPASS
advanced observation system payload for the UK Watchkeeper program. See above UAV
Systems  UAV Programs  Watchkeeper Program.

In
February 2007, Kollsman received two follow-on orders from the USMC for its
high-performance Laser Target Designator (LTD) systems that have proven successful in
field test evaluations. This followed an initial award in May 2006, under an IDIQ
contract by the USMC for a LTD based on an Elop developed product.
The potential value under this IDIQ contract is up to approximately $100M over a
five-year period. In addition, Elop and Kollsman are involved in the development and
supply of 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 Homeland Security Systems and Naval Systems.

In
July 2006, Elop was awarded several new contracts to supply advanced CoMPASS
payloads for naval and aerial use, to be supplied over a four-year period.

IMINT.    Elop
supplies advanced IMINT systems to various customers internationally.
          Elop also supplies to customers worldwide a range of hand-held, surveillance and
          homeland security and armored vehicle 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.

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Space
Systems

Space
Cameras.    Elop is actively expanding space applications for its technology and
products. Elop 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 April 2006,
EROS B, a commercial reconnaissance satellite, was launched and began transmitting images
taken by an advanced high resolution camera developed by Elop. This followed Elops
supply of an advanced digital camera for the EROS A satellite in 2000. EROS B and EROS A
were launched by ImageSat International N.V. in which Elop owns a minority interest. See
below Technology Spin-Offs.

Tauvex
II.    In 2004, Elop was awarded a contract from the Israel Ministry of Science and
Technology and the Israel Space Agency for the supply of Tauvex II (Tel-Aviv
University Ultra-Violet Explorer) scientific space telescope. The Tauvex II telescope will
be launched into space mounted on the Indian Satellite GSAT-4, for the purpose of
scientific research in exploration of the galaxies. The telescope is to be supplied for
integration into the GSAT-4 by the end of 2007. 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.

CNES.    
          In 2005, CNES, the French Space Agency, selected Elop for cooperation in the
          supply of a scientific electro-optical space camera called Venus. The contract
          is for the production of the camera which will be mounted onboard a
          micro-satellite. The contract followed a successful feasibility study by Elop.
          The camera will be installed on a satellite resulting from a contract signed
          between the Israel Space Agency and CNES. The camera is scheduled for
          integration into the micro-satellite in 2009.

Hyperspectral
Systems.    Elop has been selected by the IMOD to be Israels hyperspectral systems
development house. Currently, Elop is involved in an on-going hyperspectral system
development program for the IMOD.

Subsidiaries.Elbit Systems owns an approximately 8% 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. Elop and OHB System
          A.G. of Germany each own 50% of a German subsidiary, OHB Electro-Optics Gmbh,
          which pursues space-related activities.

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Homeland
Security Systems

We
are involved in the homeland security market that includes airports, border control,
transportation, 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.

ELSEC,
as well as Elbit Systems and Elop, develop and supply detection sensors and other products
for facility security, border and coastal control and perimeter protection in Israel and
numerous other countries. Kollsman leads the Groups homeland security business in
the U.S. market. Products in this area include thermal imaging detection systems, remote
controlled surveillance systems and smart perimeter protection systems. We are also
involved in the field of aviation and transportation security applications and are
investing in future fusion technologies for passenger screening at border gates and
transportation terminals.

Customers
in this field include the Israeli Ministry of Transportation, the IMOD, the U.S.
Department of Homeland Security and several international defense forces and security
organizations, including airport, border guard and coastal control authorities. ELSEC is a
supplier of E-fences and surveillance EO day/night sensors to the IMOD, as well as coastal
surveillance systems, surveillance vehicles, airport security systems and boarder
surveillance systems to a variety of customers, mainly in Europe.

SBInet.In September 2006, the Boeing-led team, including Kollsman, was awarded the
          U.S. Secure Border Initiative Project (the SBInet Project). The
          SBInet Project is designed to provide the U.S. Department of Homeland Security
          with increased border security capabilities along more than 6,000 miles of the
          United States borders. Kollsman, as a first tier team member to Boeing,
          currently is under contract to supply the LORROS® long-range observation
          systems and system engineering know-how for border control applications.
          Kollsman has subcontracted with ELSEC to support this effort. Kollsmans
          content for the SBInet Project may reach a level that will be material to Elbit
          Systems and will be performed over a several-year period.

Perimeter
Security

In
March 2006, ELSEC was selected by the IMOD to deploy a smart electronic
deterrence system. The first phase of the project includes an electronic deference system
to detect and assist in preventing crossing attempts 24-hours a day, in all weather
conditions. The contract contains an option for the IMOD to significantly expand the
system. The system is comprised of advanced sensors, an electronic fence, communications
and computerized command and control posts.

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During
2003 and 2004, ELSEC was awarded contracts for a total of approximately 50 kilometers of
electronic perimeter systems for military bases and municipalities. This followed Elbit
Systems award from the IMOD of a contract to supply an electronic warning systems
smart fence, and Elbit Systems is executing that program through ELSEC.

Mobile
Surveillance Vehicles.    In October 2006, ELSEC was awarded a project for the supply of
mobile surveillance vehicles and advanced cameras for the Ukraine Border Security Project.
Deliveries are scheduled to be completed during 2007. These vehicles include a command and
control station, monitoring sensors and additional security measures, allowing operation
even in severe weather conditions. The vehicles can accommodate three operators
simultaneously.

Surveillance
Towers.    In March 2007, ELSEC was awarded a project for the supply of surveillance
towers for the border protection of a European country. Deliveries are scheduled during
2007.

Airport
Integrated Security System.    In October 2006, ELSEC was awarded a contract to install a
comprehensive airport integrated security system in a European country. Deliveries are to
be completed during 2007. The system enables the integration of existing systems with new
systems and includes surveillance systems for short and medium-range, access control and
sensitive areas intruder detection. Also, the system is scalable to accommodate the
customers future requirements.

Peripheral
Coastal Security System.    In March 2007, Elbit Systems was awarded a European Union
funded contract for delivery and commissioning of an integrated coastal surveillance
system to Lithuania. Deliveries are scheduled for the end of 2007. In
February 2006, ELSEC completed, for a customer in Asia, the deployment of its first
peripheral coastal security system. ELSECs contract for the project was awarded in
2005 and includes additional stages for deployment of other locations in the
customers country. ELSECs coastal security system is remote controlled and
enables its operators to track a large number of vessels simultaneously, for dozens of
miles, using identification capabilities to send alerts regarding types of threats those
vessels may pose. The system includes advanced night vision sensors, daylight
surveillance and laser range finders developed by Elop.

Governmental
Monetary Systems.    We also are supplying an anti-money laundering system to the Israeli
Government. See above  C4I and Government Information Systems.

Israel
Border Security System.    In December 2006, Elbit Systems Border Control
Management System for the Israeli Police was inaugurated. The innovative system interfaces
with all government and security agencies in Israel, managing all entry and exit posts
including airports, sea ports and land crossings. Also, the Israeli National Border Control
Registration System (BCRS) was developed by Elbit Systems and has been fully operational
since 2004. BCRS is a computerized system for registration and control of Israels
border crossing points. The system supports border inspection processes and assists in the
control of the passage of vehicles and goods at all Israeli airports, seaports and land
entry points.

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MUSIC®.  Elop
applied its defense based technologies to develop a Multi-Spectral           Infrared
Countermeasure System (MUSIC®) for commercial aircraft applications in
          preventing terrorism. MUSIC® enables identification of anti-aircraft
          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.

Naval
Systems

Over
the past three 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.    Elop supplies electro-optic products for naval applications to several
customers.  Elop also supplies electro-optic shipboard payloads to several navy and
maritime forces for both observation and fire control applications. In 2006, Elop was
awarded a follow-on contract for the supply of additional CoMPASS systems to a
European Navy. Deliveries are to be completed in 2007.

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 (HDW) to supply our
Timnex 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 2007. In April 2007, Elbit Systems was
awarded an additional contract by HDW for two systems for the new Dolphin class submarines
ordered by the Israeli Navy. Furthermore, in July 2006, two additional systems were
ordered by an overseas customer. Elisra also supplies a range of systems for a variety of
shipboard EW, threat detection and intelligence applications.

Communications
Systems.    Elisra supplies several types of communications systems for naval
applications. Also, Elisras subsidiary, Tadiran Spectralink, supplies data links for
seaborne applications.

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Nirit Navigation
System.    Kollsman supplies navigation systems for the Israel Navy's Nirit patrol boats.

Unmanned Surface Vehicles.    Elbit
Systems is developing the Silver Marlin USV for various maritime applications.

Technology
Spin-Offs and Other Commercial Activities

Several
of the companies in our Group 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, commercial satellites and internet
communications for commercial aviation, commercial communications and microwave
technologies. Several of our companies also engage in other commercial activities. The
following is a description of our main current technology spin-offs and other commercial
activities.

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 have been made
          in MediGuide by venture capital groups and others. As of May 31, 2007, Elbit
          Systems equity interest in MediGuide, on a fully-diluted as
          converted basis, was approximately 41.6%.

Starling.    
          Elbit Systems, Rafael Development Corporation Ltd. (RDC) and Elron Electronics
          Industries Ltd. (Elron) own Starling Advanced Communications Ltd. (Starling).
          Starling develops products in the area of internet communications through
          satellite transmissions and broad band information transfer for commercial
          aircraft. In May 2007, Starling issued an initial public offering on the
          TASE following which Elbit Systems shareholdings are anticipated to be diluted from approximately
          21% to approximately 16% (10% on a fully-diluted basis).

ImageSat.    
          Elop has an approximately 14% equity interest and approximately 12.5% voting
          power in ImageSat InternationalN.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 A and EROS B satellites contain advanced high
          resolution cameras developed by Elop. See above Electro-Optics and
          Countermeasures Systems  Space Systems  Space Cameras.

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Chip
PC.    In 2005, Elbit Systems acquired an approximately 20% interest (18.5% plus a loan
convertible into additional shares) in Chip PC Ltd. (Chip PC). Chip PC is an Israeli
company located in Haifa, Israel, engaged in the development and manufacture of thin
client solutions enabling server based computing technologies to replace traditional
PCs and deploy and control large numbers of work stations.

Other
Commercial Activities.    The Elbit Systems Group conducts a number of other activities
in the commercial area. These activities include medical equipment produced by
Kollsmans KMC Systems subsidiary, commercial communications and mobile and wireless
telephone network encryptions by Tadiran Communications and its subsidiaries, microwave
technologies and components produced by Elisra and its subsidiaries, night vision products
for the automotive industry developed by Elbit Systems and general manufacturing and
machinery services by Elbit Systems and its Romanian subsidiary, Elmet International SRL.

# Property, Plant and
Equipment

Facilities
in Israel

Our
executive offices and main research and development facilities are located on
approximately 840,000 square feet of property in the Advanced Technology Center in Haifa.
We own approximately 362,000 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 leased facility of approximately
282,000 square feet in Karmiel. In May 2007, Elbit Systems entered into an agreement that
provides an option to purchase the Karmiel facility after a three-year period. We also
lease approximately 84,000 square feet in Netanya, approximately 21,500 square feet in
Rehovot and approximately 5,300 square feet in Tel-Aviv. We lease a landing strip in
northern Israel of approximately 3,900 feet.

Elop
owns or has long-term leasehold rights to approximately 525,000 square feet of property
and leases approximately 5,000 square feet of its facilities in Rehovot. These facilities
contain Elops headquarters, offices, development facilities and manufacturing
operations.

Cyclone
owns approximately 1,406,100 square feet of property near Karmiel. This includes
approximately 230,000 square feet on which its offices, manufacturing, maintenance and
hangar facilities are located. Kinetics owns office, laboratory and manufacturing
facilities in Airport City, covering approximately 32,000 square feet. Silver Arrow leases
facilities in Nes Ziona, covering approximately 84,000square feet.ELSEC owns
approximately 109,000 square feet of property in Sderot, which includes approximately
20,200 square feet of offices and manufacturing facilities. ELSEC anticipates adding an
additional 3,500 square feet of office facilities during 2007.

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Elisra
owns approximately 122,000 square feet and has leasehold rights of approximately 148,000
square feet in Bnei Brak. These facilities contain Elisras headquarters, development
facilities and manufacturing operations. Tadiran Systems and Tadiran Spectralink, have
long-term leasehold rights to approximately 188,300 and 71,300 square feet, respectively,
in Holon containing their headquarters, development facilities and manufacturing
operations. Tadiran Communications facilities in Israel occupy a total of
approximately 309,000 square feet. These facilities are leased on a long-term basis and
are located primarily in Petah Tiqwa (management, marketing, engineering and development),
Holon (manufacturing) and Kiryat Shmona (engineering, development and manufacturing).

Facilities
in the United States

EFW
owns approximately 25 acres of property in Fort Worth, Texas. That property includes an
approximately 230,000 square foot facility containing EFWs offices, engineering and
integration center, and manufacturing operations. 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.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.

Tadiran
Communications U.S. subsidiaries, Talla-Com and Talla-Tech, occupy a total of
approximately 109,000 square feet in Tallahassee, Florida, out of which 77,000 square feet
are owned by Talla-Com, while the rest is leased on a long-term basis.

Facilities
in Other Countries.    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 118,000 square feet in Belgium. In the U.K.,
U-TacS leases approximately 3,800 square feet and UAV Engines approximately 13,000 square
feet. Elmet and AE Electronics in Romania lease approximately 91,000 square feet and
35,000 square feet, respectively. Tadiran Communications subsidiary, Telefunken
RACOMS, leases facilities in Ulm, Germany of approximately 30,000 square feet.

Recent
Investment in Facilities.    Over the last two years the average annual investment in our
facilities, including building projects , as well as equipment, machinery and vehicles,
amounted to approximately $62 million. There are no material plans to construct, expand or
improve existing facilities, however, ongoing improvements and minor expansions are
planned at the facilities in Karmiel and Sderot, Israel and at EFW in the U.S. Each of our
manufacturing facilities generally operate at or near full capacity. Accordingly, we
believe that our current facilities are adequate for our operations as now conducted.

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# 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 2006, approximately 50% of our revenue
was derived from exports subject to Israeli export regulations. In 2006, the Israeli
Government passed a law regulating export of dual use items (items that are
typically sold in the commercial market but they also may be used in the defense market).
As of May 31,2007, a bill was pending before the Knesset to adopt a new and enhanced law
governing export of defense items and technologies.

U.S. and
Other Export Regulations.    ESA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 in defense-related
          technical areas 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.

Approval
of Israel Defense Acquisitions

The
Israeli Defense Entities Law (Protection of Defense Interests) became effective in January
2006. Among other matters, this law establishes conditions for the approval of an
acquisition or transfer of control of an entity that is determined to be an Israeli
defense entity under the terms of the law. Designation as a defense
entity is to occur through an order to be issued jointly by the Israeli Prime
Minister, Defense Minister and Trade and Industry Minister. Although no such orders have
been issued as of May 31, 2007, it is assumed that Elbit Systems and most of its Israeli
subsidiaries will be designated as defense entities under the law.

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Orders
issued under the law will also establish other conditions and restrictions. It is
anticipated that in the case of a publicly traded company such as Elbit Systems, Israeli
government approval will be required for acquisition of 25% or more of the voting
securities or a smaller percentage of shares that grant means of control.
Means of control for purposes of the law includes the right to control the vote at a
shareholders meeting or to appoint a director. Orders relating to defense entities are
also anticipated to, among other matters, (1) impose restrictions on the ability of
non-Israeli resident citizens to hold means of control or to be able to
substantially influence defense entities; (2) require that senior officers of
defense entities have appropriate Israeli security clearances; (3) require that a defense
entity headquarters be in Israel and (4) subject a defense entitys international
joint ventures and various technology transfers of the approval of the IMOD.

Approval
of U.S. and Other Defense Acquisitions.    Many other countries also 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).

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, and our Israeli subsidiaries.

Foreign
Military Funding (FMF).    The ESA companies 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, the ESA companies 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 our Israeli
subsidiaries, 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. U.S.
companies in the Group also participate in U.S. Foreign Military Sales (FMS) programs.

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. In connection with the acquisition of Elbit
Systems interest in Elisra, the Israeli Antitrust Authority imposed stringent
conditions for Elbit Systems to meet so long as Elisra is jointly held by Elbit Systems
and IAI.

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 (FAA) and similar civil aviation authorities in Israel,
Europe and other countries.

Federal
Drug Administration Regulations.    Medical products designed and manufactured by
Kollsmans subsidiary, KMC Systems, are subject to the U.S. Federal Drug
Administration (FDA) regulations.

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# 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 to 100% of the price of the
contract with our customer, the actual effective buy-back obligation amount in some cases
could be 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, 2006 were approximately $1,078 million, to be fulfilled
over a period of up to 10 years.

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# 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. 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. Under certain
circumstances, such as 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, 2006, the amount of guarantees
relating to customer advances were approximately $607 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. These types of guarantees may remain in effect
for a period of time after completion of deliveries under the contract. We provide these
types of guarantees in the normal course of our business. As of December 31, 2006, the
balance of performance guarantees for Group companies amounted to approximately $103million.

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.

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

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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.    Elbit Systems and Elop collectively own
approximately 120 living patent families including patents and applications registered or
filed in Israel, the United States, the European Patent Office and other countries.
Tadiran Communications, Elisra and the Elbit Systems of America companies hold additional
patents. Our technology spin-off companies often rely in part on our patented technology.
We also hold approximately 30 trademarks relating to specific products. Asignificant 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.

Governmental
Customers 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 2006 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 in relation to sales resulting 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. In some cases where we have acquired business lines we obtain a
          royalty free license to use the applicable technology for specified
          applications. 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.

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# Research and
Development

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

We
perform R&D projects to produce new systems for the IMOD and other customers. These
projects give us the opportunity to develop and test emerging technologies. We developed
new tools for fast prototyping for both the design and development process. This permits
the operational team members to effectively specify requirements and to automatically
transfer them into software code. Examples of our ongoing defense-related R&D projects
include those for night operation capabilities, laser systems, display systems, helmet
mounted systems, other avionics systems, UAVs, UGVs, USVs, spaced based cameras, Recce
systems, C4I systems, electric tank turret drive systems, unmanned turret systems and
homeland security systems.  We also perform R&D in the area of commercial
aviation and commercial night vision products for automobiles. In addition, our technology
spin-offs perform R&D in their areas of operation, mainly in the fields of medial
instrumentation and broadband communications.

We
employ more than 2,500 software and hardware development and systems engineers engaged in
advance programs for airborne, ground and naval defense, homeland security and space
applications. More than 50% 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, 2004, 2005 and 2006:

|                     | 2004 | 2005  | 2006
|-------------------- | ---- | ----- | ----
|
|Total Investment     |      | $86.4 |     
|Less  Participation* |      | 19.6  |     
|                     |      |       |     
|Net Investment       |      | $66.8 |     
|                     |      |       |     

_________________

*See above  Government
Rights in Data and see below  Conditions in Israel  Chief
Scientist and Investment Center Funding.

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# Manufacturing

We
manufacture and assemble most of our systems at Elbit Systems production facility in
Karmiel, Israel, at Elops facilities in Rehovot, Israel, at EFWsfacilities in Fort Worth, Texas and at Kollsmans facilities in Merrimack, New
Hampshire. These facilities contain warehouses, electronic manufacturing areas, test
equipment and final assembly and test stations. They also have mechanical workshops, 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 U.S. FAA and FDA registered facilities.

Cyclone
performs manufacturing and assembly of composite materials and other products at its
facilities in Karmiel, Israel. Silver Arrow, Kinetics, ELSEC, Opgal, AEL and the European
Subsidiary also perform manufacturing and assembly at their facilities. SCD has a high
technology semiconductor manufacturing facility in Leshem, Israel, in which it performs
electronic integration and assembly of thermal imaging sensors and laser diodes. IEI has
facilities for manufacturing and repair of 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 metal parts and at Elmet
International SRL, a wholly-owned subsidiary of Elbit Systems involved in machining and
metal works.

Elisra
and its subsidiaries have various manufacturing facilities in Bnei Brak and Holon, Israel,
for performance of electronic assembly, testing and integration of EW, microwave and
communication equipment. Both at its facilities in Holon and Kiryat Shmona, Israel, and at
the facilities of its U.S. subsidiaries in Tallahassee, Florida, Tadiran Communications
performs manufacturing, electronic assembly and integration of communication equipment.

# Purchasing

Elbit
Systems purchasing activities in Israel are based in our facilities in Haifa and in
Karmiel. Elop, Cyclone, Silver Arrow, Elisra, Tadiran Communications 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. Raw materials used by us are generally available from a range of suppliers
internationally, and the prices of such materials are generally not subject to volativity.

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# 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, design, integration,
manufacturing and services for software and hardware, for the range of our systems and
products. 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 Kaizen 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. Elop is certified for
ISO-9001:2000, ISO-14001 and OSHAS 18001 and 9002 for software. Cyclone is certified for
ISO-9001:2000 and ISO-4001, and Silver Arrow is certified for ISO-9001:2000. All the
above, as well as Elisra, are certified by the National Standard Institution of Israel and
by the National Quality Assurance (NQA) authority for AS9100. Elisra is also certified for
ISO-14001 and SHAS 18001. Elisra, Tadiran Systems and Tadiran Spectralink are certified
for ISO-9001:2000 and ISO-9000-3:1997. Tadiran Communications is certified for
ISO-9001:2000 and ISO-90003 for software.

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. Kollsman maintains FAA Part 145 approved
repair stations in both New Hampshire and Kansas and is FAA Part 21 approved, holding a
variety of FAA certifications in support of its commercial avionics business line.
Kollsmans KMC Medical Systems business is registered to IS 13485:2003, is FDA
registered as a GMP manufacturer and is FDA compliant with Quality Systems Regulations 21
CFR Part 820, 803 and 806.

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# 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  two-year warranty for our systems and products following
delivery to, or installation by, the customer. In some cases we offer extended warranty
periods. 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, Elop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., the ESA companies lead our marketing activities, both from the Texas, New
Hampshire and Alabama facilities and from offices in the Washington, D.C. ESA operates
under an SSA that allows it and its subsidiaries to work on certain classified U.S.
Government programs. See above Principal Subsidiaries  ESA. Talla-Com
leads Tadiran Communications marketing efforts in the U.S., and its subsidiary
Talla-Tech also operates under an SSA.

Our
subsidiaries in other countries typically lead the marketing activities in their home
countries.

Over
the past several years, Elbit Systems, Elop, EFW and other subsidiaries in the Group 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.

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# 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.
Our main competitors include divisions and subsidiaries of Northrop Grumman Corporation,
Raytheon Inc., Honeywell, BAE Systems Ltd., Rockwell Collins, L-3 Communications Holdings,
Inc., Thales S.A., Harris Corporation, European Aerospace Defense and Space Company EADS
N.V., Goodrich Corporation, FLIR Systems, Inc., Rhode and Schwartz GmbH, Selex
Communications Ltd. and ITT Defense Limited. Our competitors also include a number of
other major defense contractors in the United States and Europe. We also compete with a
range of companies in the commercial avionics market. 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, 18% of our revenues in 2004, 26% in 2005 and 24% in 2006, and the U.S.
Government, that accounted for 10% of our revenues in each of 2004 and 2005 and 15% of our
revenues in 2006.

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# 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 (OCS) 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 as well as company investments in
manufacturing infrastructures.

Under
the terms currently applying to OCS funding, companies receiving funding for development
of products must pay the Israeli Government a royalty of usually 0% (in the case of
non-royalty bearing grants) 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 rate of manufacture of products developed with
government grants be performed in Israel at a rate equal to or higher than the rate
contained in the funding proposal, 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.

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In
2002, Elop 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
Elops agreement with the OCS, Elop is paying $10.6 million over a five-year period
beginning in 2002 in exchange for a release of Elop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.

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. A portion of the severance pay and pension obligation is covered by payment of
premiums to insurance companies under approved plans and to pension funds. 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. As of December 31, 2005, the payments to the National Insurance Institute were
equal to approximately 16.3% of wages. In 2006, the payments were increased to
approximately 17.7% of wages, subject to a cap if an employees monthly wages exceed
a specified amount. The employee contributes approximately 66% and the employer
contributes approximately 34%.

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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:

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

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

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

| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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.

|Item 4A. |  | Unresolved
Staff Comments
|-------- |  | -------------------------

None

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|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

Our significant
accounting policies are described in Note 2 to the audited consolidated financial
statements for the year ended December 31, 2006.

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

We
believe our most critical accounting policies relate to:

| |  |  | Revenue
Recognition.
| | - |  | --------------------

| |  |  | Business
Combinations and Purchase Price Allocation.
| | - |  | ----------------------------------------------------

| |  |  | Impairment
of Goodwill and Other Long-Lived Assets.
| | - |  | ---------------------------------------------------

| |  |  | Other-Than-Temporary
Decline in Value of Investments in Investee Companies.
| | - |  | ---------------------------------------------------------------------------

| |  |  | Useful
Life of Long-Lived Assets.
| | - |  | ---------------------------------

Revenue
Recognition

We
generate revenues, mainly from long-term contracts involving the design, development,
manufacture and integration of defense systems and products.  In addition, to a minor extent we provide 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.

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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. In certain
circumstances, which involve long-term fixed-price production type contracts for
non-homogenous or small quantity of units, revenue is recognized based on the achievement
of performance milestones, which provide a more reliable, and objective, measure to the
extent of progress toward completion.

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

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.

We
believe 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 our contractual
obligations, and our customers are expected to satisfy their obligations under the
contract.

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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
Deliverables in order to allocate the contract fees between the products accounted
for under SOP 81-1 and the services.

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). In such cases sales are 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.

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 estimating progress cost and measuring progress towards
completion, it is likely that materially different amounts would be reported in our
consolidated financial statements.

Business
Combinations and Purchase Price Allocation

Business
combinations are accounted for using the purchase method of accounting, under which the
total purchase price is allocated to proportional interest in the acquired companys
assets and liabilities based on their estimated fair values, and the remainder, if any, is
attributed to goodwill. The aggregate purchase price of any investment accounted for under
either the consolidation or the equity method of accounting is allocated to identifiable
net assets, intangible assets other than goodwill, in-process research and development
(IPR&D) activities and to goodwill. The amount allocated to IPR&D is being charged
immediately to the Groups results of operations in accordance with FASB
Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method (FIN 4). The amounts allocated to finite-lived
intangible assets other than goodwill are amortized on a straight-line basis over their
weighted average expected useful life.

Estimating
the fair value of certain assets acquired and liabilities assumed is judgmental in nature
and often involves the use of significant estimates and assumptions, mainly with respect
to intangible assets. While there are a number of different methods for estimating the
value of intangibles acquired, the primary method used is the discounted cash flow
approach. Some of the more significant estimates and assumptions inherent in the
discounted cash flow approach include projected future cash flows, including their timing,
a discount rate reflecting the risk inherent in the future cash flows and a terminal
growth rate.

Another area which requires judgment
which can impact our results of operations is estimating the expected useful lives of the
intangible assets.

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To
the extent intangible assets are ascribed with longer useful lives, there may be less
amortization expenses recorded in any given period. As the Group companies operate in
industries which are extremely competitive, the value of the intangible assets, including
goodwill and their respective useful lives, are exposed to future adverse changes which
can result in a charge to our results of operations.

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. We conduct a goodwill
impairment review at least annually and on an interim basis whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors considered
important which could trigger an impairment review include significant underperformance
relative to historical or expected future operating results and significant negative
industry or economic trends. We test for impairment at a level referred to as a reporting
unit. Determining fair value of a reporting unit involves the use of significant estimates
and assumptions. These estimates and assumptions could have an impact on whether or not an
impairment charge is recognized. To determine fair value, we may use a number of valuation
methods.

The
methods commonly used to value reporting units are the Income, Market and Cost
approaches. Our reporting units fair market value was estimated using two valuation
methodologies: the Income Approach and the Market Approach. As mentioned above, these
approaches use estimates and assumptions including projected future cash flows, discount
rate and terminal growth rate. Using different assumptions could result in different
results.

As
of December 31, 2006, our goodwill amounted to $58.4 million. We tested our goodwill as of
December 31, 2006 and concluded that no impairment loss was identified.

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
whenever events or circumstances indicate that carrying amount of an asset may not be
recoverable. The recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to the future undiscounted cash flows expected to be
generated by the asset. If an asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset exceeds its
fair value. In the evaluation of fair value, we use significant estimates and assumptions
such as projected future cash flows which are subject to high degree of judgment. If the
carrying value of the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. In the valuation of fair value we use
judgment as to which is the most appropriate method to use for measuring fair value and as
to what assumptions to use in implementing the methodology chosen. As we operate in
industries which are extremely competitive, changes in the assumptions and estimates may

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affect the carrying value of the
intangible assets, and could result in an impairment charge to our results of
operations. As of December 31, 2006, our long-lived assets amounted to $365.2 million,
including $70.6 million in intangible assets, and we concluded that there were no
indicators for impairment.

Should
our future impairment tests 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.

Other-Than-Temporary
Decline in Value of Investments in Investee Companies

At
the end of each reported period we evaluate whether an other-than-temporary decline in the
value of an investment in investee companies has been sustained. This evaluation is
judgmental in nature. If it has been determined that an investment has sustained an
other-than-temporary decline in its fair value relative to its carrying value, the
investment is written down to its fair value by a charge to our results of operations.

An
evaluation of fair value is dependent upon specific facts and circumstances. Factors that
are considered in this determination include financial information (including, among
others, budgets, business plans and financial statements) and independent appraisals, if
available. Factors indicative of an other-than-temporary decline include recurring
operating losses, credit defaults, specific conditions affecting the investment, such as
in the industry or in a geographic area, and subsequent rounds of financing at an amount
below the cost basis of the investment. This list is not all inclusive, and we weigh all
quantitative and qualitative factors in determining if an other-than-temporary decline in
value of an investment has occurred. As the Group operates in industries which are
extremely competitive, it is possible that estimates could change in the near term, and
there can be no assurance that an additional write-down or write-off of the carrying value
will not be required in the future. See also Other Income (Expenses) (Net) below.

Useful
Life of Long-Lived Assets

Intangible
assets and property, plant and equipment are amortized over their estimated useful lives.
Determining the useful life of such assets involves the use of estimates and judgments. In
determining the useful life we take into account various factors such as the expected use
of the assets, effects of obsolescence, competition, demand, changes in business,
acquisitions and other economic factors. If we estimate changes and the useful lives of
such assets increase or decrease, it will affect our results of operations.

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# 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.

During
2006, 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 have
completed the required activities for the 2006 year end financial statements.

# New Accounting
Standards

The
following are the recently issued accounting standards that may have an impact on our financial statements:

| |  |  |  | FIN48.    In
July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies
the accounting for income taxes by prescribing the minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. FIN 48
utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs
when an enterprise concludes that a tax position, based solely on its technical merits,
is more-likely-than-not to be sustained upon examination. Measurement (step two) is only
addressed if step one has been satisfied. Under step two, the tax benefit is measured as
the largest amount of benefit, determined on a cumulative probability basis that is
more-likely-than-not to be realized upon ultimate settlement.
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 applies to all tax positions related to income taxes, including tax positions
considered to be routine as well as those with a high degree of uncertainty.
FIN 48 has expanded disclosure requirements, which include a tabular roll forward of the
beginning and ending aggregate unrecognized tax benefits as well as specific detail
related to tax uncertainties for which it is reasonably possible the amount of
unrecognized tax benefit will significantly increase or decrease within twelve months.
These disclosures are required at each annual reporting period and if a significant change
occurs in an interim period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect
of applying FIN 48 will be reported as an adjustment to the opening balance of retained
earnings of 2007. We implemented FIN 48 in the first quarter of 2007. As a result of the
implementation, our tax liabilities increased by $4.8 million, which were recorded as a
reduction to the opening balance of retained earnings as of January 1, 2007.
We do not expect a significant increase or decrease in unrecognized tax benefits during 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  |  | SFAS157.    In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This
Statement provides a single definition of fair value, a framework for measuring fair
value, and expanded disclosures concerning fair value. Previously, different definitions
of fair value were contained in various accounting pronouncements creating
inconsistencies in measurement and disclosures. SFAS 157 applies under those previously
issued pronouncements that prescribe fair value as the relevant measure of value, except
SFAS No. 123(R) and related interpretations. The Statement does not apply to accounting
standards that require or permit measurement similar to fair value but are not intended
to represent fair value. This pronouncement is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact of adopting SFAS 157.
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | SFAS158.    In
September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires plan sponsors of defined benefit
pension and other postretirement benefit plans (collectively, postretirement
benefit plans) to recognize the funded status of their postretirement benefit plans
in the statement of financial position, measure the fair value of plan assets and benefit
obligations as of the date of the fiscal year-end statement of financial position, and
provide additional disclosures. Effective December 31, 2006, we adopted the recognition
and disclosure provisions of Statement 158. The effect of adopting Statement 158 on our
financial condition at December 31, 2006 has been included in the accompanying
consolidated financial statements. See below  Item 18. Financial Statements  Note
15 (Benefit Plans and Accrued Terminational Liability) for further discussion of the
effect of adopting SFAS 158 on our consolidated financial statements.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | SFAS159.    In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). This Statement provides companies with an
option to report selected financial assets and liabilities at fair value. Generally
accepted accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in earnings. The
Statements objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets and
liabilities differently. This Statement is effective as of the beginning of an entitys
first fiscal year beginning after November 15, 2007. We are currently evaluating the
impact of adopting SFAS 159.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Off Balance Sheet and
Other Long-Term Arrangements and Commitments

Buy-Back.
In connection with long-term projects in certain countries, Elbit Systems
          and certain subsidiaries undertook to use our respective best efforts to make or
          facilitate purchases or investments in those countries at specified percentages
          (typically up to 100%) of the amount of the specific contract. 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, 2006 amounted to $1,078 million to be performed
          over a

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period of up to 10 years. In the
opinion of our 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.

Government
Funding of Development.    Elbit Systems and certain Israeli subsidiaries partially
finance our research and development expenditures under programs sponsored by the
Government of Israel Chief Scientist Office (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, Elbit Systems and the subsidiaries agreed to pay
0%  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. Elbit
Systems and some of its subsidiaries may also be obligated to pay certain amounts to the
Israeli Ministry of Defense (IMOD) and others on certain sales including sales resulting
from the development of some of the technologies developed with their participation. See
above  Item 4. Information on the Company  Conditions in Israel  Chief
Scientist and Investment Center Funding.

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, 2006 as follows: $14 million for 2007, $12 million
for 2008, $9.5 million for 2009 and $28 million for 2010 and thereafter.

Bank
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,
Elbit Systems and certain subsidiaries are obligated to meet certain financial covenants.
See below  Liquidity and Capital Resources  Financial Resources.
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, 2006, Elbit Systems and its subsidiaries, except Elisra, were
in compliance with all covenants. As of December 31, 2006, Elisra did not comply with its
financial covenants. As a result, the banks requested to register a general floating lien
on the assets of Elisra. In February 2007, Elisras Board of Directors approved the
banks request.

Bank
Guarantees.    As of December 31, 2006, guarantees in the aggregate amount of
approximately $766 million were issued by banks on behalf of Group companies in order to
secure certain advances from customers and performance bonds.

Purchase
Commitments.    As of December 31, 2006 and 2005, the Group had purchase commitments that
amounted to approximately $681 and $661 million, respectively. These purchase orders and
subcontracts are typically in a standard format proposed by the Group, with the
subcontracts and purchase orders also reflecting provisions from the 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 the Groups customers in international contracts. These
terms include our right to terminate the purchase order or subcontract in the event of the
vendors or

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subcontractors default, as well
as the Groups right to terminate the order or subcontract for the Groups
convenience (or if the Groups prime contractor has so terminated the prime
contract). Such purchase orders and subcontracts typically are not subject to variable
price provisions.

Cancellation
of Export Authorizations for Elisra Project.    As a result of cancellation of the export
authorization in 2006 to a foreign country (the Customer), Elisra and one of its
subsidiaries were forced to terminate four projects. Most of the activity in respect of
the projects the total amount of which was approximately $40 million, has already been
executed and the deliveries have been made to the Customer. For those projects, Elisra and
its subsidiary provided to the Customer advances and performance guarantees issued by
banks and financial institutions in the total amount to approximately $10 million.
Elisras and Elbit Systems management, based on the opinion of its legal
advisors, believe that the financial impact of the four projects termination 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 Elbit Systems. The
Customer financed the projects by means of bank loans. The banks received indemnity
letters as security for repayment of the loans. Most of the indemnity was provided to the
banks by International Foreign Trade Risks Insurance Company (IFTRIC) (since renamed
ASHRA), and the balance was provided by Elisra and its subsidiary. In addition, Elisra
provided indemnity letters to IFTRIC that can be exercised upon the occurrence of specific
unusual events and is subject to IFTRIC fulfilling its commitments to the banks. In the
opinion of Elisras and Elbit Systems management, no provisions are required in
respect of these indemnity letters.

# Acquisitions and
Divestitures During 2006

See
above  Item 4. Information on the Company  Recent Acquisitions and
Divestitures.

Sandel

On
May 31, 2006, our U.S. subsidiary, Kollsman acquired a 20% preferred share interest in Sandel Avionics,
Inc. (Sandel) in consideration for $12.5 million (represented by a $11.5 million cash
payment and a $1 million holdback to be paid within 12 months). Sandel, based in Vista,
California, produces specialized integrated display systems and other products for the
commercial aviation market. We expect that some of Kollsmans new products will be
integrated with Sandels display electronics for the general aviation market.

Kollsman
has an option to buy the remaining 80% interest in Sandel for a period of 30 months after
the initial investment at the equivalent price per share as the first transaction. During
the option period, Kollsman has the right to representation on the Sandel board of
directors, as well as several specific minority rights. In addition, Kollsman and Sandel
have formed an alliance to cooperate on product development and marketing.

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Tadiran
Communications

On
June 5, 2006, Elbit Systems acquired approximately 4.3% of Tadiran Communications
outstanding shares in consideration for $18.3 million. Following the acquisition, Elbit
Systems held approximately 43% of Tadiran Communications shares.

Based
on a PPA performed by an independent advisor, the excess of the amounts paid for the above
mentioned Tadiran Communications shares acquired over their book value was attributed as
follows:

|                                 | Book value in
Tadiran |  | Excess cost |        | Total |   | Expected useful lives of excess cost | 
|-------------------------------- | --------------------- |  | ----------- | ------ | ----- | - | ------------------------------------ | 
|
|Working capital                  |                       |  | $           | 2,600  |       |   |                                     | 
|Inventory                        |                       |  |             | 1,000  |       |   | 300                                  | 
|Long-term assets and investments |                       |  |             | 1,300  |       |   | 100                                  | 
|Long-term liabilities            |                       |  |             | (1,800 | )     |   |                                     | 
|Brand name                       |                       |  |             | 400    |       |   | 600                                  | 
|Customer base                    |                       |  |             |       |       |   | 5,300                                | 
|Technology                       |                       |  |             | 200    |       |   | 2,300                                | 
|IPR&D                            |                       |  |             |       |       |   | 1,000                                | 
|Goodwill                         |                       |  |             | 2,500  |       |   | 2,500                                | 
|                                 |                       |  |            
|                                 |                       |  | $           | 6,200  |       | $ | 12,100                               | 
|                                 |                       |  |            

With
respect to Elbit Systems acquisition in April 2007 of the balance of the Tadiran
Communications shares pursuant to a tender offer, see below  Item 4.
Information on the Company - Recent Acquisitions and Divestitures - Tadiran
Communications.

Soltam.              In
December 2006, Elbit Systems sold our holdings in Soltam Systems Ltd.
          (Soltam) in consideration for $5 million, to be paid in 24 monthly
installments.           An amount of $2.3 million was recorded as long-term receivables.
A gain of $1.5           million was recorded as other income.

# Backlog of Orders

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.

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We
reduce 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.

Our
backlog of orders as of December 31, 2006 reached $3,786 million, of which 68% were for
orders outside Israel. The Companys backlog as of December 31, 2005 was $3,347
million, of which 72% were for orders outside Israel. Approximately 70% of our backlog as
of December 31, 2006 is scheduled to be performed during 2007 and 2008. The majority of
the 30% balance is scheduled to be performed in 2009 and 2010. Backlog information and any
comparison of backlog as of different dates may not necessarily represent an indication of
future sales.

# Trends

Trends
in the defense electronics and homeland security markets in which we operate have been
impacted by the nature of recent conflicts and terrorism activities throughout the world.
Lessons learned in Operation Iraqi Freedom, Afghanistan and various terrorist actions
worldwide 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 C(4)ISR. Accordingly, while we continue to perform platform
upgrades, more emphasis is being placed on C(4)ISR, including information systems,
intelligence gathering, situational awareness, precision guidance, all weather and
day/night operations, border and perimeter security, UAVs, other unmanned vehicles, space
and satellite based defense capabilities and homeland security systems. We believe that
its 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. It also anticipates continued competition in defense markets due to
declining defense budgets in some countries. We believe in our ability to compete on the
basis of its systems development and technological expertise, combat-proven performance
and policy of offering customers overall solutions to technological, operational and
financial needs and in the same time enhancing the industrial capabilities at these
countries.

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# Summary of Operating
Results

The
following table sets forth the consolidated statements of operations of Elbit Systems and
our subsidiaries for the years ended December 31, 2006 and
December 31, 2005.

The
financial statements of Elbit Systems include consolidation of Elisras financial
results, commencing December 1, 2005, therefore Elisras results are included in 2006
results and are not included in the 2005 results, prior to the day of the acquisition.

|                                                    | For the year ended
on December 31                    |          
|--------------------------------------------------- | ---------------------------------------------------- | ---------
|
|
|                                                    | (In thousands of U.S. dollars except per share data)
|Total revenues                                      |                                                      | 1,523,243
|Cost of revenues                                    |                                                      | 1,149,768
|Restructuring expenses (pre-contract and            |                                                      |          
|equipment write-off)                                |                                                      | -        
|                                                    |                                                      |          
|Gross profit                                        |                                                      | 373,475  
|                                                    |                                                      |          
|Research and development (R&D) expenses             |                                                      | 115,648  
|Less - participation                                |                                                      | (23,416  
|                                                    |                                                      |          
|R&D expenses, net                                   |                                                      | 92,232   
|Marketing and selling expenses                      |                                                      | 111,880  
|General and administrative expenses                 |                                                      | 77,505   
|IPR&D write-off                                     |                                                      | -        
|                                                    |                                                      |          
|                                                    |                                                      | 281,617  
|                                                    |                                                      |          
|Operating  income                                   |                                                      | 91,858   
|Finance expenses, net                               |                                                      | (21,456  
|Other income (expenses), net                        |                                                      | 1,814    
|                                                    |                                                      |          
|Income before taxes on income                       |                                                      | 72,216   
|Taxes on income                                     |                                                      | 20,694   
|                                                    |                                                      |          
|                                                    |                                                      | 51,522   
|Minority interest in loses (gains) of  subsidiaries |                                                      | 5,977    
|Equity in net earnings (losses) of affiliated       |                                                      |          
|companies and partnership                           |                                                      | 14,743   
|                                                    |                                                      |          
|Net earnings                                        |                                                      | 72,242   
|                                                    |                                                      |          
|Diluted earnings per share                          |                                                      | 1.72     
|                                                    |                                                      |          

95

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# 2006 Compared to 2005

Elisra

The
results of Elisra were included in our consolidated financial reports commencing December
1, 2005. The effect on 2005 results was mainly a $7.5 million IPR&D write-off. Because
of the acquisition date (November 30, 2005), the effects of Elisras results on our
consolidated results in 2005 were not material.

Accordingly,
in light of the immaterial effect of Elisra on our 2005 results, in order to facilitate
comparison of our 2006 results to those of 2005, the following information is provided on
Elisras 2006 results: revenues  $219 million, gross profit  $29 million
and net loss  $26 million. Our net share in the loss (70%) was $18 million.

The
results of Elisra reflected increased costs in the performance of several programs, mainly
in the fourth quarter of 2006. Elisras results reduced our gross profit, operational
profit and net profit percentages.

In
February 2007, Elisras Board of Directors approved the framework of an efficiency
plan, including a reduction in the number of employees, with a potential efficiency plan
cost of up to $16 million. The plan also includes co-location to one operating site as
well as other cost cutting measures. The goal of the plan is to return Elisra to
profitability. We believe that the efficiency plan, which requires the cooperation of
Elisras employees, provides a reasonable basis to improve Elisras efficiency.
In the event the level of Elisras
implementation of the plan is not as expected, we will evaluate whether this would require us to reflect any significant impairment in our
recorded assets related to Elisra.

Revenues

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.

Our
consolidated revenues increased by 42.4%, from $1,069.9 million in 2005 to $1,523.2
million in 2006.

96



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The
following table sets forth our revenue distribution by areas of operation:

|                                                                    | Year ended
|------------------------------------------------------------------- | ----------
|
|
|
|Airborne systems                                                    | 547.8     
|Land systems                                                        | 317.7     
|C(4)ISR systems                                                     | 313.5     
|Electro-optics                                                      | 223.3     
|Other  (mainly non-defense engineering and     production services) | 120.9     
|                                                                    |           
|Total                                                               | 1,523.2   
|                                                                    |           

The following
table sets forth our distribution of revenues by geographical regions:

|                | Year ended
|--------------- | ----------
|
|
|
|Israel          | 407.1     
|United States   | 609.5     
|Europe          | 233.7     
|Other countries | 272.9     
|                |           
|Total           | 1,523.2   
|                |           

The
changes in revenues by areas of operation, other than the inclusion of Elisra, were in
revenues from customers for land systems, which were increased mainly as a result of sales
related to systems supplied to the USMC.

The
changes in revenues by geographic distribution, other than standard quarterly
fluctuations, were in the revenues from customers in Europe and the U.S., which were
increased mainly as a result of the Watchkeeper project in the United Kingdom and systems
to the USMC.

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 are engaged during the reported period.

Gross
profit in 2006 was $373.5 million (with a gross profit margin of 24.5%), as compared to
$279.8 million (gross profit margin of 26.1%) in 2005. The decrease in the gross profit
margin was mainly as a result of the lower gross profit margin generated by Elisra.

97



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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 included programs which are partially funded by third parties, including the IMOD,
the OCS and bi-national and European development funds. The R&D was performed in all
major areas of our core technological activities and mainly in the areas of advanced
airborne systems, C(4)I systems, cutting edge electro-optics technology and
products for surveillance, aerial reconnaissance, lasers and space based sensors and
homeland security technologies and products. See above  Item 4. Information on the
Company  Research and Development.

Gross
R&D expenses in 2006 totaled $115.6 million (7.6% of revenues), as compared with $92.4
million (8.6% of revenues) in 2005.

Net
R&D expenses (after deduction of third party participation) in 2006 totaled $92.2
million (6.1% of revenues), as compared to $71.9 million (6.7% of revenues) in 2005.

Marketing
and Selling Expenses

We
maintain our activities in developing new markets and pursues various business
opportunities according to our plans.

Marketing
and selling expenses in 2006 were $111.9 million (7.3% of revenues), as compared to $78.6
million (7.4% of revenues) in 2005.

General
and Administrative (G&A) Expenses

G&A
expenses in 2006 were $77.5 million (5.1% of revenues), as compared to $54.4 million (5.1%
of revenues) in 2005.

The
increase in G&A expenses in 2006 compared to 2005 was 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.

Financing
Expenses (Net)

Net
financing expenses in 2006 were $21.5 million, as compared to $11.5 million in 2005.

The increase
in the net financing expenses resulted mainly from a higher level of long-term loans
during the first half of 2006.

98



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Other
Income (Expenses) (Net)

Other
income in 2006 was a $1.8 million gain, which was mainly as a result of the capital gain
related to the selling of Soltam shares, as compared to a $5.3 million loss in 2005, which
included a write-off of $5.4 million related to our investment in ImageSat
International B.V.

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 2006 was $20.7 million (tax rate of 28.7%), as compared to a provision for
taxes of $16.3 million (tax rate of 32.3%) in 2005. The change in the effective tax rate
is attributable mainly to the mix of the tax rates in the various tax jurisdictions in
which the Groups companies generating the taxable income operate.

Companys
Share in Earnings of Affiliated Entities

In
2006, we had income of $14.7 million from our share in earnings of affiliated entities, as
compared to a loss of $1.6 million in 2005. Our share in earnings of affiliated entities
in 2005 included $8.5 million in IPR&D write-offs related to Tadiran.

The
companies and partnerships, in which we hold 50% or less in shares or voting rights and
are therefore not consolidated in its financial statements, operate in complementary areas
to our core business activities, including electro-optics, airborne systems and
communications.

Net
Earnings and Earnings Per Share (EPS)

Net
earnings in 2006 were $72.2 million (4.7% of revenues), as compared to reported net
earnings of $32.5 million (3.0% of revenues) in 2005. Diluted EPS was $1.72 in 2006, as
compared to $0.78 in 2005.

The
number of shares used for computation of diluted EPS in the year ended December 31, 2006
was 41,880 thousand shares, as compared to 41,623 thousand shares in the year ended
December 31, 2005.

Net earnings in 2005 included a $8.5 million IPR&D write-off related to the
acquisition of Tadiran Communications shares in 2005.

99



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# 2005 Compared to 2004

Revenues

Our
consolidated revenues increased by 13.8%, from $939.9 million in 2004 to $1,069.9 million
in 2005.

Following
the acquisition of Elisras shares, our consolidated revenues in 2005 included $15.7
million of Elisras revenues.

The
following table sets forth our revenue distribution by areas of operation:

|                                                                | Year ended |        
|--------------------------------------------------------------- | ---------- | -------
|
|
|Airborne systems                                                |            | 420.8  
|Land systems                                                    |            | 117.4  
|C4ISR systems                                                   |            | 217.3  
|Electro-optics                                                  |            | 242.3  
|Other  (mainly non-defense engineering and production services) |            | 72.1   
|                                                                |            |        
|Total                                                           |            | 1,069.9
|                                                                |            |        

Airborne
systems revenues increased by approximately 14% from $367.9 million to $420.8 million. The
increase was primarily as a result of ongoing internal growth in airborne systems related
activities.

Land
systems revenues decreased by 41% from $199.2 million to $117.4 million. The decrease in
land systems revenues was mainly as a result of temporary delay in some projects that we
believe will be sold during 2006.

C4ISR
systems revenues increased by 100% from $108.9 million to $217.3 million. The increase in
C(4)ISR revenues resulted mainly from sales in the IMODs Digital Army Program (DAP)
related projects.

Electro-optics
revenues increased by 21% from $200.3 million to $242.3 million. The increase in
electro-optics revenues resulted from increased sales of homeland security systems for
international customers, night vision equipment for various customers, as well as sales of
electro-optic products by a European subsidiary.

100



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The
following table sets forth our distribution of revenues by geographical regions:

|                | Year ended |        
|--------------- | ---------- | -------
|
|
|Israel          |            | 315.4  
|United States   |            | 397.5  
|Europe          |            | 104.2  
|Other countries |            | 252.8  
|                |            |        
|Total           |            | 1,069.9
|                |            |        

The changes
in revenues by geographic distribution were in the revenues from customers in Europe,
which decreased mainly as a result of the temporary reduction in the land systems area of
operations, while revenues in all other geographical regions increased. The increase in
revenues in Israel was mainly from programs in the C(4)ISR area.

Gross
Profit

Following
the acquisition of Elisras shares in the fourth quarter of 2005, we identified and
wrote-off pre-contract costs related to duplicated inventories and equipment in the amount
of $3.5 million, which were recorded as restructuring costs in the cost of goods sold.

Gross
profit in 2005 was $279.8 million (with a gross profit margin of 26.1%), as compared to
$250.3 million (gross profit margin of 26.6%) in 2004.

R&D

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 2005 totaled $92.4 million (8.6% of revenues), as compared with $86.4
million (9.2% of revenues) in 2004.

Net
R&D expenses (after deduction of third party participation, including the IMOD and the
OCS) in 2005 totaled $71.9 million (6.7% of revenues), as compared to $66.8 million (7.1%
of revenues) in 2004. The increase in R&D expenses reflects the overall growth of our
activities.

101

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Marketing
and Selling Expenses

Marketing
and selling expenses in 2005 were $78.6 million (7.4% of revenues), as compared to $69.9
million (7.4% of revenues) in 2004.

G&A
Expenses.    G&A expenses in 2005 were $54.4 million (5.1% of revenues), as
compared to $47.8 million (5.1% of revenues) in 2004. The increase in G&A expenses in
2005 compared to 2004 was 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.

Financing
Expenses (Net).    Net financing expenses in 2005 were $11.5 million, as
compared to $5.9 million in 2004. The increase in the net finance expenses resulted mainly
from a higher level of long-term loans, currency exchange rate differences and an increase
in market interest rates.

Other
Expenses (Net)

Other
expenses in 2005 were a $5.3 million loss as compared to a $0.8 million gain in 2004.

During
the fourth quarter of 2005, the fair value of ISI decreased as a result of a decrease in
ISIs backlog and estimated future cash flows. Based on a valuation performed by an
independent advisor, we wrote-off approximately $5.4 million of our investment in ISI.

Taxes
on Income.    Provision for taxes in 2005 was $16.3 million (effective tax rate of
32.3%), as compared to a provision for taxes of $15.2 million (effective tax rate of
25.1%) in 2004. Excluding the IPR&D related to Elisra and the write-off related to
ISI, which are not deductible for tax purposes, our effective tax rate was 25.8%.

Companys
Share in Earnings of Affiliated Entities.    In 2005, we had net expense of $1.6
million from our share in earnings of affiliated entities, as compared to an income of
$6.6 million in 2004. The decrease in our share in earnings of affiliated entities in 2005
resulted mainly from inclusion of the write-off of IPR&D related to the acquisition of
Tadiran Communications shares, which amounted to $8.5 million.

EPS

Net
earnings in 2005 were $32.5 million (3.0% of revenues), as compared to net earnings of
$51.9 million (5.5% of revenues) in 2004. Fully diluted EPS was $0.78 in 2005, as compared
to $1.26 in 2004.

Net
earnings include IPR&D related to Tadiran Communications and Elisra and other
write-offs, which amounted in 2005 to approximately $18.6 million, and in 2004 to
approximately $1.0 million.

102



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The
number of shares used for computation of diluted EPS in the year ended December 31, 2005
was 41,623 thousand shares, as compared to 41,041 thousand shares in the year ended
December 31, 2004.

# 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.

# 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. 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
December 31, 2006, each of the companies subject to financial covenants, except Elisra,
was in compliance with the applicable covenants. With respect to Elisras financial
covenants as of December 31, 2006 see above Off-Balance Sheet and Other Long-Term
Arrangements and Commitments  Bank Covenants.

On
December 31, 2006, we had total borrowings in the amount of $153.3 million, including
$125.3 million in long-term loans, and $765.6 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, 2006, we had a cash balance amounting to $84.6
million. We also have the ability to raise funds on the capital market and through
expansion of our credit lines.

As
of December 31, 2006, we had working capital of $118 million, and our current ratio was
1.15. Our ratio of equity to total assets was 27.9%.

103



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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. In addition, our ability to
borrow may be limited in certain circumstances if we are included in the group of a
banks six largest borrowers. 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 11 (Short-Term Bank Credit and Loans) and Note 14
(Long-Term Loans). We believe our working capital is sufficient to support our current
requirements and financial covenants.

# 2006 Cash Flow

Our
net cash flow generated from operating activities in 2006 was $201 million, resulting
mainly from net income and advances received from customers. The cash inflows were
partially offset, mainly by an increase in inventories. Net cash flow used for investment
activities in the year ended December 31, 2006 was $87 million, which was used mainly for
acquisition of Tadiran Communications and Sandels shares in the second quarter
of 2006 and purchase of various assets and equipment. Net cash flow used for financing
activities in 2006 was $123.3 million, which was mainly for repayment of long-term loans.

# 2005 Cash Flow

Our
net cash flow generated from operating activities in 2005 was $187.6 million, resulting
mainly from net income and advances received from customers. The cash inflows were
partially offset, mainly by an increase in inventories and by payments of trade payables.
Net cash flows used for investment activities in the year ended December 31, 2005 were
$241.7 million, which was used mainly for acquisition of Tadiran Communications and
Elisras shares and for procurement of various assets and equipment. Net cash flow
derived from financing activities in 2005 was $113.9 million, which was mainly from
receipt of long-term loans.

# 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, 2007 and the subsequent fiscal
year. See above Financial Resources. Our specific material commitments for
capital expenditures (which include mainly the purchase of equipment, vehicles and
buildings) as of December 31, 2006 and May 31, 2007 were approximately $2 million, and were
and will be paid, respectively, out of cash from
operations. See also below  Item 18. Financial Statements  Consolidated
Statements of Cash Flows and Note 9 (Property, Plant and Equipment, Net) to the Financial
Statements.

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In
general, subsidiaries are able to freely transfer cash dividends, loans or advances to
Elbit Systems, subject to tax considerations in their applicable jurisdictions. Such tax
considerations have not had in the past, and are not anticipated to have, a material
impact on our ability to meet cash obligations.

# Impact of Inflation and
Exchange Rates

# Functional Currency

Our reporting
currency is the U.S. dollar, which is also the functional currency 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. Some of our subsidiaries have functional currencies in Euro, GBP and other
currencies. 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.

On
December 31, 2006, our liquid assets were comprised of bank deposits, and we had no
investments in liquid equity securities that were subject to market fluctuations, except
for its shareholdings in Tadiran. Our deposit and loans are based on variable interest
rates, and their value as of December 31, 2006 was therefore not exposed to changes in
interest rates. Should interest rates either increase or decrease, such change may affect
our results of operations due to changes in the cost of the liabilities and the return on
the 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 as of the date of the
transaction. Consequently, we are affected by changes in the NIS/U.S. dollar exchange
rates. On December 31, 2005 and 2006, we had exposure due to NIS denominated liabilities
of $37 million and $88 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.

105



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Most
of our future cash flows which will be in currencies other than the NIS and the U.S.
dollar were covered as of December 31, 2006 by forward contracts and options. On December
31, 2006, we had forward contracts for the sale and purchase of such foreign currencies
totaling $315.9 million ($113.3 million in Euro, $88.7 million GBP and the balance
in other currencies).

# 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
(measured by the change in CPI from the beginning to the end of the calendar year)
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 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% and
the devaluation rate was negative 1.6%. In 2005, the inflation rate was approximately 2.4%
and the devaluation rate was 6.8%. In 2006, the inflation rate was approximately negative
0.1% and the devaluation rate was negative 8.2%. 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.

106



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# 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 to 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 beenin 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 future cash flows that will be denominated in currencies other than the NIS and the
U.S. dollar were covered as of December 31, 2006 by forward contracts. On December 31,
2006, we had forward contracts for the sale and purchase of Euro, GBP and various other
currencies. As of December 31, 2006, the forward contracts to buy U.S. dollars and sell
GBP are expected to mature during the years 2007  2013. All of the other forward
contracts are expected to mature during 2007.

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, 2006 and is presented in millions of U.S. dollar equivalent terms.

|Forward                  | Notional Amount | Fair Value of Derivative
|------------------------ | --------------- | ------------------------
|Buy US$ and Sell:        |                 |                         
|Euro                     |                 | 107.3                   
|GBP                      |                 | 160.7                   
|Other various currencies |                 | 7.4                     
|
|Sell US$ and Buy:        |                
|Euro                     |                 | 39.4                    
|GBP                      |                 | 0.5                     
|Other various currencies |                 | 0.7                     

107



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# Contractual Obligations

|   |                            | Less than
1 year                             |  | 1-3 years |  | 4-5 years |  | 5 years | 
|-- | -------------------------- | -------------------------------------------- |  | --------- |  | --------- |  | ------- | 
|   | (U.S. dollars in millions)
|1. |                            | Long-Term Debt Obligations                   |  | $10       |  | $123      |  | $0      | 
|2. |                            | Operating Lease Obligations                  |  | 14        |  | 21        |  | 19      | 
|3. |                            | Purchase Obligations*                        |  | 540       |  | 113       |  | 22      | 
|4. |                            | Other Long-Term Liabilities Reflected on the |  |           |  |           |  |         | 
|   |                            | Company's Balance Sheet under U.S. GAAP**    |  |          |  |          |  |        | 
|5. |                            | Other Long-Term Liabilities                  |  |          |  |          |  |        | 
|   |                            |                                              |  |           |  |           |  |         | 
|   |                            | Total                                        |  | $564      |  | $257      |  | $41     | 
|   |                            |                                              |  |           |  |           |  |         | 

| | * |  | 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 17I (Commitments and Contingent
Liabilities  Contractual Obligations).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** |  | See
above  Item 4. Information on the Company  Buy-Back. The obligation amount
does not include an amount of $189 million of employee termination liabilities. See below
Item 18. Financial Statements  Note 2P (Significant Accounting Policies Severance
Pay) and Note 15 (Benefit Plans and Accrued Termination Liability).
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Off-Balance Sheet
Transactions

See
above General  Off-Balance Sheet and Other Long-Term Arrangements and
Commitments.

108



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|Item 6. |  | Directors,
Senior Management and Employees.
|------- |  | -------------------------------------------

# Directors and Executive
Officers

# Board of Directors

The
directors of Elbit Systems as of May 31, 2007 are as follows:

|Name                                | Age | Director Since
|----------------------------------- | --- | --------------
|Michael Federmann (Chairman)        | 64  | 2000          
|Moshe Arad                          | 72  | 2005          
|Avraham Asheri                      | 69  | 2000          
|Rina Baum                           | 62  | 2001          
|David Federmann                     | 32  | 2007          
|Yaacov Lifshitz (External Director) | 63  | 2003          
|Yigal Ne'eman                       | 65  | 2004          
|Dov Ninveh                          | 60  | 2000          
|Nathan Sharony (External Director)  | 72  | 2002          

The term
of office of each director, other than the External Directors, expires at the annual
general shareholders meeting to be held during 2007. The term of office for Nathan Sharony
as an External Director expires in March 2008 and for Yaacov Lifshitz as an External
Director in August 2009.

Michael
Federmann.    Michael Federmann has served as Chairman of the Board of Directors
since the merger with Elop in 2000. He served as Chairman of the Board of Directors of
Elop 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 Council of the Weizmann Institute of Science. He serves as the
President of the Israel-Germany Chamber of Industry and Commerce. Mr. Federmann holds a
bachelors degree in economics and political science from the Hebrew University.

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.

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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., Koor Industries Ltd., Mikronet Ltd. 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 FEL, and since 1986 has
served as Director and General Manager of Unico Investment Company Ltd. She serves as a
director of Dan Hotels and Etanit Building Products Ltd., as well as in other managerial
positions within the Federmann Group. She also serves as a director in Harel-PIA Mutual
Funds Management Company Ltd. Mrs. Baum holds an L.L.B. degree from the Hebrew University.

David
Federmann.    David Federmann has served in various management capacities in
FEL since 2000 and since 2002 as Business Development Manager of Freiberger Compound
Materials GmbH in Freiberg, Germany. In 2000 he joined FEL. Mr. Federmann holds a
bachelors degree in mathematics and philosophy from New York University.

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. He also currently serves on the Boards of
Directors of Kali  Insurance Agencies Ltd. and Carmel Investments Ltd. In addition,
he is a member of the Investment Committee of Angels-Club Ltd., a company engaged in
raising capital for start-up ventures. 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 Israel Ministry of Defense, Senior Vice President and Chief Credit Officer
of Israel Discount Bank and President and CEO of Electra (Israel) Ltd. Mr. Lifshitz holds
a bachelors degree in economics and political science and a masters degree in
economics from the Hebrew University.

Yigal
Neeman.    Yigal Neemanhas 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 completed his accounting studies at the Hebrew
University and is a Certified Public Accountant.

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Dov
Ninveh.    Dov Ninveh has served since 1994 as Chief Financial Officer and a
manager in FEL. He serves as a director of Dan Hotels and Etanit Ltd. Mr. Ninveh served as
a director of Elop 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 Israel Institute of Technology (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 Bituach Yashir Ltd., an
insurance company, Union Bank, Ormat Industries Ltd., Genoa Technologies Ltd., H-Tachof
Ltd. and Israel Bonds International Inc. From 1997 to 1999, he served as Chairman of
Technorov Holdings (1993) Ltd. 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 Elop and Vice President for
Logistics of Tadiran Ltd. In 1982, Mr. Sharony completed 30 years of service in the Israel
Defense Forces, retiring with the rank of Major General. Mr. Sharony participated in the
Field Artillery Battery Officers Course in Fort Sill, Oklahoma.

# Executive Officers

The
executive officers of Elbit Systems as of May 31, 2007 are as follows:

|Name              | Age | Position                                                                     
|----------------- | --- | -----------------------------------------------------------------------------
|Joseph Ackerman   | 58  | President and Chief Executive Officer                                        
|David Block Temin | 52  | Corporate Vice President and General Counsel                                 
|Guy Brill         | 55  | Corporate Vice President and Co-General Manager - Technologies and Operations
|Itzhak Dvir       | 59  | Corporate Vice President and Chief Operating Officer                         
|Robert Elrod      | 68  | President and Chief Executive Officer - ESA                                  
|Jacob Gadot       | 60  | Corporate Vice President - Mergers and Acquisitions                          
|Ran Galli         | 58  | Corporate Vice President - Strategic Initiatives                             
|Joseph Gaspar     | 59  | Corporate Vice President and Chief Financial Officer                         
|Zeev Gofer        | 55  | Corporate Vice President - Business Development and Marketing                
|Dalia Gonen       | 55  | Vice President - Human Resources                                             
|Ran Hellerstein   | 56  | Corporate Vice President and Co-General Manager - Airborne and Helmet Systems
|Haim Kellerman    | 53  | Corporate Vice President and General Manager - UAV Systems                   
|Bezhalel Machlis  | 44  | Corporate Vice President and General Manager - Land Systems and C4I          
|Marco Rosenthal   | 60  | Corporate Vice President and Co-General Manager - Technologies and Operations
|Haim Rousso       | 61  | Corporate Vice President and General Manager - Elop                          
|Gideon Sheffer    | 58  | Corporate Vice President - Strategic Planning                                
|Yoram Shmuely     | 47  | Corporate Vice President and Co-General Manager - Airborne and Helmet Systems

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Joseph
Ackerman.    Joseph Ackerman was appointed as President and Chief Executive Officer
in 1996. From 1996 to 2004, he served as a member of the board of directors of Elbit Systems.
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 Chairman or a director on the boards of
many of the companies in the Elbit Systems Group. 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 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.

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Itzhak
Dvir.    Itzhak Dvir was appointed as Chief Operating Officer in 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.

Robert
Elrod.    Robert R. (Bob) Elrod was appointed as President and Chief Executive
Officer of Elbit Systems of America, LLC (ESA) in April 2007. He was appointed as a member
of the ESA Board of Directors in February 2007. Mr. Elrod retired from Lockheed Martin
Corporation in 2005, after a distinguished career. During his tenure at Lockheed Martin,
he was responsible for a broad portfolio of combat, air mobility and sustainment programs
including the F-35 Joint Strike Fighter and the domestic and international F-16 multi-role
fighter. He also served as the president of Lockheed Martin Skunk Works. Before joining
industry, Mr. Elrod served 21 years with the U.S Air Force in a variety of assignments.
Mr. Elrod holds a bachelors degree in business administration with honors from the
University of Oklahoma and a MBA from Ohio State University.

Jacob
Gadot.    Jacob Gadot was appointed Corporate Vice President  Mergers and
Acquisitions in 2000. He also served as Chief Technology Officer from 2001 until 2005. 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. Mr. Gadot holds a
bachelor of science degree in electrical engineering from the Technion.

Ran
Galli.    Ran Galli was appointed Corporate Vice President  Strategic
Initiatives in 2005. He served as Corporate Vice President  Major Campaigns from
2003 until his current appointment. 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.

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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 Elop merger in 2000 until 2001. From 1996 until the merger, he held
the position of Corporate Vice President, Marketing and Business Development of the Elop
Group. Mr. Gaspar joined Elop in 1975 and held several management positions, including
Vice President and General Manager of Elops Optronics Product Division and
co-manager of an Elop subsidiary in the United States. He serves as a director for several
of the companies within the Elbit Systems Group. 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 Resourcesin 2000. She became Director of Human Resources in 1996. Ms. Gonen joined Elbit Ltd.
in 1971 and held variouspositions 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 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.

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Bezhalel
Machlis.    Bezhalel Machlis was appointed Corporate Vice President and General
Manager  Land Systems and C4I in 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.

Marco
Rosenthal.    Marco Rosenthal was appointed Corporate Vice President 
Co-General Manager Technologies and Operations in 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
Elop following the merger in 2000. Prior to that, Mr. Rousso held the position of
Corporate Vice President of the Elop Group and General Manager of Elop. He has held
various managerial positions in Elop 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.

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# 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, 2006:

|                            | Salaries, Directors' Fees
Commissions and Bonuses(1) | Pension, Retirement
and Similar Benefits
|--------------------------- | ---------------------------------------------------- | ----------------------------------------
|
|All directors and officers  |                                                      |                                         
|other than the President    |                                                      |                                         
|(consisting of 26* persons) |                                                      | $6,595                                  
|                            |                                                     
|President                   |                                                      | $2,777                                  

(1)    
          Elbit Systems shareholders at the annual general shareholders meeting held
          in 2004 approved payment to directors thereafter 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 of $10,436 and a per meeting fee of $402.  Such
          payments are made either directly to the director or to his or her employing
          company.

The employment contract of Joseph
Ackerman, Elbit Systems President and Chief Executive Officer, was renewed by the
Board of Directors (after approval by the Compensation and Audit Committees of the Board)
in August 2006 for a three-year period.

*One of our officers during 2006 has
subsequently resigned.

# Board Practices

Appointment
and Termination of Directors

Directors
are recommended for appointment or election to the Elbit Systems board by the
boards Nominating Committee. Consistent with Nasdaq requirements, the Nominating
Committee is composed of directors meeting the Nasdaq rules director independence
criteria.

The
current External Directors on Elbit Systems board of directors were each appointed
to three-year terms at a general meeting of shareholders, with Mr. Sharonys term
expiring in March 2008 and Mr. Lifshitzs term expiring in August 2009. The six of
the other seven current directors were appointed at the annual general meeting of
shareholders held in August 2006. David Federmann was appointed by the Board as a director in
March 2007.

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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.

Nasdaqs
director independence and related rules applicable to the board of directors became
applicable with respect to Elbit Systems in 2005. Under these rules, Elbit Systems
Ltd.s board of directors is required to meet the Nasdaq director independence
criteria. Certain other rules also became applicable regarding independent directors
serving on a director nomination committee and approving the compensation to Elbit
Systems Chief Executive Officer.

Audit
Committee. Nathan Sharony (chairman), Moshe Arad, Avraham Asheri, Yaacov
Lifshitz and Yigal Neeman 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 took effect with respect to Elbit Systems in
2005, and all the members of the Audit Committee meet such requirements. The Audit
Committee meets from time to time in executive sessions and also conducts annual
assessments of the sufficiency of its charter and of the Committees compliance with
its obligations. See below  Item 10. Additional Information  General
Provisions of Israeli Law and Related Provisions  Internal Auditor and Audit
Committee; Item 16A. Audit Committee  Financial Expert and Item 16D. Exemptions from
Listing Standards for Audit Committees.

# Employees

Number
of Employees. Most of our employees are based in Israel, and we have a significant
amount of employees in the United States. A significant majority of the employees who are not U.S. employees are in Israel.
The total number of employees worldwide and the
number of employees in the U.S. at the end of 2006, 2005 and 2004 were as follows:

|     | Total Employees | U.S. Employees
|---- | --------------- | --------------
|2006 | 8,030           | 1,357         
|2005 | 6,340           | 1,225         
|2004 | 5,782           | 1,150         

Employment
Contracts. 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. We
believe our overall relationship with our employees is satisfactory.

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Collective
Bargaining Agreements, Approximately 530 of Elops employees are covered by a
collective bargaining agreement extending through the end of 2007. Union collective
bargaining agreements in effect through the end of 2007 apply to approximately 175 of
Cyclones employees. Approximately 675 of Elisras employees are covered by
collective bargaining agreements extending through March 2008 and September 2012,
respectively. As of the beginning of 2007 Elisras employees covered by the
collective bargaining agreements announced a labor dispute with the support of the
relevant trade union and have initiated various sanctions. As of the date of this
Annual Report, negotiations with Elisras employees and trade union are ongoing.
Tadiran Systems is currently under advanced negotiations towards reaching a new
collective bargaining agreement to replace the collective bargaining agreements which
ended during December 2006 which will continue in effect until a new agreement is reached
and covering approximately 153 of Tadiran Systems employees. Approximately 95 of
Tadiran Spectralinks employees are covered by collective bargaining agreements
extending through October 2010. Approximately 430 Tadiran Communications employees at its
Holon plant are covered by collective bargaining agreements extending through July 2010,
and approximately 100 Tadiran Communications employees at its Kiryat Shmona plant are
covered by collective bargaining agreements extending through August 2007.
Approximately 160 of EFWs employees in Fort Worth are subject to union
collective bargaining agreements expiring in November 2008.

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# Share Ownership

# Elbit Systems
Stock Option Plans

2007
Employee Stock Option Plan

In
January 2007, our shareholders approved the 2007 Option Plan (the Plan). The purpose of
the Plan is to provide an incentive to applicable employees of Elbit Systems and certain
of our subsidiaries, who are expected to contribute to the Groups future growth and
success and to strengthen the alignment of the option recipients interests with
those of Elbit Systems and our shareholders.

The
options were allocated, subject to the required approvals, in two tracks as follows: (i)
Regular Options  up to 1,250,000 options exercisable into 1,250,000 Ordinary Shares
of the Company in consideration for the exercise price, all or any portion of which may be
granted as Incentive Stock Options (Regular Options) and (ii) Cashless Options  up to
1,250,000 options, which entitle the participant to exercise options for an amount
reflecting only the benefit factor (Cashless Options). Each of the participants is granted
an equal amount of Regular Options and Cashless Options. The exercise price for Israeli
participants is the average closing price of Elbit Systems shares during 30 trading
days preceding the options grant date. The exercise price of options granted to a
non-Israeli participant residing in the United States is the fair market value of the
share on the day the options are granted. Generally, the options expire five years from
the grant date.

According
to the Plan, the options granted on a certain date (such grant date being the Commencement Date)
will become vested and exercisable in accordance with the following
vesting schedule:

|(1) |  | Fifty percent (50%) of the options will be vested and exercisable from the
                    second anniversary of the Commencement Date;
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | An additional twenty-five percent (25%) of the options will be vested and
                    exercisable from the third anniversary of the Commencement Date; and
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The remaining twenty-five (25%) of the options will be vested and exercisable
                    from the fourth anniversary of the Commencement Date.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

Subject
to the above-mentioned vesting periods, the options are exercisable during the five-year
period after the Commencement Date.

Israeli
participants are granted options under the Plan in accordance with the provisions of
Section 102 of the Israeli Tax Ordinance related to the Capital Gains Tax Track.

119



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During
the first quarter of 2007, we granted approximately 200 employees an aggregate total of
2,366,300 options under the Plan. The average exercise price of the options was $33.19.
The options are exercisable for five years from the Commencement Date. All grants were
made in accordance with the grant date conditions specified in the Plan. The compensation
expenses related to the options granted in the first quarter of 2007 is estimated at $20
million. That expense is expected to be recognized over a period of four years. As part of the overall grant in the first quarter of 2007, in January
2007, Elbit Systems President, Mr. Ackerman, was granted 95,000 options under the
Plan at an exercise price of $33.20 per share. No directors were granted options under the
Plan but officers other than Mr. Ackerman were granted an aggregate of 733,000 options
under the Plan.

For
a full description of the Plan see the exhibit to the Proxy Statement filed with the
Securities and Exchange Commission (SEC) on Form 6-K on December 7, 2006.

Post
Merger Plan

Elbit
Systems adopted an employee stock option plan following the merger with Elop in 2000 (the
Post Merger Plan). Under this Plan, stock options for our ordinary shares were granted to
officers and employees of Elbit Systems and wholly-owned subsidiaries. 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.

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.. 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. 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. As of May 31, 2007, options
exercisable into  92,021 ordinary shares, based on the shares May 31,
2007 closing price on TASE of $43.46, remain unvested under the Post Merger Plan. The
options expire upon the later of six years after the grant date or 90 days after the
employees termination of employment with Elbit Systems or its subsidiaries, as
applicable.

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|Item 7. |  | Major
Shareholders and Related Party Transactions.
|------- |  | --------------------------------------------------

# Major Shareholders

# Percentages

Elbit
Systems had, as of May 31, 2007, 42,064,268 ordinary shares.(1 ) The following
table sets forth specific information as of May 31, 2007, to the best of our knowledge,
concerning:

| |  |  | beneficial
ownership of more than 5% of our outstanding ordinary shares; and
| | - |  | ----------------------------------------------------------------------------

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

|Name of Beneficial Owner   | Amount Owned | Percent of Ordinary Shares
|-------------------------- | ------------ | --------------------------
|Federmann Enterprises Ltd. |              |                           
|99 Hayarkon Street        
|Tel-Aviv, Israel(2)        | 19,105,448   | 45.42%                    
|                          
|Heris Aktiengesellschaft   |              |                           
|c/o 99 Hayarkon Street     |              |                           
|Tel-Aviv, Israel           | 3,836,458(3) | 9.12%                     
|                          
|All officers and directors
|as a group (26 persons)    | 176,456(4)   | 0.42%                     

_________________

|(1) |  | The
total number of ordinary shares includes 23,091 ordinary shares held by a
          subsidiary of Elbit Systems but excludes 385,900 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | As
of May 31, 2007, 4,655,448 Elbit Systems ordinary shares held by FEL were pledged to Bank
Leumi Le-Israel BM to guarantee loans provided to FEL in connection with FELs
purchase in 2004 of the Elbit Systems shares held by Elron Electronics Industries Ltd.
(Elron) as well as to guarantee a further loan provided to FEL in 2007. In addition,
1,380,000 and 510,000 Elbit Systems shares held by FEL were pledged in favor of Koor
Industries Ltd. (Koor) and Bank Hapoalim BM (Bank Hapoalim), respectively, in connection
with FELs purchase in 2006 from Koor of Elbit Systems shares. A further 460,000
Elbit Systems shares held by FEL are in the process of being pledged in favor of Bank
Hapoalim, also in connection with the financing of FELs 2006 purchase of Elbit
Systems shares from Koor.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The
amount of shares owned by Heris is included in the amount of shares held by           FEL
as set forth in footnote (2) above.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(4) |  | This
amount does not include any shares that may be deemed to be beneficially           owned
by Michael Federmann as described in footnote (2) above. The amount           includes
8,061 shares underlying options that are currently exercisable or that           will
become exercisable within 60 days of May 31, 2007. A portion of the           underlying
options are phantom options that have been calculated           based on
Elbit Systems May 31, 2007 share closing price on TASE of $43.46.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Rights in Shares,
Significant Changes in Shareholders and Controlling Shareholders

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:

| |  |  | In
July 2004, FEL purchased approximately 19.6% of Elbit Systems ordinary shares from Elron
Electronic Industries Ltd. (Elron), resulting in FELs shareholdings increasing from
approximately 30.2% to approximately 49.8%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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.)
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
August 2005, Koor purchased an additional 1,000,000 ordinary shares from FEL, resulting
in FELs ownership percentage decreasing from approximately 43.5% to approximately
41% (the 0.1% dilution in FELs percentage of shareholders from April 2005 to August
2005 was a result of exercise of options by Elbit Systems employees under the stock
option plan.)
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

122



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| |  |  | In
the second quarter of 2006, each of the Bank Leumi Group and the Bank Hapoalim Group
reduced their respective ownership of our ordinary shares to less than 5%.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
November 2006, FEL purchased from Koor 2,350,000 ordinary shares, increasing FELs
ownership to approximately 45.4%. (In December 2006, Koor sold on the market the balance
of its shares in Elbit Systems.)
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of May 31, 2007, approximately 4.14% of our outstanding ordinary shares were held in the
United States by approximately 204 holders registered on the books of our transfer agent.

# Related Party
Transactions

Agreements
Relating to the Elop Merger.The various shareholder-related agreements entered into
by the Federmann Group in 1999 and 2000 in connection with the merger with Elop, including
a Registration Rights Agreement, ceased to have effect upon FELs purchase of
Koors holdings in Elbit Systems in November 2006.

Agreements
Related to the Tadiran Communications Acquisition. The shareholders agreements entered
into by FEL and Koor in 2004 and 2005 in connection with Elbit Systems 2005 acquisitions
of shares in Tadiran Communications, ceased to have effect upon FELs purchase of
Koors shares of Elbit Systems in November 2006.

# 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.

See
below  Item 10. Additional Information  General Provisions of Israeli Law and
Related Provisions of Articles of Association  Approval of Certain
Transactions.

# Transactions with
Officers and Directors

Some
members of Elbit Systems Board are also directors of FEL or companies controlled by
either FEL. 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.

123



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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.

|Item 8. |  | Financial
Information.
|------- |  | ----------------------

# Consolidated
Statements and Other Financial Information

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

# Legal Proceedings

Elisra
Plant Fire Insurance Claim.In 2001, a fire occurred at the Holon, Israel plants of
Elisras subsidiaries, Tadiran Systems and Tadiran Spectralink, causing significant
damages. In 2001, Elisra and its subsidiaries filed a claim in the District Court of
Tel-Aviv for damages arising out of the fire against the Phoenix Israeli Insurance
Company and other insurance companies. The aggregate amount of the claim is approximately
$96 million, based upon a book value of $36 million of the equipment, inventory and costs
of work in process lost in the fire, as well as various other damages, including
consequential damages, in accordance with the terms of the insurance policy. A $10
million advance was paid by the insurance company to Elisra. At the end of 2004 the claim
was transferred for mediation before a retired Israel Supreme Court judge, and numerous
meetings have taken place to date with the mediator. Mediation conducted during 2005 and
2006 did not result in a resolution of this matter. A preliminary hearing held in March
2007 also did not result in a resolution.  The parties have been requested by the court
to conclude preliminary issues prior to the next court hearing scheduled for July 2007.
In the opinion of Elbit Systems management, the outcome of this claim will not have
a material adverse effect on Elbit Systems financial condition.  Pursuant
to the terms of the agreements entered into in 2005 between Koor and Elbit Systems
regarding Elbit Systems purchase of Koors shares in Elisra, Koor is entitled to
compensation corresponding to a portion of the future proceeds that may be received by
Elisra relating to this claim.

Other
Legal Proceedings. Elbit Systems and our subsidiaries are involved in other 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.

124



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# 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:

|     |                                                                                                                
|---- | ---------------------------------------------------------------------------------------------------------------
|2004 | $2.17 per share (including an extraordinary dividend of $1.80 per share declared in the second quarter of 2004)
|2005 | $0.54 per share                                                                                                
|2006 | $0.61 per share                                                                                                

# Significant Changes

In
April 2007, Elbit Systems completed a tender offer for shares of Tadiran Communications.
See above, Item 4  Information on the Company - Recent Acquisitions and Divestitures.

125



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|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)
|---- | ------ | -------
|
|
|2002 | $19.31 | $14.68 
|2003 | $20.00 | $14.51 
|2004 | $26.40 | $17.85 
|2005 | $26.85 | $20.90 
|2006 | $34.03 | $23.00 

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:

|                                      | Nasdaq   | TASE(1) 
|------------------------------------- | -------- | --------
|
|2005                                  |          |         
|First Quarter                         | $  26.85 | $  22.97
|Second Quarter                        | $  25.35 | $  21.86
|Third Quarter                         | $  25.30 | $  22.41
|Fourth Quarter                        | $  25.35 | $  20.92
|                                      |          |         
|2006                                  |          |         
|First Quarter                         | $  25.62 | $  23.00
|Second Quarter                        | $  27.77 | $  23.12
|Third Quarter                         | $  30.34 | $  25.00
|Fourth Quarter                        | $  34.03 | $  29.89
|                                      |          |         
|2007                                  |          |         
|First Quarter                         | $  35.90 | $  32.30
|Second Quarter (through May 31, 2007) | $  44.98 | $  36.82

|(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 for the applicable day of the
          high/low amount in the specified period.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

126



---

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

|              | Nasdaq | TASE(1)
|------------- | ------ | -------
|
|December 2006 | $34.03 | $31.90 
|January 2007  | $35.13 | $32.30 
|February 2007 | $35.56 | $33.30 
|March 2007    | $35.90 | $32.70 
|April 2007    | $42.34 | $36.82 
|May 2007      | $44.98 | $42.09 

_________________

|(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 for the applicable day of the
          high/low amount in the specified period.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|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).

Purpose. Elbit
Systems purpose, as described in Article 3 of the Articles of
          Association, includes any objectives permitted by law.

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. The Articles of Association authorizes a maximum of
17 and a minimum of five directors.

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.

128



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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 additional terms of up to
three years each term. Any committee of the Board must include at least one External
Director. Nathan Sharony and Yaacov Lifshitz currently serve as an External Directors of
Elbit Systems, and their terms of office end in March 2008 and August 2009, respectively.
External Directors are required to have professional 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 a company
and Office Holders who are not directors require approval of the Board, and such
compensation arrangements that are extraordinary also require the approval of the Audit
Committee prior to Board approval. Elbit Systems directors are compensated at rates
approved by a general meeting of shareholders. See above  Item 6. Directors, Senior
Management and Employees  Compensation of Directors and Officers.

129



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# 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 many cases by the audit
committee and by the board of directors. Sometimes shareholder approval is also required.

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

Matters
referred to in (4) also require shareholder approval, including, where applicable, a
specified percentage of non-interested shareholders.

130



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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 certain of their 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.

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. Insurance may also be obtained to cover 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.

Also
under the Companies Law, a company also may 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 an investigation or proceeding in which no indictment was
filed and no monetary payments in lieu of criminal proceedings were imposed against the
Office Holder, or monetary payments in lieu of criminal proceedings were imposed on him or
her provided that the alleged criminal offense does not require proof of criminal intent.

131



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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 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.
|--- |  | --------------------------------------------------------------------------

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 or paid by him or her 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; however, such
                    undertaking will be limited to events which, in the Boards opinion, are
                    foreseeable in light of the Companys actual activities at the time of
                    granting the obligation to indemnify, and to a sum or criteria as the Board
deems  reasonable
under the circumstances, and the undertaking to indemnify will specify the aforementioned
events and sum or criteria.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

132



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|(2) |  | reasonable legal fees incurred by a director or officer in an investigation or
                    proceeding conducted against him by an authority authorized to conduct such
                    investigation or procedure, provided that such investigation or procedure (i)
                    concludes without the filing of an indictment against the director or officer
                    and without imposition of monetary payment in lieu of criminal proceedings, or
                    (ii) concludes with imposing on the director or officer monetary payment in lieu
                    of criminal proceedings, provided that the alleged criminal offense in question
                    does not require proof of criminal intent.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | 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
|--- |  | --------------------------------------------------------------------------------------------------------------------

|(4) |  | 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 Audit Committee, Board and 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 Audit Committee and the Board for grant to officers of
Elbit Systems.

In
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 million (from the then current level of $30
million) for any year covered by the policy. As of May 31, 2007, the level of D&O
insurance coverage was $40 million. The framework resolution also allows for an increase
of up to 25%

133



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per year in the D&O insurance
premium up to a maximum aggregate of 125% of the then 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.

# Incorporation by
Reference

The
description of our Memorandum of Association and Articles of Association included in our
Form 20-F, under the Securities Act of 1933, as amended, filed with the SEC on November
22, 1996, is incorporated by reference herein.

# Material Contracts

Elbit
Systems has not entered into material contracts since June 1, 2004, other than in the
ordinary course of business and other than the agreements entered into in 2004 and 2005
related to the Elisra and the Tadiran Communications acquisitions. These agreements,
which for the most part are no longer in effect, were described in our Annual Report on
Form 20-F for 2005.

# 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.

134



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# 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).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 34% Company Tax in 2005. 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.

135



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In
2004, the Israeli Parliament approved the Amendment to the Income Tax Ordinance (No. 140
and Temporary Provision) (the Amendment) that reduced the corporate tax rate from 36% to
35% in 2004, 34% in 2005, 32% in 2006 and 30% in 2007. In 2005, the Israeli Parliament
approved the Amendment to the Income Tax Ordinance (No. 147) (Amendment 147) that reduces
the corporate tax in 2006 to 31%, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010.

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. Webelieve 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 (the Investment Law)
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, 2006, Elbit Systems
and some of its subsidiaries in Israel had active approved programs eligible for tax
benefits. These programs will expire during the years 2007 to 2013.

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

136



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| |  |  | TaxholidaypackageforaPrivilegedEnterprise: 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Grant/lowtaxpackageforanApprovedEnterprise:
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 was 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.
Amendment 147 (see above Effective Corporate Tax Rate) increases the tax rate
on capital gain to a non-principal shareholder (holding less than 10% of the shares),
derived from sale of shares listed on a stock exchange, to 20% on the total capital gain
accrued from January 1, 2003, and to a principal shareholder to 25%. The Amendment applies
to sales as from January 1, 2006.

137



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According
to an amendment in the Israeli Tax Ordinance, which became effective in 2003, gains on the
sale of ordinary shares that are traded on the TASE and on Nasdaq 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.

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
2004 the inflation rate was 1.2%, 2.4% in 2005 and negative 0.1% in 2006.

Income
Tax for Individual Israeli Residents.Residents of Israel are subject to income
tax distributions of dividends other than bonus shares (stock dividends). The paying
company withholds at source income tax at the rate of 20%. 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 that 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.

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 the source income tax at
the rate of 25%, unless a lower rate is applicable under a double taxation treaty.
Accordingly, Elbit Systems withholds income tax at the source. 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. 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%
(after Amendment 147  20%) of the dividend amount, or 15% in connection with an
Approved Enterprise.

138



---

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 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 100 F Street, N.E., Washington, D.C.
20549 Copies of the materials may be obtained from the Public Reference Room of the SEC at
100 F Street, N.E., 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.

139



---

|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. As of December 31, 2006, such investments were not
material. Therefore, we do not believe that we were exposed to any material market risk
with regard to market risk sensitive instruments, including the effect of debt denominated
in foreign currencies and the effect of interest rates on debt.

|Item 12. |  | Description
of Securities Other than Equity Securities.
|-------- |  | -------------------------------------------------------

Not
applicable.

|Item 13. |  | Defaults,
Dividend Arrearages and Delinquencies.
|-------- |  | ------------------------------------------------

Not
applicable.

|Item 14. |  | Material
Modifications to the Rights of Security Holders and Use of Proceeds.
|-------- |  | -----------------------------------------------------------------------------

Not
applicable.

|Item 15T. |  | Controls
and Procedures
|--------- |  | -----------------------

Disclosure
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. As of December 31, 2006, 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

140



---

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.

Managements
Annual Report on Internal Control Over Financial Reporting

Elbit
Systems management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is defined in
Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended, as a process
designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that
(1) pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect our transactions and dispositions of assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our
receipts and expenditures are being made in accordance with authorizations of our
management and directors; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements including the possibility of human error and the circumvention or
overriding of the sound control procedures. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.

Elbit
Systems management, including our CEO and CFO, assessed the effectiveness of our
internal control over financial reporting as of December 31, 2006. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control 
Integrated Framework. Based on this assessment, management believes that, as of
December 31, 2006, our internal control over financial reporting is effective.

This
Annual Report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only
managements report in this Annual Report.

Changes
in Internal Control over Financial Reporting. During the period covered by this
Annual Report, there have not been any changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

141



---

# Item 16.

# Item 16.A 
Audit Committee Financial Expert

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

# Item 16.B  Code
of Ethics

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

# Item 16.C 
Principal Accountant Fees and Services

In
the annual general shareholders meeting held in August 2006, our shareholders reappointed
Kost Forer Gabbay & Kasierer (Kost), a member of Ernst & Young Global (E&Y),
to serve as our independent auditors. We incurred the following billings from Kost and
other E&Y affiliates for professional services in each of the last two fiscal years:

|           | Year Ended December 31
|---------- | ----------------------
|
|
|Audit Fees |                       
|Tax Fees   |                       
|           |                       
|Total      |                       
|           |                       

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
consents and assistance with and review of documents filed with the SEC, as well as with documentation
related to Sarbanes-Oxley Act implementation. It also includes
fees billed for 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.

142



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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 pre-approved fees or which includes other
scope of work requires specific pre-approval by the Audit Committee. Accordingly,
all of the above-mentioned independent audit fees were pre-approved by our Audit
Committee.

# Items 16.D 
Exemptions from the Listing Standards for Audit Committees

None

# Items 16.E  Purchases
of Equity Securities by the Issuer and Affiliated Purchasers

Neither Elbit
Systems nor any affiliated purchaser purchased any of Elbit Systems equity
securities during 2006.

|Item 17. |  | Financial
Statements.
|-------- |  | ---------------------

Not
applicable.

|Item 18. |  | Financial
Statements.
|-------- |  | ---------------------

See
Financial Statements attached.

143



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# CONSOLIDATED FINANCIAL
STATEMENTS as of December 31, 2006 In U.S. dollars

# C O N T E N T S

|                                                        | Page     
|------------------------------------------------------- | ---------
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 145-149  
|                                                       
|CONSOLIDATED FINANCIAL STATEMENTS:                     
|                                                       
|Consolidated Balance Sheets                             | 150 - 151
|                                                       
|Consolidated Statements of Income                       | 152      
|                                                       
|Statements of Changes in Shareholders' Equity           | 153 - 154
|                                                       
|Consolidated Statements of Cash Flows                   | 155 - 156
|                                                       
|Notes to the Consolidated Financial Statements          | 157 - 209

144



---



145



---



146

---



147

---



148

---



149

---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|                                                                     |  | December 31, |     
|-------------------------------------------------------------------- |  | ------------ | ----
|
|CURRENT ASSETS:                                                      |  |              |     
|Cash and cash equivalents                                            |  |              |     
|Short-term bank deposits                                             |  |              |     
|Available for sale marketable securities                             |  |              |     
|Trade receivables (net of allowance for doubtful                     |  |             
|accounts in the amount of $3,390 and $3,221 as of December           |  |             
|31, 2006 and 2005, respectively)                                     |  |              | (3) 
|Other receivables and prepaid expenses                               |  |              | (4) 
|Inventories, net of customer advances                                |  |              | (5) 
|                                                                     |  |              |     
|Total current assets                                                 |  |              |     
|                                                                     |  |              |     
|LONG-TERM INVESTMENTS AND RECEIVABLES:                               |  |             
|Investments in affiliated companies, partnership and other companies |  |              | (6) 
|Compensation receivables in respect of fire damages, net             |  |              | (7) 
|Long-term bank deposits and trade receivables                        |  |              | (8) 
|Severance pay fund                                                   |  |              | (2P)
|                                                                     |  |              |     
|                                                                     |  |              |     
|                                                                     |  |              |     
|PROPERTY, PLANT AND EQUIPMENT,  NET                                  |  |              | (9) 
|                                                                     |  |              |     
|INTANGIBLE ASSETS, NET:                                              |  |              | (10)
|Goodwill                                                             |  |              |     
|Other intangible assets, net                                         |  |              |     
|                                                                     |  |              |     
|                                                                     |  |              |     
|                                                                     |  |              |     
|                                                                     |  |              |     
|                                                                     |  |              |     

The accompanying notes
are an integral part of the consolidated financial statements
150

---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

|                                              
|----------------------------------------------
|CONSOLIDATED BALANCE SHEETS                   
|                                              
|U.S. dollars (In thousands, except share data)

|                                                          |  | December 31, |         
|--------------------------------------------------------- |  | ------------ | --------
|
|CURRENT LIABILITIES:                                      |  |              |         
|Short-term bank credit and loans                          |  |              | (11)    
|Current maturities of long-term loans                     |  |              | (14)    
|Trade payables                                            |  |              |         
|Other payables and accrued expenses                       |  |              | (12)    
|Customers advances in excess of                           |  |              |         
|costs incurred on contracts in progress                   |  |              | (13)    
|                                                          |  |              |         
|Total current liabilities                                 |  |              |         
|                                                          |  |              |         
|LONG-TERM LIABILITIES:                                    |  |             
|Long-term loans                                           |  |              | (14)    
|Advances from customers                                   |  |              | (13)    
|Deferred income taxes                                     |  |              | (16)    
|Accrued termination liability                             |  |              | (15, 2P)
|                                                          |  |              |         
|                                                          |  |              |         
|                                                          |  |              |         
|COMMITMENTS  AND CONTINGENT  LIABILITIES                  |  |              | (17)    
|                                                          |  |              |         
|MINORITY INTERESTS                                        |  |              |         
|                                                          |  |              |         
|SHAREHOLDERS' EQUITY:                                     |  |              | (18)    
|Share capital:                                            |  |              |         
|Ordinary shares of New Israeli Shekels (NIS) 1 par value; |  |              |         
|Authorized -  80,000,000 shares as of                     |  |              |         
|December 31, 2006 and 2005;                               |  |              |         
|Issued 42,425,595 and 41,375,545 shares as                |  |              |         
|of December 31, 2006 and 2005, respectively;              |  |              |         
|Outstanding 42,016,674 and 40,966,624 shares              |  |              |         
|as of December 31, 2006 and 2005,  respectively           |  |              |         
|Additional paid-in capital                                |  |              |         
|Accumulated other comprehensive loss                      |  |              |         
|Retained earnings                                         |  |              |         
|Treasury shares - 408,921 shares as of                    |  |              |         
|December 31, 2006 and 2005                                |  |              |         
|                                                          |  |              |         
|                                                          |  |              |         
|                                                          |  |              |         
|                                                          |  |              |         
|                                                          |  |              |         

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

151



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ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|                                                               |  | Year ended December 31, |     
|-------------------------------------------------------------- |  | ----------------------- | ----
|
|Revenues                                                       |  |                         | (19)
|Cost of revenues                                               |  |                         |     
|Restructuring expenses (pre-contract costs and equipment       |  |                         |     
|write-off)                                                     |  |                         | (1G)
|                                                               |  |                         |     
|Gross profit                                                   |  |                         |     
|                                                               |  |                         |     
|Research and development expenses, net                         |  |                         | (20)
|Marketing and selling expenses                                 |  |                         |     
|General and administrative expenses                            |  |                         |     
|In process research and development write-off                  |  |                         | (1G)
|                                                               |  |                         |     
|                                                               |  |                         |     
|                                                               |  |                         |     
|Operating income                                               |  |                         |     
|                                                               |  |                         |     
|Financial expenses, net                                        |  |                         | (21)
|Other income (expenses), net                                   |  |                         | (6B)
|                                                               |  |                         |     
|Income before taxes on income                                  |  |                         |     
|Taxes on income                                                |  |                         | (16)
|                                                               |  |                         |     
|                                                               |  |                         |     
|Equity in net earnings (losses) of affiliated companies  and   |  |                        
|partnership (*)                                                |  |                         | (6A)
|Minority interests in losses (earnings) of subsidiaries        |  |                         |     
|                                                               |  |                         |     
|Net income                                                     |  |                         |     
|                                                               |  |                         |     
|Earnings per share                                             |  |                        
|Basic net earnings per share                                   |  |                         |     
|                                                               |  |                         |     
|Diluted net earnings per share                                 |  |                         |     
|                                                               |  |                         |     
|Number of shares used in computation of basic net earnings per |  |                         |     
|share                                                          |  |                         |     
|                                                               |  |                         |     
|Number of shares used in computation of diluted net earnings   |  |                        
|per share                                                      |  |                         |     
|                                                               |  |                         |     

(*)              Includes
in process research and development write-off of $8,500 in           2005.

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

152



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ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

|                                              
|----------------------------------------------
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY 
|                                              
|U.S. dollars (In thousands, except share data)

|                                                | Number of
outstanding
shares |  | Share
capital |            | Additional
paid-in
capital |   | Accumulated
other
comprehensive
loss |  | Retained
earnings |         | Treasury
shares |   | Total
shareholders'
equity |   | Total
comprehensive
income |        
|----------------------------------------------- | ---------------------------- |  | ------------- | ---------- | -------------------------- | - | ------------------------------------ |  | ----------------- | ------- | --------------- | - | -------------------------- | - | -------------------------- | -------
|Balance as of  January 1, 2004                  |                              |  |               | 39,337,304 |                            | $ | 11,273                               |  | $                 | 259,033 |                 | $ | (3,992                     | ) | $                          | 190,086
|Exercise of options                             |                              |  |               | 1,223,722  |                            |   | 275                                  |  |                   | 10,985  |                 |   |                            |   |                            |        
|Cumulative effect of first time adoption of     |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|the fair value based method for stock           |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|based compensation expenses                     |                              |  |               | -          |                            |   | -                                    |  |                   | (152    | )               |   | -                          |   |                            | -      
|Tax benefit in respect of options exercised     |                              |  |               | -          |                            |   | -                                    |  |                   | 1,179   |                 |   | -                          |   |                            | -      
|Stock based compensation                        |                              |  |               | -          |                            |   | -                                    |  |                   | 3,387   |                 |   | -                          |   |                            | -      
|Dividends paid                                  |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | -                          |   |                            | (86,692
|Other comprehensive income (losses) net of tax: |                              | 
|Unrealized loss on derivative instruments       |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | (299                       | ) |                            | -      
|Foreign currency translation differences        |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | 450                        |   |                            | -      
|Minimum pension liability adjustment            |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | (901                       | ) |                            | -      
|Net income                                      |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | -                          |   |                            | 51,873 
|                                                |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|Total comprehensive income                      |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|                                                |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|Balance as of December 31, 2004                 |                              |  |               | 40,561,026 |                            | $ | 11,548                               |  | $                 | 274,432 |                 | $ | (4,742                     | ) | $                          | 155,267
|Exercise of options                             |                              |  |               | 405,598    |                            |   | 88                                   |  |                   | 3,423   |                 |   | -                          |   |                            | -      
|Tax benefit in respect of options exercised     |                              |  |               | -          |                            |   | -                                    |  |                   | 652     |                 |   | -                          |   |                            | -      
|Stock based compensation                        |                              |  |               | -          |                            |   | -                                    |  |                   | 172     |                 |   | -                          |   |                            | -      
|Dividends paid                                  |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | -                          |   |                            | (21,631
|Other comprehensive income (losses) net of tax: |                              | 
|Unrealized gain on derivative instruments       |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | 6,412                      |   |                            | -      
|Foreign currency translation differences        |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | (924                       | ) |                            | -      
|Minimum pension liability adjustment            |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | (2,086                     | ) |                            | -      
|Net income                                      |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | -                          |   |                            | 32,487 
|                                                |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|Total comprehensive income                      |                              |  |               | -          |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|                                                |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|Balance as of December 31, 2005                 |                              |  |               | 40,966,624 |                            | $ | 11,636                               |  | $                 | 278,679 |                 | $ | (1,340                     | ) | $                          | 166,123
|                                                |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        

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

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

|                                                                                      | Number of
outstanding
shares |  | Share
capital |            | Additional
paid-in
capital |   | Accumulated
other
comprehensive
loss |  | Retained
earnings |         | Treasury
shares |   | Total
shareholders'
equity |   | Total
comprehensive
income |        
|------------------------------------------------------------------------------------- | ---------------------------- |  | ------------- | ---------- | -------------------------- | - | ------------------------------------ |  | ----------------- | ------- | --------------- | - | -------------------------- | - | -------------------------- | -------
|Balance as of January 1, 2006                                                         |                              |  |               | 40,966,624 |                            | $ | 11,636                               |  | $                 | 278,679 |                 | $ | (1,340                     | ) | $                          | 166,123
|Exercise of options                                                                   |                              |  |               | 1,050,050  |                            |   | 240                                  |  |                   | 8,008   |                 |   | -                          |   |                            | -      
|Tax benefit in respect of options exercised                                           |                              |  |               | -          |                            |   | -                                    |  |                   | 2,144   |                 |   | -                          |   |                            | -      
|Stock based compensation                                                              |                              |  |               | -          |                            |   | -                                    |  |                   | 195     |                 |   | -                          |   |                            | -      
|Dividends paid                                                                        |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | -                          |   |                            | (24,322
|Other comprehensive income (losses), net of      tax:                                 |                              | 
|Unrealized loss on derivative                                                         |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|instruments                                                                           |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | (15,642                    | ) |                            | -      
|Foreign currency translation differences                                              |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | 2,034                      |   |                            | -      
|Decrease in additional minimum pension                                                |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|liability per FAS 87                                                                  |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | 2,603                      |   |                            | -      
|Adjustment for adoption of FAS 158 for the      pension plans as of December 31, 2006 |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | (4,341                     | ) |                            | -      
|Adjustment for adoption of FAS 158 for the                                            |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|post medical plan as of December 31, 2006                                             |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | (252                       | ) |                            | -      
|Unrealized gain on available for sale                                                 |                              | 
|securities                                                                            |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | 192                        |   |                            | -      
|Net income                                                                            |                              |  |               | -          |                            |   | -                                    |  |                   | -       |                 |   | -                          |   |                            | 72,242 
|                                                                                      |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|Total comprehensive income                                                            |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|                                                                                      |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        
|Balance as of December 31, 2006                                                       |                              |  |               | 42,016,674 |                            | $ | 11,876                               |  | $                 | 289,026 |                 | $ | (16,746                    | ) | $                          | 214,043
|                                                                                      |                              |  |               |            |                            |   |                                      |  |                   |         |                 |   |                            |   |                            |        

# Accumulated other
comprehensive income (loss)(net of taxes)

|                                                             | December 31,
|------------------------------------------------------------ | ------------
|
|Accumulated gains (losses) on derivative instruments         |             
|Accumulated foreign currency translation differences         |             
|Accumulated unrealized gain on available for sale securities |             
|Additional minimum pension liability, FAS 87                 |             
|Adjustment for FAS 158 adoption                              |             
|                                                             |             
|Accumulated other comprehensive loss                         |             
|                                                             |             

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

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

|                                                                                  | Year ended December 31, | 
|--------------------------------------------------------------------------------- | ----------------------- | 
|
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |                         | 
|Net income                                                                        |                         | 
|Adjustments to reconcile net income to net cash provided by operating activities: |                         | 
|Depreciation and amortization                                                     |                         | 
|Purchased in process R&D                                                          |                         | 
|Stock based compensation                                                          |                         | 
|Deferred income taxes                                                             |                         | 
|Accrued severance pay, net                                                        |                         | 
|Loss (gain) on sale of property, plant, equipment and investment                  |                         | 
|Tax benefit in respect of options exercised                                       |                         | 
|Minority interests in earnings (losses) of subsidiaries                           |                         | 
|Equity in net losses (earnings) of affiliated companies and partnership, net of   |                         | 
|dividend received (*)                                                             |                         | 
|Changes in operating assets and liabilities:                                      |                         | 
|Increase in short and long-term trade receivables, and prepaid expenses           |                         | 
|Decrease (increase) in inventories, net                                           |                         | 
|Increase (decrease) in trade payables, other payables and accrued expenses        |                         | 
|Increase (decrease) in advances received from customers                           |                         | 
|Settlement of royalties with the Office of the Chief Scientist                    |                         | 
|Other adjustments                                                                 |                         | 
|                                                                                  |                         | 
|Net cash provided by operating activities                                         |                         | 
|                                                                                  |                         | 
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |                         | 
|Purchase of property, plant and equipment                                         |                         | 
|Acquisition of subsidiaries and businesses  (Schedule A)                          |                         | 
|Investments in affiliated companies and other companies                           |                         | 
|Proceeds from sale of property, plant and equipment                               |                         | 
|Proceeds from sale of investment                                                  |                         | 
|Investment in long-term bank deposits                                             |                         | 
|Proceeds from sale of long-term bank deposits                                     |                         | 
|Short-term deposits, net                                                          |                         | 
|                                                                                  |                         | 
|Net cash used in investing activities                                             |                         | 
|                                                                                  |                         | 
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |                         | 
|Proceeds from exercise of options                                                 |                         | 
|Repayment of long-term bank loans                                                 |                         | 
|Receipt of long-term bank loans                                                   |                         | 
|Dividends paid                                                                    |                         | 
|Tax benefit in respect of options exercised                                       |                         | 
|Change in short-term bank credit and  loans, net                                  |                         | 
|                                                                                  |                         | 
|Net cash provided by (used in) financing activities                               |                         | 
|                                                                                  |                         | 
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |                         | 
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR                            |                         | 
|                                                                                  |                         | 
|CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                  |                         | 
|                                                                                  |                         | 
|(*) Dividend received                                                             |                         | 
|                                                                                  |                         | 

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

155



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ITS SUBSIDIARIES

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

|                                                                    | Year ended December 31, | 
|------------------------------------------------------------------- | ----------------------- | 
|
|SUPPLEMENTAL CASH FLOW ACTIVITIES:                                  |                         | 
|                                                                    |                         | 
|Cash paid during the year for:                                      |                         | 
|Income taxes                                                        |                         | 
|                                                                    |                         | 
|Interest                                                            |                         | 
|                                                                    |                         | 
|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, net (excluding cash and cash equivalents)          |                         | 
|Property, plant and equipment                                       |                         | 
|Other long term assets                                              |                         | 
|Goodwill and other intangible assets                                |                         | 
|In process R&D                                                      |                         | 
|Deferred income taxes                                               |                         | 
|Long-term liabilities                                               |                         | 
|Minority interest                                                   |                         | 
|                                                                    |                         | 
|                                                                    |                         | 
|                                                                    |                         | 

|(*) |  | In
2004, the assets of Computer Instruments Corporation Inc. (see Note 1(D)).
|--- |  | -----------------------------------------------------------------------------

| | In
2005, the assets of IMI (see Note 1(E)) and the shares of Elisra (see Note
               1(G)).
| | ---------------------------------------------------------------------------------------------------

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

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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, 45.4%
               owned by the Federmann Group. 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 the Elbit Systems of America (ESA)
companies and                Elbit Systems Electro-Optics Industries Elop Ltd. (Elop).
The                Company also owns 70% holdings in Elisra Electronic Systems Ltd.
               (Elisra), see Note 1(G).
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. |  | A
majority of the Groups revenues are derived from direct or indirect           sales
to governments or to governmental 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 governmental 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 19(C).
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. |  | 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 ten years and to goodwill ($334).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
results of AD&Ds operations have been included in the consolidated financial
statements from the date of acquisition.
| | --------------------------------------------------------------------------------------------------------------------------

| | In
July 2005, the Company completed the purchase of the remaining shares of AD&D in
consideration for $1,025 in cash. The excess of the purchase price over the fair value of
net tangible assets acquired in the amount of approximately $1,214 was allocated to
technology ($900) to be amortized by the straight-line method over a period of eight
years and to goodwill ($314).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro
forma information in accordance with SFAS No. 141 has not been provided, since the net
income of AD&D was not material in relation to total consolidated revenues and net
income for the years 2004 and 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. |  | In
August 2004, the Company (through a subsidiary of ESA) 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.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITS SUBSIDIARIES

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

|Note 1- |  | GENERAL (Cont.)
|------- |  | ---------------

| | D. |  | (Cont.)
| | -- |  | -------

| | The
acquisition was accounted for by the purchase method of accounting. The excess of the
purchase price over the fair market value of the net tangible assets acquired in the
amount of approximately $1,598 was allocated to technology and other intangible assets to
be amortized over a weighted average period of seven 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 year 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. |  | In
March 2005, the Company, through its wholly-owned subsidiary Cyclone           Aviation
Products Ltd. (Cyclone), acquired from Israel Military           Industries
Ltd. (IMI) the assets and customers contracts           related to the
Aircraft Systems Division of IMI (the Aircraft           Division) in
consideration for approximately $7 million, paid in cash           (approximately $1
million out of which $718 was paid through balance sheet date)           and assumed
liabilities of approximately $6 million. The excess of the purchase           price over
the fair value of net tangible assets acquired in the amount of           approximately
$1,500 was allocated to customers contracts to be amortized           over an
estimated period of four years.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Aircraft Division manufactures weapon payloads and external fuel tanks for fighter
aircraft.
| | ------------------------------------------------------------------------------------------------

| | The
financial results of the business acquired are included in the Companys
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 the Aircraft Division are not material in relation to the
total consolidated revenues and net income for the years 2004 and 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | On
December 27, 2004, the Company reached an agreement with Koor to purchase           all
of Koors holdings in Tadiran Communications Ltd.           (Tadiran),
which represented approximately a 32% interest in           Tadiran, at a price of $37
per share. This purchase was to be made concurrently           with Koors purchase
of a portion of the Companys shares from           Federmann Enterprises Ltd. (Federmann).
Tadiran is an Israeli           company, whose shares are traded on the Tel Aviv Stock
Exchange. The purchase of           the interest in Tadiran was made in several stages as
detailed below.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Tadiran
is a leading company active mainly in the defense communication area. The Company is
active in the C(4)ISR area, and is using integrated communication equipment in its
systems. The Company foresees synergies between its systems operations and Tadiran, by
providing advanced integrated network and communication solutions to its customers.
Consequently, the acquisition of Tadiran resulted in goodwill amounting to $64,200 (see
below).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

158



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ITS SUBSIDIARIES

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

|Note 1- |  | GENERAL (Cont.)
|------- |  | ---------------

| | F. |  | (Cont.)
| | -- |  | -------

| | During
2004, the Company acquired 4.3% of Tadirans outstanding shares on the Tel Aviv
Stock Exchange in consideration for $15,900.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | In
the first and the second quarters of 2005, the Company acquired additional 17% of Tadirans
outstanding shares in consideration for $74,100.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the acquisition in the second quarter of 2005, the Company was able to
exercise significant influence on Tadiran. In accordance with APB 18, The Equity
Method of Accounting for Investments in Common Stock, the Companys interest
in Tadiran, which was previously accounted for as available-for-sale securities, was
accounted retroactively under the equity method of accounting (step-by-step
acquisition).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 25, 2005, the Company purchased an additional 5.2% of Tadirans outstanding
shares in consideration for $23,000. Following this purchase, the Company held
approximately 26.5% of Tadirans shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 30, 2005, the Company completed the purchase of the remaining shares held by
Koor in Tadiran, for approximately $59.3 million in cash. As of December 31, 2005, the
Company held approximately 40% of Tadirans shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on a purchase price allocation analysis (PPA) performed by an independent
advisor, the investment amount was attributed as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------

|                                 | Book value
in Tadiran |  | Excess
cost |         | Total |  
|-------------------------------- | --------------------- |  | ----------- | ------- | ----- | -
|Working capital                  |                       |  | $           | 14,500  |       | $
|Inventory                        |                       |  |             | 7,700   |       |  
|Long-term assets and investments |                       |  |             | 12,100  |       |  
|Long-term liabilities            |                       |  |             | (14,000 | )     |  
|Brand name                       |                       |  |             | 4,300   |       |  
|Customer base                    |                       |  |             | -       |       |  
|Technology                       |                       |  |             | 3,600   |       |  
|IPR&D                            |                       |  |             | -       |       |  
|Deferred taxes                   |                       |  |             | 1,100   |       |  
|Goodwill                         |                       |  |             | 21,200  |       |  
|                                 |                       |  |             |         |       |  
|                                 |                       |  | $           | 50,500  |       | $
|                                 |                       |  |             |         |       |  

159



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

|Note 1- |  | GENERAL (Cont.)
|------- |  | ---------------

| | F. |  | (Cont.)
| | -- |  | -------

| | The
excess costs over Tadirans book value in the quarters of 2005 are detailed below:
| | --------------------------------------------------------------------------------------

|                                           | Until
June 30,
2005 | In the
third
quarter
of 2005 | In the
fourth
quarter
of 2005 | Total      |  | Expected useful lives 
|------------------------------------------ | ------------------- | ---------------------------- | ----------------------------- | ---------- |  | ----------------------
|IPR&D                                      | $  5,100            | $  1,200                     | $  3,100                      | $    9,400 |  | immediate write-off   
|Inventory                                  | 1,600               | 400                          | 1,100                         | 3,100      |  | up to a quarter       
|Other tangible assets and liabilities      | 400                 | 100                          | 300                           | 800        |  | 5 years               
|Brand name                                 | 2,500               | 600                          | 1,800                         | 4,900      |  | 15 years              
|Customer base and backlog                  | 21,200              | 5,200                        | 13,000                        | 39,400     |  | 2-12 years            
|Technology                                 | 11,100              | 2,700                        | 7,300                         | 21,100     |  | 10 years              
|Goodwill                                   | 22,400              | 5,500                        | 15,100                        | 43,000     |  | indefinite-subject to 
|                                           |                     |                              |                               |            |  | annual impairment test
|                                           |                     |                              |                               |           
|Total excess of consideration             
|over book value                            | $64,300             | $15,700                      | $41,700                       | $121,700  
|                                           |                     |                              |                               |           
|Percentage of interest acquired in Tadiran | 21.3%               | 5.2%                         | 13.5%                         | 40%       
|                                           |                     |                              |                               |           

| | On
June 5, 2006, the Company acquired 4.37% of Tadirans outstanding shares in
consideration for approximately $18.3 million. Following the acquisition, the Company
holds approximately 43% of Tadirans shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based on a PPA performed by an independent advisor, the investment amount was
attributed as follows:
| | ----------------------------------------------------------------------------------------------------

|                                 | Book value
in Tadiran | Excess
cost | Total      |  | Expected useful lives of excess cost
|-------------------------------- | --------------------- | ----------- | ---------- |  | ------------------------------------
|Working capital                  | $   2,600             | $         - | $ 2,600    |  | -                                   
|Inventory                        | 1,000                 | 300         | 1,300      |  | Up to a quarter                     
|Long-term assets and investments | 1,300                 | 100         | 1,400      |  | 5 years                             
|Long-term liabilities            | (1,800)               | -           | (1,800)    |  | -                                   
|Brand name                       | 400                   | 600         | 1,000      |  | 15 years                            
|Customer base                    | -                     | 5,300       | 5,300      |  | 2-12 years                          
|Technology                       | 200                   | 2,300       | 2,500      |  | 10 years                            
|IPR&D                            | -                     | 1,000       | 1,000      |  | Immediate write-off                 
|Goodwill                         | 2,500                 | 2,500       | 5,000      |  | Indefinite - subject to             
|                                 |                       |             |            |  | annual impairment test              
|                                 |                       |             |           
|                                 | $6,200                | $12,100     | $   18,300 |  |                                     
|                                 |                       |             |           

160



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ITS SUBSIDIARIES

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

|Note 1- |  | GENERAL (Cont.)
|------- |  | ---------------

| | G. |  | On
July 6, 2005, the Company signed an agreement with Koor to acquire all of
               Koors 70% holdings in Elisra, an Israeli company, in consideration
for $70                million ($68.8 million after certain adjustments) in cash. The
parties also                agreed on an additional contingent consideration as a result
of future insurance                proceeds relating to the fire at Elisras plant
in 2001 (see Note 7).
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreement for acquiring Koors holdings in Elisra was signed following the approval
of the transaction by the Companys Audit Committee and Board of Directors, who
obtained a fairness opinion from an independent appraiser regarding the consideration to
be paid for the Elisra shares and following the Companys shareholders approval in
August 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 30, 2005, simultaneously with the acquisition of Koors shares in Tadiran,
the Company completed the purchase of all of the shares of Koor in Elisra for
approximately $68.8 million in cash. Following the completion of the transaction, the
Company owns 70% of Elisra.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
completion of the purchase of the Elisra shares was made possible following the receipt
of all required approvals, including that of the Israeli Antitrust Authorities. In
accordance with the Israeli antitrust approval, the Company has agreed to fulfill
conditions imposed by the Antitrust Authorities related to the market environment between
the Company and Israel Aircraft Industries Ltd. (IAI), which holds the
balance of Elisras shares. Should the Antitrust Authorities conclude, during the
course of a five-year period following the acquisition, that the Company has not complied
with such conditions, the Antitrust Authorities may take various measures, including
steps that could result in the cessation of the joint holdings in Elisra by the Company
and IAI.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Elisra
is the leading airborne electronic warfare company in Israel with advanced technology and
significant market presence. Elisra has significant complementary technologies and
customer installment base to those of the Group in areas including ELINT systems, EW
suites, airborne warning systems and data links. As such, the Companys management
believes that Elisras business is very synergetic with several of the Companys
areas of operations as the aforementioned technologies and customer installment base will
enable the Group to offer more comprehensive turnkey solutions to its customers and
strengthen its competitive position. Consequently, the acquisition of Elisra resulted in
goodwill amounting to $24,500 (see below).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on a PPA performed by an independent advisor, the purchase price was attributed to the
fair value of the assets acquired and liabilities assumed as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

161



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ITS SUBSIDIARIES

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

|Note 1- |  | GENERAL (Cont.)
|------- |  | ---------------

| | G. |  | (Cont.)
| | -- |  | -------

|                                 | Book value
in Elisra | Excess cost | Total     |  | Expected useful lives
of excess cost
|-------------------------------- | -------------------- | ----------- | --------- |  | ------------------------------------
|Current monetary liabilities net |                      |             |           |  |                                     
|of current monetary assets       | $(11,500)            | $         - | $(11,500) |  | -                                   
|Pre-acquisition contingency      | 15,530               | -           | 15,530    |  | -                                   
|Other long-term investments     
|and receivables                  | 59,270               | -           | 59,270    |  | -                                   
|Long-term liabilities            | (100,700)            | -           | (100,700) |  | -                                   
|Minority interest                | (8,300)              | -           | (8,300)   |  | -                                   
|IPR&D                            | -                    | 7,500       | 7,500     |  | Immediate write-off                 
|Inventory                        | 31,200               | 1,200       | 32,400    |  | Up to 2 quarters                    
|Property, plant and equipment    | 23,100               | 5,700       | 28,800    |  | 20 years                            
|Customers base and backlog       | -                    | 11,800      | 11,800    |  | 10 years                            
|Technology                       | -                    | 9,500       | 9,500     |  | 10 years                            
|Goodwill                         | -                    | 24,500      | 24,500    |  | Indefinite - subject to             
|                                 |                      |             |           |  | annual impairment test              
|                                 |                      |             |          
|                                 | $  8,600             | $  60,200   | $  68,800 |  |                                     
|                                 |                      |             |          

| | The
pre-acquisition contingency, which amount to $15,530, are related to the compensation
receivables in respect of the fire damage in Elisra (see Note 7 bellow).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
results of Elisras operations have been included in the consolidated financial
statements from the date of acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------

| | The
following unaudited proforma data is based on historical financial statements of the
Company and Elisra and is provided for comparative purposes only. The proforma
information does not purport to be indicative of the results that actually would have
occurred had the purchase of the shares been consummated prior to the beginning of the
reported periods.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
proforma information reflects the results of the Companys operations assuming that
Elisras results were included in the Companys consolidated results at the
beginning of each of the reported periods, and under the following assumptions:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (1) |  | Intangible
assets (customer base, backlog and technology) arising from the           acquisition of
Elisras shares of approximately $21,300, are amortized over a period of 10 years.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | Excess
of cost over equity purchased allocated to real estate assets of           approximately
$5,700, is amortized over a period of 20 years.
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

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

|Note 1- |  | GENERAL (Cont.)
|------- |  | ---------------

| | G. |  | (Cont.)
| | -- |  | -------

| |  | (3) |  | The
cost attributed to purchase IPR&D projects, in the amount of           approximately
$7,500 has been charged to operations immediately as a           non-recurring item and
is not included in the proforma consolidated results.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | Intercompany
balances and transactions, if any, have been eliminated.
| |  | --- |  | ---------------------------------------------------------------------

| |  | (5) |  | Management
fees which were paid to Elisras shareholders and will be paid           in the
future to the Company were eliminated in the proforma statements.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                  | For the year ended
December 31, | 
|------------------------------------------------- | ------------------------------- | 
|
|Revenues                                          |                                 | 
|                                                  |                                 | 
|Net income as reported                            |                                 | 
|Adjustments:                                      |                                 | 
|Elimination of the charge to operations for IPR&D |                                 | 
|Other adjustments, net                            |                                 | 
|                                                  |                                 | 
|Net income - proforma (*)                         |                                 | 
|                                                  |                                 | 
|Basic earnings per share - proforma               |                                 | 
|                                                  |                                 | 
|Diluted earnings per share - proforma             |                                 | 
|                                                  |                                 | 

| |  | (*) |  | The
proforma net income for the year ended December 31, 2005 includes a           write-off
of pre contract costs and equipment, net in the amount of $2,616 in           the Company
and expenses related to cutback in personnel in the amount of           $19,103 in Elisra
(see Note 15).
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the acquisition of Elisras shares in the fourth quarter of 2005, the Company
identified and wrote-off duplicated inventories and equipment in the amount of $3,488
which was recorded as restructuring costs in the cost of revenues.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. |  | In
October 2005, the Company invested an amount of $2.5 million in Chip PC Ltd.
               (Chip PC), an Israeli company, in consideration for a 20%
interest                in Chip PC.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Chip
PC develops and manufactures Post PC solutions, focused on enabling
server-based- computing technologies to replace traditional PCs and deploy and control
large numbers of workstations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
excess of the amount paid for the Chip PC shares acquired over their book value is
approximately $2.4 million. Based on a PPA performed by an independent advisor, this
excess was allocated mainly to technology ($1.6 million) to be amortized by a
straight-line method over a period of 5  8 years and to goodwill ($1.1 million).
The financial results of the investee acquired are included in the Companys
consolidated financial statements from the date of acquisition, as equity in net earnings
(losses) of affiliated companies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

163



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

|Note 1- |  | GENERAL (Cont.)
|------- |  | ---------------

| | I. |  | In
October 2005, the Company established a U.K. subsidiary  UAV Tactical
               Systems Ltd. (U-Tacs), in which the Company holds 51% and the
rest                of the shares are held by Thales U.K.. U-Tacs will be the
manufacturing and                support center of the Watchkeeper program  an
Unmanned Air Vehicle (UAV)                program for the U.K. MOD. U-Tacs will establish
the capabilities to design,                manufacture, integrate and fly tacticalUAV
systems, consisting of air                vehicles, ground control stations, data links,
payloads and launch and recovery                subsystems (see Note 2(AA)).
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. |  | On
May 31, 2006, the Companys U.S. subsidiary Kollsman, Inc. (Kollsman)
acquired Preferred B shares of Sandel Avionics, Inc. (Sandel), which constituted a
20% interest in Sandel on a fully diluted and as converted basis in
consideration for $12.5 million (represented by a $11.5 million cash payment
and a $1 million holdback to be paid within 12 months). Sandel, based in Vista,
California, produces specialized integrated display systems and other products
for the commercial aviation market. The Company expects that some of Kollsmans
new products will be integrated with Sandels display electronics for the
general aviation market.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Kollsman
has an option to buy the remaining 80% interest in Sandel for a period of 30 months after
the initial investment at the equivalent price per share as the first transaction. During
the option period, Kollsman has the right to representation on the Sandel board of
directors, as well as several specific minority rights. In addition, Kollsman and Sandel
have formed an alliance to cooperate on product development and marketing.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As the Preferred shares do not represent in substance common stock (as defined in EITF 02-14), the
investment in Sandel is accounted for under the cost basis.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

164



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ITS SUBSIDIARIES

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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES
|------- |  | -------------------------------

| | The
consolidated financial statements have been prepared in accordance with generally
accepted accounting principles in the United States (U.S. GAAP). As
applicable to the consolidated financial statements of the Group, such principles are
substantially identical to accounting principles generally accepted in Israel, except as
described in Note 23.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. |  | USE
OF ESTIMATES
| | -- |  | ----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported and disclosure of contingent assets and liabilities in the financial statements
and accompanying notes. Actual results could differ from those estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. |  | FINANCIAL
STATEMENTS IN U.S. DOLLARS
| | -- |  | ------------------------------------

| | The
Companys revenues are generated mainly in U.S. dollars. In addition, most of the
Companys costs are incurred in U.S. dollars. The Companys management believes
that the U.S. dollar is the primary currency of the economic environment in which the
Company operates. Thus, the functional and reporting currency of the Company is the U.S.
dollar.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
and balances originally denominated in U.S. dollars are presented at their original
amounts. Transaction and balances in other currencies have been remeasured into U.S.
dollars in accordance with principles set forth in SFAS No. 52 Foreign Currency
Translation. All exchange 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. Resulting translation differences 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 Elop, ESA, Elisra and other Israeli and non-Israeli
subsidiaries.
| | -------------------------------------------------------------------------------------------------------

| | Intercompany
transactions and balances including profit from intercompany sales not yet realized
outside the Group have been eliminated upon consolidation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

165



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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | 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. |  | AVAILABLE
FOR SALE MARKETABLE SECURITIES
| | -- |  | ----------------------------------------

| | Investments
in marketable securities are classified as available for sale securities 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 market value, with unrealized gains and losses, net
of taxes, reported in accumulated other comprehensive income, a separate component of
shareholders equity. Realized gains and losses on sale of investments and a decline
in value which is considered to be other-than-temporary, are included in the consolidated
statements of income as finance income (loss).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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:
| | ------------------------------

| |  |  |  | Raw
materials using the average cost method.
| |  | - |  | --------------------------------------------

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

| |  |  |  | Labor
overhead is generally included on a basis of hourly rates and is allocated to each
project according to the amount of hours expended. 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 presented as
net amounts. Advances in excess of related inventories are classified as liabilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                                      
|------------------------------------------------------
|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, are 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
change in the Companys proportionate share of a subsidiarys or investees
equity, resulting from issuance of common or in substance common 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 SEC Staff Accounting Bulletin 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. The results of 2005 include an impairment loss related to the
investment in ISI (see Note 6(B)2)).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. |  | LONG-TERM
RECEIVABLES
| | -- |  | ---------------------

| | Long-term
trade and other receivables, from extended payment agreements, are recorded at their
estimated present values (determined based on the original market rates of interest).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. |  | LONG-TERM
BANK DEPOSITS
| | -- |  | -----------------------

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

167



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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | 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                            | 2-6.6 |             
|Instruments, machinery and equipment | 6-33 
|Office furniture and other           | 6-33  |             
|Motor vehicles                       | 12-33 | (mainly 15%)

| | Land
rights and leasehold improvements  generally 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 16(A)(3) and 17(K)). 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 the cost of property, plant and equipment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. |  | INTANGIBLE
ASSETS
| | -- |  | -----------------

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

| | N. |  | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | O. |  | GOODWILL
| | -- |  | --------

| | Goodwill
represents the excess of the cost of acquired businesses over the net fair values of the
assets acquired and liabilities assumed. Under SFAS No. 142, 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 the discounted future cash flows method.
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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
each of the three years in the perios ended December 31, 2006, no impairment losses have
been identified.
| | -------------------------------------------------------------------------------------------------------------

| | 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 benefit is calculated based on the employees latest salary and the
period of his/her employment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Groups companies in Israel record a liability for the amount that would have to be
paid to the employees as severance payment in the event of the companies shut down.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 profits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expenses for the years ended December 31, 2006, 2005 and 2004 amounted to
approximately $19,161, $17,500 and $15,574, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

169



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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | Q. |  | REVENUE
RECOGNITION
| | -- |  | -------------------

| | The
Group generates revenues mainly from long-term contracts involving the design,
development, manufacture and integration of defense systems and products.
In addition, to a minor extent, the Company is 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. In certain
circumstances, which involve long-term fixed-price production type contracts for
non-homogenous or small quantity of units, revenue is recognized based on the achievement
of performance milestones, which provide a more reliable and objective measure to the
extent of progress toward completion.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITS SUBSIDIARIES

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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | Q. |  | REVENUE
RECOGNITION (Cont.)
| | -- |  | ---------------------------

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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).
| | -----------------------------------------------------------------------------------------

| | 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. The specific
terms and conditions of those warranties vary depending upon the product sold and the
country in which the Group does business. Factors that affect the Groups warranty
liability include the number of delivered products, 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITS SUBSIDIARIES

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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | S. |  | WARRANTY
(Cont.)
| | -- |  | ----------------

| | Changes
in the Groups provision for warranty, which is included in the Companys
balance sheet, during the years, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------

|                                                  | 2006 |  | 2005 |        
|------------------------------------------------- | ---- |  | ---- | -------
|Balance, at January 1                             |      |  | $    | 31,797 
|Warranties issued during the year                 |      |  |      | 27,733 
|Warranties forfeited or exercised during the year |      |  |      | (15,113
|                                                  |      |  |      |        
|Balance, at December 31                           |      |  | $    | 44,417 
|                                                  |      |  |      |        

| | T. |  | RESEARCH AND DEVELOPMENT COST
| | -- |  | -----------------------------

| | 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. The grants are not to be repaid, but instead the Group companies will be sometimes obliged to pay
royalties as a percentage of future sales if and when sales are generated from the funded 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, since the payment of royalties is not probable
when the grants are received.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 asset 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 amounts that are more likely than not to be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

172



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ITS SUBSIDIARIES

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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | 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 United States. 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
| | -- |  | --------------------------------

| | Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133), requires companies to recognize
all 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 effective
portion of the gain and loss on thederivative 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 value. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the fair value of the asset or liability hedge, if
any, is recognized as financial expense in current earnings during the period of change.
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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

173



---

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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 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
of December 31, 2006, the Group had forward contracts with a notional amount of
approximately $315,900 to purchase and sell foreign currencies (113,300 Euro,
88,700 Great Britain Pounds (GBP) and other currencies).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the foreign exchange contracts and the options as of December 31, 2006 is a
liability of approximately $13,400.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | X. |  | STOCK-BASED
COMPENSATION
| | -- |  | ------------------------

| | 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 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 in 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2006, the Company adopted the provision of Statement 123(R), using the
modified prospective method. The adoption of Statement 123(R) had an immaterial effect on
the Companys financial position and results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of options is estimated using a Black-Scholes option pricing model with the
following weighted average assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------

|                        | 2006 | 2005    | 2004   
|----------------------- | ---- | ------- | -------
|Divided yield           | -    | 2.25%   | 2.20%  
|Expected volatility     | -    | 25.60%  | 26.70% 
|Risk-free interest rate | -    | 4.50%   | 4.00%  
|Expected life           | -    | 4 years | 4 years

174



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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 securities is recorded according to its fair market value,
as determined by quoted market prices on the stock exchange.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of long-term loans is 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 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,
2005 and 2006 were $6,345 and $2,845, respectively, and represent the original cost of
acquisition. As noted in Note 2H above, management is constantly monitoring such
investments for other-than-temporary decline in value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 their effect is anti-dilutive. In all the years presented no stock options
were excluded.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

175



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ITS SUBSIDIARIES

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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | AA. |  | VARIABLE
INTEREST ENTITIES
| | --- |  | --------------------------

| | FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulleting No. 51 (FIN 46)
provides a framework for identifying Variable Interest Entities (VIEs)
and determining when a company should include the assets, liabilities, non-controlling
interests and results of activities of a VIE in its consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
general, a VIE is an entity that either (1) has an insufficient amount of equity to carry
out its principal activities, without additional subordinated financial support, (2) has
a group of equity owners that are unable to make significant decisions about the entitys
activities, or (3) has a group of equity owners that do not have the obligation to absorb
the entitys losses or the right to receive returns generated by its operations. FIN
46 requires the consolidation of a VIE by its primary beneficiary. The primary
beneficiary is the entity that absorbs a majority of the entitys expected losses,
receives a majority of the entitys expected residual returns, or both, as a result
of ownership, contractual or other financial interests in the entity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | U-Tacs
is considered to be a variable interest entity. As the Company is the primary
beneficiary, U-Tacs is consolidated in the Companys financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | AB. |  | IMPACT
OF RECENTLY ISSUED ACCOUNTING STANDARDS
| | --- |  | ----------------------------------------------

| |  | (1) |  | In
July 2006, the FASB issued FASB Interpretation No. 48 Accounting for
          Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109          (FIN
48). FIN 48 clarifies the accounting for income taxes by           prescribing the
minimum recognition threshold a tax position is required to meet           before being
recognized in the financial statements. FIN 48 utilizes a two-step           approach for
evaluating tax positions. Recognition (step one) occurs when an           enterprise
concludes that a tax position, based solely on its technical merits,           is
more-likely-than-not to be sustained upon examination. Measurement (step two)
          is only addressed if step one has been satisfied. Under step two, the tax
          benefit is measured as the largest amount of benefit, determined on a
cumulative           probability basis that is more-likely-than-not to be realized upon
ultimate           settlement.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 applies to all tax positions related to income taxes, including tax positions
considered to be routine as well as those with a high degree of uncertainty.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 has expanded disclosure requirements, which include a tabular roll forward of the
beginning and ending aggregate unrecognized tax benefits as well as specific detail
related to tax uncertainties for which it is reasonably possible the amount of
unrecognized tax benefit will significantly increase or decrease within twelve months.
These disclosures are required at each annual reporting period and if a significant
change occurs in an interim period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect
of applying FIN 48 will be reported as an adjustment to the opening balance of retained
earnings. The Company is currently evaluating the impact of adopting FIN 48.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

176



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ITS SUBSIDIARIES

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

|Note 2- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- |  | ---------------------------------------

| | AB. |  | IMPACT
OF RECENTLY ISSUED ACCOUNTING STANDARDS (Cont.)
| | --- |  | ------------------------------------------------------

| |  | (2) |  | In
September 2006, the FASB issued SFAS No. 157, Fair Value           Measurements (SFAS
157). This statement provides a single           definition of fair value, a
framework for measuring fair value, and expanded           disclosures concerning fair
value. Previously, different definitions of fair           value were contained in
various accounting pronouncements creating           inconsistencies in measurement and
disclosures. SFAS 157 applies under those           previously issued pronouncements that
prescribe fair value as the relevant           measure of value, except SFAS 123(R) and
related interpretations. The statement           does not apply to accounting standard
that require or permit measurement similar           to fair value but are not intended
to represent fair value. This pronouncement           is effective for fiscal years
beginning after November 15, 2007. The Company is           currently evaluating the
impact of adopting SFAS 157.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | In
September 2006, the FASB issued FASB Statement No. 158,           Employers Accounting
for Defined Benefit Pension and Other           Postretirement Plans, an amendment
of FASB Statements No 87, 88, 106, and           132(R) (SFAS 158). SFAS 158
requires plan sponsors of defined           benefit pension and other postretirement
benefit plans (collectively,           postretirement benefit plans) to
recognize the funded status of           their postretirement benefit plans in the
statement of financial position,           measure the fair value of plan assets and
benefit obligations as of the date of           the fiscal year-end statement of
financial position, and provide additional           disclosures. Effective December 31,
2006, the Company adopted the recognition           and disclosure provisions of SFAS
158. The effect of adopting SFAS 158 on the           Companys financial condition
at December 31, 2006 has been included in the           accompanying consolidated
financial statements. See Note 15 for further           discussion of the effect of
adopting SFAS 158 on the Companys consolidated           financial statements.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
          Financial Assets and Financial Liabilities(SFAS 159). This
          Statement provides companies with an option to report selected financial assets
          and liabilities at fair value. Generally accepted accounting principles have
          required different measurement attributes for different assets and liabilities
          that can create artificial volatility in earnings. The Statements
          objective is to reduce both complexity in accounting for financial instruments
          and the volatility in earnings caused by measuring related assets and
          liabilities differently. This Statement is effective as of the beginning of an
          entitys first fiscal year beginning after November 15, 2007. The Company
          is currently evaluating the impact of adopting SFAS 159.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | AC. |  | RECLASSIFICATIONS
| | --- |  | -----------------

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

177



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ITS SUBSIDIARIES

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

|Note 3- |  | TRADE RECEIVABLES, NET
|------- |  | ----------------------

|                                       | December 31, | 
|-------------------------------------- | ------------ | 
|
|Open accounts (*)                      |              | 
|Unbilled receivables                   |              | 
|Less - allowance for doubtful accounts |              | 
|                                       |              | 
|                                       |              | 
|                                       |              | 
|(*)     Includes affiliated companies  |              | 
|                                       |              | 

|Note 4- |  | OTHER
RECEIVABLES AND PREPAID EXPENSES
|------- |  | --------------------------------------

|                        | December 31, | 
|----------------------- | ------------ | 
|
|Deferred income taxes   |              | 
|Prepaid expenses        |              | 
|Government institutions |              | 
|Employees               |              | 
|Others                  |              | 
|                        |              | 
|                        |              | 
|                        |              | 

|Note 5- |  | INVENTORIES, NET OF CUSTOMER ADVANCES
|------- |  | -------------------------------------

|                                                 | December 31, | 
|------------------------------------------------ | ------------ | 
|
|Cost incurred on long-term contracts in progress |              | 
|Raw materials                                    |              | 
|Advances to suppliers and subcontractors         |              | 
|                                                 |              | 
|                                                 |              | 
|Less -                                           |              | 
|Cost incurred on contracts in progress deducted  |              | 
|from customer advances (see Note 13)(*)          |              | 
|Advances received from customers (*)             |              | 
|Provision for losses                             |              | 
|                                                 |              | 
|                                                 |              | 
|                                                 |              | 

| | 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 included in inventories.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

178



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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, | 
|----------- | ------------ | 
|
|Tadiran (1) |              | 
|SCD (2)     |              | 
|VSI (3)     |              | 
|Opgal (4)   |              | 
|Chip PC (5) |              | 
|Others (6)  |              | 
|            |              | 
|            |              | 
|            |              | 
|            |              | 

|(1) |  | Tadiran Communications Ltd. (Tadiran)  a publicly-traded
               43%-owned investee registered in Israel, is involved in the worldwide market for
               military communications systems and equipment and is also active in the civilian
               communications market.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
summarized financial information regarding Tadiran (see Note 1(F)) is as follows:
| | -------------------------------------------------------------------------------------

| | Balance
Sheet Information:
| | --------------------------

|                        | December 31, | 
|----------------------- | ------------ | 
|
|Current assets          |              | 
|Non-current assets      |              | 
|                        |              | 
|Total assets            |              | 
|                        |              | 
|Current liabilities     |              | 
|Non-current liabilities |              | 
|Shareholders' equity    |              | 
|                        |              | 
|                        |              | 
|                        |              | 

| | Income
Statement Information:
| | -----------------------------

|             | Year ended December 31, | 
|------------ | ----------------------- | 
|
|Revenues     |                         | 
|Gross profit |                         | 
|Net income   |                         | 

| | As
of December 31, 2006, the fair market value of Tadirans shares held by the Company
was $207,128.
| | ----------------------------------------------------------------------------------------------------

179



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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.)
| | -- |  | ----------------------------------------------------------------------

| |  | (2) |  | 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.
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | Vision
Systems International LLC (VSI) based in San Jose, is a           California
limited liability company that is held 50% by ESA 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.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | 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.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (5) |  | Chip
PC Ltd. is an Israeli company, of which approximately 20% is held by the
          Company. Chip PC develops and manufactures Post PC solutions,
          focused on enabling server-based-computing technologies to replace traditional
          PCs and deploy and control large numbers of workstations.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (6) |  | 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%
          (41% 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.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.)
| | -- |  | ----------------------------------------------------------------------

| |  | (7) |  | Equity
in net earnings (losses) of affiliated companies is as follows:
| |  | --- |  | ----------------------------------------------------------------------

|            | December 31, | 
|----------- | ------------ | 
|
|Tadiran (*) |              | 
|SCD         |              | 
|VSI         |              | 
|Others      |              | 
|            |              | 
|            |              | 
|            |              | 

| |  |  | (*) |  | The
Companys share in Tadirans 2006 results includes a loss of           $2,400
as a result of exercise of options in Tadiran.
| |  |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------

| |  | (8) |  | The
summarized aggregate financial information of companies accounted for under           the
equity method, excluding Tadiran (see Note 6(A)(1)), is as follows:
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Balance
Sheet Information:
| | --------------------------

|                        | December 31, | 
|----------------------- | ------------ | 
|
|Current assets          |              | 
|Non-current assets      |              | 
|                        |              | 
|Total assets            |              | 
|                        |              | 
|Current liabilities     |              | 
|Non-current liabilities |              | 
|Shareholders' equity    |              | 
|                        |              | 
|                        |              | 
|                        |              | 

| | Income
Statement Information:
| | -----------------------------

|             | Year ended December 31, | 
|------------ | ----------------------- | 
|
|Revenues     |                         | 
|Gross profit |                         | 
|Net income   |                         | 

| |  | (9) |  | See
Note 17(E) for guarantees.
| |  | --- |  | ------------------------------

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|                                                      
|------------------------------------------------------
|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 on a cost basis
| | -- |  | ------------------------------------------------------

|           | December 31, | 
|---------- | ------------ | 
|
|Soltam (1) |              | 
|ISI (2)    |              | 
|AAI (3)    |              | 
|Sandel (4) |              | 
|Others     |              | 
|           |              | 
|           |              | 
|           |              | 
|           |              | 

| |  | (1) |  | Soltam
Systems Ltd. (Soltam), held 10%, is an Israeli company           engaged in
the development and manufacturing of military systems in the           artillery sector.
In December 2006, the Company sold its holdings in Soltam in           consideration for
$5,000, to be paid in 24 monthly installments bearing interest           of Libor+1%. An
amount of $2,341 was recorded as other long-term receivables. A           gain of $1,500
was recorded as other income.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (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. During the           fourth quarter
of 2005, the fair value of ISI decreased as a result of a           decrease in ISIs
backlog and estimated future cash flows. Based on a           valuation performed by an
independent advisor, the Company wrote-off           approximately $5,400 of its
investment in ISI.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | AeroAstro
Inc. (AAI), held 8.33% (on a fully diluted basis) is a           Delaware
corporation 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.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | Sandel
Avionics, Inc. (Sandel) based in Vista, California, produces specialized
integrated display systems and other products for the commercial aviation market. In
2006, Kollsman acquired Preferred B Shares, which constitute a 20% interest in Sandel on
a fully diluted and as converted basis.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 7- |  | COMPENSATION RECEIVABLES IN RESPECT OF FIRE DAMAGE, NET
|------- |  | -------------------------------------------------------

|                                       | December 31, | 
|-------------------------------------- | ------------ | 
|
|Receivables from insurance company (A) |              | 
|Net of contingent payment to Koor (B)  |              | 
|                                       |              | 
|                                       |              | 
|                                       |              | 

| | A. |  | On
March 17, 2001, a fire broke out in the manufacturing plants in two of           Elisras
subsidiaries (the companies). The fire caused damage           to equipment,
building, inventory and work in progress.  Up to December 31, 2005 and 2006,
          advances were received from the insurance company in the aggregate amount of
          approximately $10 million.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITS SUBSIDIARIES

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

|Note 7- |  | COMPENSATION RECEIVABLES IN RESPECT OF FIRE DAMAGE, NET (Cont.)
|------- |  | ---------------------------------------------------------------

| | A. |  | Cont.
| | -- |  | -----

| | Upon
the acquisition of Elisra in 2005, as part of the assets purchased in the business
combination, the Company recorded the receivables from the insurance company at their
estimated value of approximately $26 million considering the advances previously received
from the insurance companies in years prior to the acquisition.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
claim submitted by the companies to the insurance company, and which is based on the
terms of the insurance policy, also includes a demand for consequential damages along
with other damages that the companies believe are covered by the insurance policy.
Therefore, the total amount of the claim is much higher than the book value of the damage
and the cost of repairing the building.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
companies are taking legal action in order to receive the insurance claim and they have
submitted a claim to the District Court of Tel-Aviv against the insurance company and its
assessors, in the aggregate amount of $96 million. In light of the duration of the
proceedings, the managements of the companies decided to classify the balance of the
compensation receivable from the insurance company as a long-term receivable.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2004, the companies filed a request with the Court, for issuance of a partial
judgment, in the amount of $33 million (in excess of the advances already paid by the
insurance company) based on the admission made by the insurance company and its
representatives of an obligation deriving from the insurance event, while the dispute
remains regarding the amount of the damages.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, a hearing was held in the Court wherein the force of a judgment was given
to an agreement of the parties pursuant to which a separate bank account was opened, in
which the insurance company deposited $15 million. Every withdrawal from such account
requires approval of the Court until the proceedings on the claim are concluded. In
accordance with the aforesaid agreement, the claim was transferred for mediation. A
number of meetings took place during 2005 and 2006, including a visit of the reinsurance
representatives with the Company, however the mediation did not result in an agreement
between the parties.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
light of the failure of the mediation proceeding, on September 19, 2006 the mediator
notified the Court of discontinuance of the proceeding.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | On
September 21, 2006, the Company requested from the Court to renew the legal proceedings
and requested that a ruling be made on the request for a partial ruling that had been
filed on April 21, 2004 as described above. A hearing on the ruling is scheduled for
March 18, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the opinion of the companies, based on, among other things, the opinion of their legal
advisors regarding this matter, it is difficult to estimate the chances that the
companies will receive the full amount of the claim, even though it is considered to be
well founded. Nonetheless, the managements of the companies estimate, based on the
opinion of their legal advisors that the chances are good of receiving indemnification
from the insurance company, in an amount at least equal to the balance of the receivable which
they recorded as an asset in the financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. |  | In
the agreement the Company signed with Koor, for the purchase of Elisras
               shares, it was agreed that the Company will pay Koor 40% of the
consideration                received from the insurance company, up to $30 million and
25%-27.5% of                additional consideration received (see Note 1(G)).
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITS SUBSIDIARIES

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

|Note 7- |  | COMPENSATION RECEIVABLES IN RESPECT OF FIRE DAMAGE, NET (Cont.)
|------- |  | ---------------------------------------------------------------

| | C. |  | The
receivables in respect of the fire damages and related payable to Koor
               represent pre-acquisition contingencies that were recognized in connection
with                the acquisition of Elisra in 2005, as part of the purchase price allocation
 (see                Note 1(G)).
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 8- |  | LONGTERM BANK DEPOSITS AND TRADE RECEIVABLES
|------- |  | ---------------------------------------------

|                                                       | December 31, | 
|------------------------------------------------------ | ------------ | 
|
|Deposits with banks for loans granted to employees (*) |              | 
|Long-term trade and other receivables (**)             |              | 
|Other deposits with banks                              |              | 
|                                                       |              | 
|                                                       |              | 
|                                                       |              | 

| |  |  | (*) |  | The
deposits are linked to the Israeli CPI, bear annual interest of 4% and are
          presented net of current maturities of $429 (2005  $539).
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (**) |  | Other
receivables include receivables in the amount of $2,341 with respect to           the
sale of Soltam, to be paid in 24 monthly installments (see Note 6(B)(1)).           The
installments bear annual interest rate of Libor +1%. As of December 31, 2006
          the rate was 6.3%.
| |  |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 9- |  | PROPERTY, PLANT AND EQUIPMENT, NET
|------- |  | ----------------------------------

|                                               | December 31, | 
|---------------------------------------------- | ------------ | 
|
|Cost (1):                                      |              | 
|Land, buildings and leasehold improvements (2) |              | 
|Instruments, machinery and equipment (3)       |              | 
|Office furniture and other                     |              | 
|Motor vehicles                                 |              | 
|                                               |              | 
|                                               |              | 
|Accumulated depreciation                       |              | 
|                                               |              | 
|Depreciated cost                               |              | 
|                                               |              | 
|                                               |              | 

| | Depreciation
expenses for the years ended December 31, 2006, 2005 and 2004 amounted to $50,323,
$44,576 and $35,001, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | (1) |  | Net
of investment grants received (mainly for instruments, machinery and           equipment)
in the amounts of $33,409 and $ 32,879 as of December 31, 2006 and           2005,
respectively.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Includes
rights in approximately 9,225 square meters of land in Tirat Hacarmel,           Israel.
The land is leased from the Israel Land Administration until the years           2014 to
2024 with a renewal option for additional periods of up to 49 years. The           Companys
rights in the land have not yet been registered in its name.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

184



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ITS SUBSIDIARIES

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

|Note 9- |  | PROPERTY, PLANT AND EQUIPMENT, NET (Cont.)
|------- |  | ------------------------------------------

| | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Includes
rights in approximately 10,386 square meters of land in Bnei Brak, Israel. The land is
leased from the Israel Land Administration (through the years 2010-2017) 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
$96,131 and $82,518 as of December 31, 2006 and 2005, respectively.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) |  | As
for pledges of assets  see Note 17(G) and 17(J).
| | --- |  | ----------------------------------------------------

|Note 10- |  | INTANGIBLE
ASSETS, NET
|-------- |  | ----------------------

| | A. |  | Composition:
| | -- |  | ------------

|                          | Weighted average number
of years of amortization |  | December 31, |   
|------------------------- | ------------------------------------------------ |  | ------------ | --
|
|Original cost:            |                                                  |  |              |   
|Technology (1)            |                                                  |  |              | 14
|Trade marks (2)           |                                                  |  |              | 17
|                          |                                                  |  |              |   
|                          |                                                  |  |              |   
|                          |                                                  |  |              |   
|Accumulated amortization: |                                                  | 
|Technology                |                                                  |  |              |   
|Trade marks               |                                                  |  |              |   
|                          |                                                  |  |              |   
|                          |                                                  |  |              |   
|                          |                                                  |  |              |   
|Amortized cost            |                                                  |  |              |   
|                          |                                                  |  |              |   
|Goodwill (3)              |                                                  |  |              |   
|                          |                                                  |  |              |   

| |  | (1) |  | The
technology acquired consists of five major items as follows:
| |  | --- |  | ----------------------------------------------------------------

| | In
2000, the Company completed a merger with Elop. A portion of the purchase price was
allocated to technology ($45,000), based on an independent appraisal. The technology
acquired in the merger with Elop 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           modern equipment and software.
| |  |  | -- |  | ---------------------------------------------------------------------------------------------

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

|Note 10- |  | INTANGIBLE
ASSETS, NET (Cont.)
|-------- |  | ------------------------------

| | A. |  | Composition
(Cont.)
| | -- |  | -------------------

| |  |  | 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 speedometers.
| |  |  | -- |  | -----------------------------------------------------------------------

| | In
2000, EFW Inc. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, the Company acquired 70% of Elisras shares as detailed in Note 1(G) above, in
consideration for $68,800. An amount of $21,300 was allocated to the technology related
to electronic warfare (EW) systems, command communication (C(2)) systems and
data link products.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | Includes
trade marks acquired in the merger with Elop in 2000.
| |  | --- |  | --------------------------------------------------------------

| |  | (3) |  | Includes
mainly goodwill resulting from the merger with Elop ($18,700) in 2000,           goodwill
acquired from Honeywell Inc. ($2,090) in 2000, goodwill resulting from           the
acquisition of IEI ($3,300) in 2001 and goodwill resulting from the           acquisition
of Elisra ($24,300) in 2005.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | Changes in goodwill,
 during the years, are as follows:
| |  | --- |  | -------------------------------------------------------

|                                   | 2006 |  | 2005 |       
|---------------------------------- | ---- |  | ---- | ------
|Balance, at January 1              |      |  | $    | 58,401
|Goodwill acquired during the year: |      | 
|Elisra                             |      |  |      | -     
|AD & D                             |      |  |      | -     
|Others                             |      |  |      | -     
|                                   |      |  |      |       
|Balance, at December 31            |      |  | $    | 58,401
|                                   |      |  |      |       

| | B. |  | Amortization
expenses amounted to $8,176, $7,742 and $7,260 for the years ended December 31,
2006, 2005 and 2004, respectively.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------

| | C. |  | The
annual amortization expense relating to intangible assets other than
               goodwill existing as of December 31, 2006 is estimated to be as follows:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|           | 
|---------- | 
|
|2007       | 
|2008       | 
|2009       | 
|2010       | 
|2011       | 
|Thereafter | 
|           | 
|Total      | 
|           | 

186



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ITS SUBSIDIARIES

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

|Note 11- |  | SHORT-TERM
BANK CREDIT AND LOANS
|-------- |  | --------------------------------

|                               | December 31,  | 
|------------------------------ | ------------- | 
|
|Short-term bank loans:         | Interest Rate | 
|                               |               | 
|In U.S. dollars                |               | 
|                               |               | 
|Short-term bank credit:        |               | 
|In NIS unlinked                |               | 
|In U.S. dollars                |               | 
|                               |               | 
|                               |               | 
|                               |               | 
|                               |               | 
|                               |               | 
|Weighted Average Interest Rate |               | 
|                               |               | 

|Note 12- |  | OTHER
PAYABLES AND ACCRUED EXPENSES
|-------- |  | -----------------------------------

|                                                | December 31, | 
|----------------------------------------------- | ------------ | 
|
|Payroll and related expenses                    |              | 
|Provision for vacation pay                      |              | 
|Provision for income taxes, net of advance paid |              | 
|Value added tax (VAT) payable                   |              | 
|Provisions for royalties                        |              | 
|Provision for warranty                          |              | 
|Deferred income taxes                           |              | 
|Liability in respect of hedge transactions      |              | 
|Others (*)                                      |              | 
|                                                |              | 
|                                                |              | 
|                                                |              | 
|                                                |              | 

| | (*)Others -
 primarily includes provisions for estimated future costs in           respect
of (1) provision for losses, penalties and the probable loss from claims           (legal
or unasserted) in the ordinary course of business (e.g. damages caused by           the
items sold and claims as to the specific products ordered), (2) unbilled
          services of service providers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 13- |  | CUSTOMERS
ADVANCES IN EXCESS OF COSTS INCURRED ON CONTRACTS IN PROGRESS
|-------- |  | -----------------------------------------------------------------------

|                                                     | December 31, | 
|---------------------------------------------------- | ------------ | 
|
|Advances received                                    |              | 
|Less -                                               |              | 
|Advances presented under long-term liabilities       |              | 
|Advances deducted from inventories                   |              | 
|                                                     |              | 
|                                                     |              | 
|Less -                                               |              | 
|Costs incurred on contracts in progress (see Note 5) |              | 
|                                                     |              | 
|                                                     |              | 
|                                                     |              | 
|                                                     |              | 

| | As
for guarantees and liens see Note 17(F).
| | -------------------------------------------

187



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ITS SUBSIDIARIES

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

|Note 14- |  | LONG-TERM
LOANS
|-------- |  | ---------------

|                        |  | Interest |                 | Years of |  | December 31, | 
|----------------------- |  | -------- | --------------- | -------- |  | ------------ | 
|
|Banks                   |  |          | U.S. dollars    |          |  | 2.98% -      | 
|                        |  |          |                 |          |  | Libor + 2.3% | 
|Office of Chief         |  |          | NIS-linked to   |          |  |              | 
|Scientist               |  |          | the Israeli-CPI |          |  | 3.2          | 
|Other                   |  |          |                 |          |  |              | 
|                        |  |          |                 |          |  |              | 
|                        |  |          |                 |          |  |              | 
|Less-current maturities |  |          |                 |          |  |              | 
|                        |  |          |                 |          |  |              | 
|                        |  |          |                 |          |  |              | 
|                        |  |          |                 |          |  |              | 

| | The
Libor rate as of December 31, 2006 was 5.3%.
| | ------------------------------------------------

| | The
maturities of these loans after December 31, 2006 are as follows:
| | ---------------------------------------------------------------------

|                          | 
|------------------------- | 
|
|2007 - current maturities | 
|2008                      | 
|2009                      | 
|2010                      | 
|2011                      | 
|2012 and thereafter       | 
|                          | 
|                          | 
|                          | 

| | See
Note 17(F) for covenants.
| | -----------------------------

| | In
order to secure liabilities to banks as well as guarantees to customers and performance
guarantees, a subsidiary granted first priority liens and/or floating liens on all of its
property and assets with no limitation as to amount, and specific liens on its short-term
investments (see Note 17(G)).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 15- |  | BENEFIT
PLANS AND ACCRUED TERMINATIONAL LIABILITY
|-------- |  | -------------------------------------------------

| | ESA,
the Companys subsidiary in the U.S., has adopted for its employees in U.S. benefits
plans as follows:
| | -----------------------------------------------------------------------------------------------------------

| | Defined
Benefit Retirement Plan
| | -------------------------------

| | ESA
has three defined benefit pension plans (the Plans) which cover the employees
of EFW and Kollsman 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. Pension expense is
allocated between cost of sales and general and administrative expenses, depending on the
responsibilities of the employee.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

188



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ITS SUBSIDIARIES

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

|Note 15- |  | BENEFIT
PLANS AND ACCRUED TERMINATIONAL LIABILITY (Cont.)
|-------- |  | ---------------------------------------------------------

| | The
measurement date for the EFW and Kollsman benefit obligation is December 31, 2006. The
following table sets forth the Plans funded status and amounts recognized in the
consolidated financial statements for the years ended December 31, 2006 and 2005:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                          | December 31, | 
|--------------------------------------------------------- | ------------ | 
|
|Changes in benefit obligation:                            |              | 
|Benefit obligation at beginning of year                   |              | 
|Service cost, end of year                                 |              | 
|Interest cost                                             |              | 
|Amendments                                                |              | 
|Actuarial losses                                          |              | 
|Benefits paid                                             |              | 
|                                                          |              | 
|Benefit obligation at end of year                         |              | 
|                                                          |              | 
|Changes in Plan Assets:                                   |              | 
|Fair value of Plans assets at beginning of year           |              | 
|Actual return on Plan assets (net of expenses)            |              | 
|Employer contribution                                     |              | 
|Benefits paid                                             |              | 
|                                                          |              | 
|Fair value of Plans assets at end of year                 |              | 
|                                                          |              | 
|Accrued benefit cost, end of year:                        |              | 
|Funded status                                             |              | 
|Unrecognized prior service cost                           |              | 
|Unrecognized net actuarial loss                           |              | 
|                                                          |              | 
|Accrued benefit cost, end of year                         |              | 
|                                                          |              | 
|Amount recognized in the statement of financial position: |              | 
|Accrued benefit liability                                 |              | 
|Intangible asset                                          |              | 
|Deferred tax assets                                       |              | 
|Accumulated other comprehensive loss                      |              | 
|                                                          |              | 
|Net amount recognized                                     |              | 
|                                                          |              | 
|                                                          |              | 

|                                                   | Year ended December 31, | 
|-------------------------------------------------- | ----------------------- | 
|
|Components of net periodic pension cost:           |                         | 
|Service cost                                       |                         | 
|Interest cost                                      |                         | 
|Expected return on  Plans assets                   |                         | 
|Amortization of prior service cost                 |                         | 
|Amortization of transition amount                  |                         | 
|Recognized net actuarial loss                      |                         | 
|                                                   |                         | 
|Total net periodic benefit cost                    |                         | 
|                                                   |                         | 
|                                                   |                         | 
|Weighted average assumptions:                      |                         | 
|Discount rate as of December 31,                   |                         | 
|Expected long-term rate of return on Plan's assets |                         | 
|Rate of compensation increase                      |                         | 

189

---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 15- |  | BENEFIT
PLANS AND ACCRUED TERMINATIONAL LIABILITY (Cont.)
|-------- |  | ---------------------------------------------------------

| | Asset
Allocation by Category as of December 31:
| | -----------------------------------------------

|                  | 2006   | 2005  
|----------------- | ------ | ------
|Asset Category    |        |       
|Equity Securities | 61.0%  | 65.9% 
|Debt Securities   | 34.5%  | 26.4% 
|Other             | 4.5%   | 7.7%  
|                  |        |       
|Total             | 100.0% | 100.0%

| | The
investment policy of ESA is directed toward a broad range of securities. The diversified
portfolio seeks to maximize investment return while minimizing the risk levels associated
with investing. The investment policy is structured to consider the retirement plans
obligations and the expected timing of benefit payments. The target asset allocation for
the Plan years presented is as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | 2006   | 2005  
|----------------- | ------ | ------
|Asset Category    |        |       
|Equity Securities | 60.0%  | 60.0% 
|Debt Securities   | 37.0%  | 37.0% 
|Other             | 3.0%   | 3.0%  
|                  |        |       
|Total             | 100.0% | 100.0%

| | In
developing the overall expected long-term rate of return on assets assumption, ESA used a
building block approach in which rates of return in excess of inflation were considered
separately for equity securities, debt securities, real estate and all other assets. The
excess returns were weighted by the representative target allocation and added along with
an approximate rate of inflation to develop the overall expected long-term rate of
return.  It
is the policy of ESA to at least meet the ERISA minimum contribution requirements for a
plan year. The minimum contribution requirements for the 2006 Plan year and the quarterly
contributions requirements for the 2005 Plan year have been satisfied as of December 31,
2006. However, ESA anticipates that it will make an additional discretionary contribution
of approximately $537 during 2007 in order to increase the Plans funded current
liability percentage. Benefit payments over the next five years are expected to be $1,532
in 2007; $1,697 in 2008; $1,982 in 2009, $2,281 in 2010 and $2,503 in 2011.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

190



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 15- |  | BENEFIT
PLANS AND ACCRUED TERMINATIONAL LIABILITY (Cont.)
|-------- |  | ---------------------------------------------------------

| | Retiree
Medical Plan
| | --------------------

| | ESA
initiated a retiree medical benefit plan at EFW which arose from a side-letter agreement
to the union negotiations in November 2002. In 2006, ESA identified this benefit
obligation and evaluated the impact to the financial statements for prior years. The
accumulated post-retirement benefit obligation (APBO) for prior years is $1,642 for 2002,
$1,589 for 2003 and $1,386 for 2004 through 2006, respectively. The accrued expense for
prior years is $640 for 2004, $905 for 2005 and $1,094 for 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
measurement date for ESA benefit obligation is December 31, 2006. The following table
sets forth the Plans funded status and amounts recognized in the consolidated
financial statements for the year ended December 31, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                           | December 31, 2006 | 
|---------------------------------------------------------- | ----------------- | 
|Change in Benefit Obligation:                              |                   | 
|Benefit obligation at beginning of period                  |                   | 
|Service cost, at the end of period                         |                   | 
|Interest cost                                              |                   | 
|Actuarial (gain) / loss                                    |                   | 
|Benefits paid                                              |                   | 
|                                                           |                   | 
|Benefit obligation at end of period                        |                   | 
|                                                           |                   | 
|Change in Plan Assets:                                     |                   | 
|Fair value of plan assets at beginning of period           |                   | 
|Actual return on plan assets (net of expenses)             |                   | 
|Employer contribution                                      |                   | 
|Benefits paid                                              |                   | 
|                                                           |                   | 
|Fair value of plan assets at end of period                 |                   | 
|                                                           |                   | 
|Accrued benefit cost, end of period:                       |                   | 
|Funded status                                              |                   | 
|Unrecognized net actuarial (gain) / loss                   |                   | 
|Initial unrecognized transition obligation                 |                   | 
|Unrecognized prior service cost                            |                   | 
|                                                           |                   | 
|Accrued benefit cost, end of period                        |                   | 
|                                                           |                   | 
|Amounts recognized in the statement of financial position: |                   | 
|Accrued benefit liability                                  |                   | 
|Deferred tax asset                                         |                   | 
|Accumulated other comprehensive loss                       |                   | 
|                                                           |                   | 
|Net amount recognized                                      |                   | 
|                                                           |                   | 
|Current                                                    |                   | 
|Non Current                                                |                   | 
|                                                           |                   | 

191



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 15- |  | BENEFIT
PLANS AND ACCRUED TERMINATIONAL LIABILITY (Cont.)
|-------- |  | ---------------------------------------------------------

|                                                  | December 31, 2006
|------------------------------------------------- | -----------------
|Components of net periodic pension                |                  
|cost (for period):                                |                  
|Service cost                                      |                  
|Interest cost                                     |                  
|Expected return on plan assets                    |                  
|Amortization of prior service cost                |                  
|                                                  |                  
|Total net periodic benefit cost                   |                  
|                                                  |                  
|Additional information:                           |                  
|Accumulated benefit obligation                    |                  
|                                                  |                  
|Weighted-average assumptions as of end of period: |                  
|Discount rate                                     |                  
|Health care cost trend rate assumed for next year |                  
|Ultimate health care cost trend rate              |                  

| | Defined
Contribution Plan
| | -------------------------

| | The
401(k) savings plan (401(k) plan) is a defined contribution retirement plan that covers
all eligible employees, as defined in section 401(k) of the U.S. Internal Revenue Code.
Employees may elect to contribute a percentage of their annual gross compensation to the
401(k) plan. ESA may make discretionary matching contributions as determined by ESA.
Total expense under the 401(k) plan amounted to $2,503, $1,984 and $1,744 for the years
ended December 31, 2006, 2005 and 2004, respectively. Expense for the deferred
401(k) plan is allocated between cost of sales and general and administrative
expenses depending on the responsibilities of the related employees.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Non-Qualified
Defined Contribution Plan
| | ---------------------------------------

| | ESA
implemented two new benefit plans for the executives of the organization. The
non-qualified, defined contribution plan is structured under Section 409(A). The plan
provides the employees at vice president level and above the opportunity to defer up to
100% of their salary and bonus or any amount below that to the 409(A) plan. The company
will provide a match of 50 cents on the dollar up to 10% of the employees total
salary and incentive based compensation. The contribution can be made into the 401(k),
409(A) or both plans. The intent was to provide comparable defined contribution plan
benefits across the three ESA locations for the senior management. The 409(A) plan funds
are contributed to several life insurance policies. These policies have been designated
for the provision of pension through the 409(A) plan. The total contributions to the plan
were $161 for 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

192



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 15- |  | BENEFIT
PLANS AND ACCRUED TERMINATIONAL LIABILITY (Cont.)
|-------- |  | ---------------------------------------------------------

| | The
second plan implemented is a non-qualified, defined benefit plan for the top four
executives of ESA. The plan provides a calculated, guaranteed payment in addition to
their regular pension through the company upon retirement. The plan is funded with
several life insurance policies. They are not segregated into a trust or otherwise
effectively restricted.  These policies are corporate owned assets that are subject
to the claims of general creditors and cannot be considered as formal plan assets.  The
defined benefit plan put in place meets the ERISA definition of an unfunded deferred
compensation plan maintained for the benefit of a select group of management or highly
compensated employees. The plan assets currently are valued at $434 and the related
liability for the pension payments is $95. As of December 31, 2006, no executives had
vested in the plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Adoption
of Statement 158
| | -------------------------

| | On
December 31, 2006, the Company adopted the recognition and disclosure provisions of
Statement 158. Statement 158 required the Company to recognize the unfunded status (i.e.,
the difference between the fair value of plan assets and the projected benefit
obligations) of its pension plan in the December 31, 2006 statement of financial
position, with a corresponding adjustment to accumulated other comprehensive income, net
of tax. The adjustment to accumulated other comprehensive income at adoption represents
the net unrecognized actuarial losses, unrecognized prior service costs, and unrecognized
transition obligation remaining from the initial adoption of Statement 87, all of which
were previously netted against the plans funded status in the Companys
statement of financial position pursuant to the provisions of Statement 87. These amounts
will be subsequently recognized as net periodic pension cost pursuant to the Companys
historical accounting policy for amortizing such amounts. Further, actuarial gains and
losses that arise in subsequent periods and are not recognized as net periodic pension
cost in the same periods will be recognized as a component of other comprehensive income.
Those amounts will be subsequently recognized as a component of net periodic pension cost
on the same basis as the amounts recognized in accumulated other comprehensive income at
adoption of Statement 158.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
incremental effects of adopting the provisions of Statement 158 on the Companys
statement of financial position at December 31, 2006 are presented in the following
table. The adoption of Statement 158 had no effect on the Companys consolidated
statement of income for the year ended December 31, 2006, or for any prior period
presented, and it will not effect the Companys operating results in future periods.
Had the Company not been required to adopt Statement 158 at December 31, 2006, it would
have recognized an additional minimum liability pursuant to the provisions of Statement
87. The effect of recognizing the additional minimum liability is included in table below
in the column labeled Prior to Application of Statement 158.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              | Year ended December 31, | 
|----------------------------- | ----------------------- | 
|
|Accrued termination liability |                         | 
|Deferred income tax assets    |                         | 
|Accumulative other            |                         | 
|comprehensive loss            |                         | 

193



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 15- |  | BENEFIT
PLANS AND ACCRUED TERMINATIONAL LIABILITY (Cont.)
|-------- |  | ---------------------------------------------------------

| | Included
in accumulated other comprehensive income at December 31, 2006 is the following amounts
that have not yet been recognized in net periodic pension cost: unrecognized prior
service costs of $889 ($577 net of tax) and unrecognized actuarial losses $12,513 ($8,154
net of tax). The transition obligation, prior service cost, and actuarial loss included
in accumulated other comprehensive income and expected to be recognized in net periodic
pension cost during the fiscal year-ended December 31, 2007 is $8 ($8 net of tax), $164
($114 net of tax), and $535 ($374 net of tax), respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Liability
for Elisras Employees
| | --------------------------------

| | In
February 2007, Elisras Board of Directors approved the framework of a new
efficiency plan, including a reduction in the number of employees with a potential
efficiency plan cost of up to $16,000. Elisras Board of Directors determined that
execution of the reduction in the number of employees is subject to preparation of a
detailed list of the specific employees, the adequate availability of financing for the
execution of the plan and the expected return on such expense in the future.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of the approved date of these financial statements, Elisras management had not
completed the above mentioned procedures and therefore was unable to estimate the total
extent of the effiency plan and its execution period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 16- |  | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

194



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 16- |  | TAXES
ON INCOME (Cont.)
|-------- |  | -----------------------

| | A. |  | APPLICABLE
TAX LAWS (Cont.)
| | -- |  | ---------------------------

| |  | (2) |  | Tax
benefits under Israels Law for the Encouragement of Industry           (Taxes),
1969:
| |  | --- |  | ------------------------------------------------------------------------------------------

| | The
Company and certain subsidiaries in Israel (mainly Elop 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (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-years and subject to reduced tax rates of 25% for a
five-year to eight-year period or tax exempt for a ten-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, 2006, the tax benefits for these exiting expansion programs will expire
within the period of 2007 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 17(J)). As of December 31, 2006, the
Companys management believes that the companies are meeting all conditions of the
approvals.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, retained earnings included approximately $251,661 in tax-exempt
profits earned by the companies Approved Enterprises. If the retained
tax-exempt income is distributed, in manner other than liquidation, 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
$83,887 as of December 31, 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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,
as such retained earnings are essentially permanent in duration.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

195



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 16- |  | TAXES
ON INCOME (Cont.)
|-------- |  | -----------------------

| | A. |  | APPLICABLE
TAX LAWS (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 31% (see also
Note 16(H)).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 31%, 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
| | -- |  | -----------------------------

|                                | Year ended December 31, | 
|------------------------------- | ----------------------- | 
|
|Income  before taxes on income: |                         | 
|Domestic                        |                         | 
|Foreign                         |                         | 
|                                |                         | 
|                                |                         | 
|                                |                         | 

| | D. |  | TAXES
ON INCOME
| | -- |  | ---------------

|                         | Year ended December 31, | 
|------------------------ | ----------------------- | 
|
|Taxes on income:         |                         | 
|Current taxes:           |                         | 
|Domestic                 |                         | 
|Foreign                  |                         | 
|                         |                         | 
|                         |                         | 
|                         |                         | 
|Taxation previous years: |                         | 
|Domestic                 |                         | 
|                         |                         | 
|Deferred income taxes:   |                         | 
|Domestic                 |                         | 
|Foreign                  |                         | 
|                         |                         | 
|                         |                         | 
|                         |                         | 
|                         |                         | 
|                         |                         | 

196



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 16- |  | TAXES
ON INCOME (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:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      |  | Deferred (1) Tax asset (liability) |  
|------------------------------------- |  | ---------------------------------- | -
|
|As of December 31, 2006               |  |                                    |  
|Deferred tax assets:                  |  |                                   
|Reserves and allowances               |  |                                    | $
|Inventory                             |  |                                    |  
|Investments in affiliates             |  |                                    |  
|Net operating loss carryforwards      |  |                                    |  
|                                      |  |                                    |  
|                                      |  |                                    |  
|Valuation allowance                   |  |                                    |  
|                                      |  |                                    |  
|Net deferred tax assets               |  |                                    |  
|                                      |  |                                    |  
|Deferred tax liabilities:             |  |                                   
|Intangible assets                     |  |                                    |  
|Property, plant and equipment         |  |                                    |  
|Reserves and allowances               |  |                                    |  
|Inventory and advance from customers  |  |                                    |  
|                                      |  |                                    |  
|                                      |  |                                    |  
|                                      |  |                                    |  
|Net deferred tax assets (liabilities) |  |                                    | $
|                                      |  |                                    |  
|As of December 31, 2005               |  |                                    |  
|Deferred tax assets:                  |  |                                   
|Reserves and allowances               |  |                                    | $
|Inventory                             |  |                                    |  
|Net operating loss carryforwards      |  |                                    |  
|                                      |  |                                    |  
|                                      |  |                                    |  
|Valuation allowance                   |  |                                    |  
|                                      |  |                                    |  
|Net deferred tax assets               |  |                                    |  
|                                      |  |                                    |  
|Deferred tax liabilities:             |  |                                   
|Reserves and allowances               |  |                                    |  
|Inventory                             |  |                                    |  
|Property, plant and equipment         |  |                                    |  
|Intangible assets                     |  |                                    |  
|                                      |  |                                    |  
|                                      |  |                                    |  
|                                      |  |                                    |  
|Net deferred tax assets (liabilities) |  |                                    | $
|                                      |  |                                    |  

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

197



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 16- |  | TAXES
ON INCOME (Cont.)
|-------- |  | -----------------------

| | F. |  | As
of December 31, 2006, The Groups Israeli subsidiaries have estimated
          total available carryforward tax losses of approximately $64,300, and the
          Groups non-Israeli subsidiaries have estimated available carryforward tax
          losses of approximately $6,500. These losses of the Israeli subsidiaries can be
          offset against future taxable profits for an indefinite period. Deferred tax
          assets in respect of the above carryforward losses amount to approximately
          $4,800 in respect of which a valuation allowance has been recorded in the
amount           of approximately $1,600.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                  | Year ended December 31, | 
|------------------------------------------------- | ----------------------- | 
|
|Income  before taxes as reported in the           |                         | 
|consolidated statements of income                 |                         | 
|                                                  |                         | 
|Statutory tax rate                                |                         | 
|Theoretical tax expense                           |                         | 
|Tax benefit arising from reduced rate as an       |                         | 
|"Approved Enterprise" and other tax               |                         | 
|benefits                                          |                         | 
|Tax adjustment in respect of different tax        |                         | 
|rates for foreign subsidiaries                    |                         | 
|Operating carryforward losses for which valuation |                         | 
|allowance was provided                            |                         | 
|Increase (decrease) in taxes resulting            |                         | 
|from nondeductible expenses                       |                         | 
|Difference in basis of measurement for            |                         | 
|financial reporting and tax return purposes       |                         | 
|Taxes in respect of prior years                   |                         | 
|Other differences, net                            |                         | 
|                                                  |                         | 
|Actual tax expenses                               |                         | 
|                                                  |                         | 
|Effective tax rate                                |                         | 
|                                                  |                         | 

| | H. |  | AMENDMENT
TO THE INCOME TAX ORDINANCE
| | -- |  | -------------------------------------

| | On
July 25, 2005, the Knesset (Israeli Parliament) approved the Law for the Amendment of the
Income Tax Ordinance (No. 147), 2005, which prescribes, among other provisions, a gradual
decrease in the corporate tax rate in Israel to the following tax rates: in 2004 35%,
in 2005  34%, in 2006  31%, in 2007  29%, in 2008  27%, in 2009
 26% and in 2010 and thereafter  25%. The change in the future tax rates did
not have a material effect on the Companys financial position and results of
operations in 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. |  | Final
tax assessments have been received by the Company up to and including the           tax
year ended December 31, 2000 and by certain subsidiaries, between the years
          2000-2003 (subsidiaries that were incorporated after 2000 have not received
          final assessments).
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

198



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 17- |  | COMMITMENTS
AND CONTINGENT LIABILITIES
|-------- |  | --------------------------------------

| | A. |  | ROYALTY
COMMITMENTS
| | -- |  | -------------------

| | 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s 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expenses
amounted to $2,830, $4,849 and $5,423 in 2006, 2005 and 2004, respectively.
| | ----------------------------------------------------------------------------------------------

| | 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, 2006 amounted to $1,078,100 to be performed over a period of up to 10 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

199



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 17- |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- |  | ----------------------------------------------

| | C. |  | LEGAL
CLAIMS
| | -- |  | ------------

| | The
Company and its subsidiaries are involved in legal claims arising in the ordinary course
of business, including claims by employees, consultants and others. Companys
management, based on the opinion of its legal counsel, believes that the financial impact
for the settlement of such claims in excess of the accruals recorded in the financial
statements will not have a material adverse effect on the financial position or results
of operations of the Group.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
information on Elisras insurance claim for damage, as a result of a fire in 2001,
see Note 7.
| | --------------------------------------------------------------------------------------------------

| | 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 as of
December 31, 2006 are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    | 
|------------------- | 
|2007                | 
|2008                | 
|2009                | 
|2010                | 
|2011                | 
|2012 and thereafter | 
|                    | 
|                    | 
|                    | 

| | Rent
expenses for the years ended December 31, 2006, 2005 and 2004 amounted to $13,786 $ 8,055
and $6,842, respectively.
| | ------------------------------------------------------------------------------------------------------------------------

| | A
 subsidiary  signed an  agreement  for receipt of computer  services for a period of 10
years ending                      2013, in exchange for an annual payment of $1,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

200



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 17- |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- |  | ----------------------------------------------

| | E. |  | GUARANTEES
| | -- |  | ----------

| |  | (1) |  | As
of December 31, 2006, guarantees in the amount of approximately $765,600 were
               issued by banks on behalf of Group companies mainly 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                by banks amounting to $16,200 (2005  $13,300), of which $15,700
(2005                 $12,500) 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. The fair
value of such guarantees as of                December 31, 2006 is not material.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. |  | COVENANTS
| | -- |  | ---------

| |  | (1) |  | 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, 2006, the Company           and its
subsidiaries, except Elisra, were in full compliance with all covenants.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | Elisras
liabilities to banks are secured by negative pledges. Pursuant to           the terms of
the negative pledges, Elisra committed to comply with certain           financial
covenants (to be measured based on Elisras financial           statements), which
include, among others, a minimum ratio of shareholders          equity to total
assets (as defined in the agreement), a minimum current ratio, a           minimum amount
of shareholders equity and a minimum amount of pre-tax           income. In
addition, certain restrictions have been imposed on Elisra regarding           the
provision of guarantees to third parties, creating new liens and on selling           or
transferring assets in material amounts.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

201



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 17- |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- |  | ----------------------------------------------

| | F. |  | COVENANTS
(Cont.)
| | -- |  | -----------------

| |  | (3) |  | During
2004, Elisra received long-term loans. In accordance with the conditions           of the
above-mentioned loans, Elisra committed to the providers of the loans to,           among
other things, comply with financial covenants as described above, as well           as a
debt coverage ratio, as defined in the loan agreement, based on           Elisras
stand alone financial statements. In addition, certain           restrictions were
imposed on Elisra regarding distribution of dividends and           other payments to its
shareholders as provided in the agreement. As at December           31, 2006, Elisra did
not comply with the above-mentioned financial covenants.           Accordingly, the
loans, in the amount of $6 million, are classified as           short-term loans. As a
result, the banks requested to register a general           floating lien on the assets
of Elisra. In February 2007, Elisras Board of           Directors approved the banks request.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. |  | CONTINGENT
LIABILITIES AND GUARANTEES
| | -- |  | -------------------------------------

| | As
a result of cancellation of the export authorization in 2006 to a foreign country (the
Customer), Elisra and one of its subsidiaries were forced to terminate four
projects. Most of the activity in respect of the projects, the total amount of which was
approximately $40 million, has already been executed and the deliveries have been made to
the Customer. For those projects, Elisra and its subsidiary provided to the Customer
advances and performance guarantees issued by banks and financial institutions in the
total amount to approximately $10 million. Elisras and the Companys
management, based on the opinion of legal counsel, believes that termination of the
projects under such circumstances constitutes a termination by mutual agreement due to
force majeure, which provides a mechanism for mutual settlement between the parties.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Elisras
management, based on the opinion of its legal advisors, believes that the financial
impact of the four projects termination 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 Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Customer financed the projects by means of bank loans. The banks received indemnity
letters as security for repayment of the loans. Most of the indemnity was provided to the
banks by the International Foreign Trade Risks Insurance Company (IFTRIC)
(since renamed ASHRA) and the balance was provided by Elisra and its
subsidiary (as of December 31, 2006, amount to approximately $4 million). In addition,
Elisra provided indemnity letters to IFTRIC that can be exercised upon the occurrence of
specific unusual events and is subject to IFTRIC fulfilling its commitments to the banks.
In the opinion of Elisras and the Companys management, based on legal advice,
the likelihood that the indemnification provided to IFTRIC would be exercised is remote,
and no provisions are required in respect of these indemnity letters.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

202



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 17- |  | 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 Group. These purchase orders and subcontracts are
typically in a standard format proposed by the Group, with the subcontracts and purchase
orders also reflecting provisions from the Group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 Groups
right to terminate the purchase order or subcontract in the event of the vendors or
subcontractors default, as well as the Groups right to terminate the order or
subcontract for the Groups convenience (or if the Group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, 2006 and 2005, the purchase
commitments were $681,000 and $661,000 respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. |  | In
order to secure bank loans and bank guarantees in the amount of $765,600 as           of
December 31, 2006, certain Group companies recorded fixed liens 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 (see Note 16(A)(3) above).
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------

|Note 18- |  | SHAREHOLDERS 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 included 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. The options vested 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

203



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 18- |  | SHAREHOLDERS EQUITY (Cont.)
|-------- |  | ----------------------------

| | C. |  | A
summary of the Companys share option activity under the plans is as
          follows:
| | -- |  | -----------------------------------------------------------------------------------------

|                              | 2006 |  | 2005 |            | 2004 |  
|----------------------------- | ---- |  | ---- | ---------- | ---- | -
|
|Outstanding -                 |      |  |      |            |      |  
|beginning of  the year        |      |  |      | 1,602,752  |      | $
|Granted                       |      |  |      | -          |      |  
|Exercised                     |      |  |      | (1,366,809 | )    |  
|Forfeited                     |      |  |      | (68,483    | )    |  
|                              |      |  |      |            |      |  
|Outstanding - end of the year |      |  |      | 167,460    |      | $
|                              |      |  |      |            |      |  
|Options exercisable at        |      | 
|the end of the year           |      |  |      | 75,085     |      | $
|                              |      |  |      |            |      |  

| | During
2006, no options were granted. Aggregate intrinsic value of outstanding options and
exercisable options as of December 31, 2006 amounts to $ 2,646 and $1,245, respectively.
The aggregate intrinsic value represents the total intrinsic value (the difference
between the Companys closing stock price on the last trading day of the fourth
quarter of fiscal 2006 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option holders
exercised their options on December 31, 2006. This amount changes based on the fair
market value of the Companys stock. Total intrinsic value of options exercised for
the year ended December 31, 2006 was $27,178. As of December 31, 2006, there was $322 of
total unrecognized compensation cost related to share-based compensation arrangements
granted under the Companys stock option plans. That cost is expected to be
recognized over a weighted-average period of 3 years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. |  | The
options outstanding as of December 31, 2006, have been separated into ranges           of
exercise prices, as follows:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------

|                 | Options outstanding | Options exercisable
|---------------- | ------------------- | -------------------
|
|$13.25 - $ 19.36 | 167,460             | 3.3                
|                 |                     |                    

| | The
weighted average remaining contractual life (years) of exercisable options as of December
31, 2006 amounts to 3 years.
| | --------------------------------------------------------------------------------------------------------------------------

204



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 18- |  | SHAREHOLDERS EQUITY (Cont.)
|-------- |  | ----------------------------

| | Compensation
expense net amounting to $195, $172 and $3,387 was recognized during the years ended
December 31, 2006, 2005 and 2004, respectively. The expenses before tax were recorded
 as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Year ended December 31, | 
|----------------------------------- | ----------------------- | 
|
|Cost of revenues                    |                         | 
|R&D and marketing expenses          |                         | 
|General and administration expenses |                         | 
|                                    |                         | 
|                                    |                         | 
|                                    |                         | 

| | E. |  | The
weighted average exercise price and fair value of options granted during           the
years ended December 31, 2006, 2005 and 2004 were:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|                                 | Less than market price | 
|-------------------------------- | ---------------------- | 
|
|
|Weighted average  exercise price |                        | 
|Weighted average fair value on   |                        | 
|grant date                       |                        | 

| | (*)                 During
2006, no options were granted.
| | ---------------------------------------------------------

| | F. |  | 2007
STOCK OPTION PLAN
| | -- |  | ----------------------

| | In
January 2007, the Companys shareholders approved the Companys 2007 Option
Plan (the Plan). The purpose of the Plan is to provide the benefits arising
from ownership of share capital by the Companys and certain of its subsidiaries
employees, who are expected to contribute to the Elbit Systems Groups future growth
and success. The options were allocated, subject to the required approvals, in two tracks
as follows: (i) Regular Options  up to 1,250,000 options exercisable into 1,250,000
shares of the Company in consideration for the Exercise Price, all or any portion of
which may be granted as Incentive Stock Options (Regular Options) and (ii)
Cashless Options  up to 1,250,000 options, which entitle the participant to
exercise options for an amount reflecting only the benefit factor (Cashless Options).
Each of the participants will be granted an equal amount of Regular Options and Cashless
Options. The exercise price for Israeli participants will be the average closing price of
the Companys share during 30 trading days proceeding the options grant date. The
exercise price of options granted to a non-Israeli participant residing in the United
States will be the fair market value of the share on the day the options were granted.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the Plan, the options granted on a certain date (the Commencement Date)
will become vested and exercisable in accordance with the following vesting schedule:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

205



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 18- |  | SHAREHOLDERS EQUITY (Cont.)
|-------- |  | ----------------------------

| | F. |  | 2007
STOCK OPTION PLAN (Cont.)
| | -- |  | ------------------------------

| |  | (1) |  | Fifty
percent (50%) of the options will be vested and exercisable from the           second
anniversary of the Commencement Date;
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | An
additional twenty-five percent (25%) of the options will be vested and
          exercisable from the third anniversary of the Commencement Date; and
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | The
remaining twenty-five (25%) of the options will be vested and exercisable           from
the fourth anniversary of the Commencement Date.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company will grant options to Israeli participants in accordance with the provisions of
Section 102 of the Israel Tax Ordinance related to the Capital Gains Tax Track.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 11, 2007, the Company granted to its employees 2,354,300 options from the Plan.
The exercise price per option for Israeli employees was $33.20 and for non-Israeli
employees was $33.10.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. |  | COMPUTATION
OF BASIC AND DILUTED NET EARNINGS PER SHARE:
| | -- |  | --------------------------------------------------------

|                       | Year ended
December 31, 2006 |  | Year ended
December 31, 2005 |        | Year ended
December 31, 2004 | 
|---------------------- | ---------------------------- |  | ---------------------------- | ------ | ---------------------------- | 
|
|Basic net earnings     |                              |  | $                            | 72,242 |                              | 
|Effect of dilutive     |                              | 
|securities:            |                              | 
|Employee stock options |                              |  |                              | -      |                              | 
|                       |                              |  |                              |        |                              | 
|Diluted net earnings   |                              |  | $                            | 72,242 |                              | 
|                       |                              |  |                              |        |                              | 
|                       |                              |  |                              |        |                              | 

| | (*)
In thousands
| | ----------------

| | H. |  | TREASURY
SHARES
| | -- |  | ---------------

| | The
Companys shares held by the Company and its subsidiaries are presented at cost and
deducted from shareholders 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

206



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 19- |  | 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:
| | -- |  | --------------------------------------------------------------------------------------------------------

|       | Year ended December 31, | 
|------ | ----------------------- | 
|
|Europe |                         | 
|U.S.   |                         | 
|Israel |                         | 
|Others |                         | 
|       |                         | 
|       |                         | 
|       |                         | 

| | B. |  | Revenues
are generated by the following product lines:
| | -- |  | ------------------------------------------------------

|                                      | Year ended December 31, | 
|------------------------------------- | ----------------------- | 
|
|Airborne systems                      |                         | 
|Land vehicles systems                 |                         | 
|Command, control, communications,     |                         | 
|computers, intelligence, surveillance |                         | 
|and reconnaissance systems (C(4)ISR)  |                         | 
|Electro-optical systems               |                         | 
|Others                                |                         | 
|                                      |                         | 
|                                      |                         | 
|                                      |                         | 

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

|                            | Year ended December 31, | 
|--------------------------- | ----------------------- | 
|
|Israeli Ministry Of Defense |                         | 
|U.S. Government             |                         | 

| | D. |  | Long-lived
assets by geographic areas:
| | -- |  | --------------------------------------

|       | Year ended December 31, | 
|------ | ----------------------- | 
|
|Israel |                         | 
|U.S.   |                         | 
|Others |                         | 
|       |                         | 
|       |                         | 
|       |                         | 

207



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 20- |  | RESEARCH
AND DEVELOPMENT EXPENSES, NET
|-------- |  | --------------------------------------

|                      | Year ended December 31, | 
|--------------------- | ----------------------- | 
|
|Total expenses        |                         | 
|Less - participations |                         | 
|                      |                         | 
|                      |                         | 
|                      |                         | 

|Note 21- |  | FINANCIAL
EXPENSES, NET
|-------- |  | -----------------------

|                                           | Year ended December 31, | 
|------------------------------------------ | ----------------------- | 
|
|Expenses:                                  |                         | 
|On long-term bank debt                     |                         | 
|On short-term bank credit and loans        |                         | 
|Others                                     |                         | 
|                                           |                         | 
|                                           |                         | 
|                                           |                         | 
|Income:                                    |                         | 
|Interest on cash, cash equivalents         |                         | 
|and bank deposits                          |                         | 
|Others                                     |                         | 
|                                           |                         | 
|                                           |                         | 
|                                           |                         | 
|Gain (loss) from exchange rate differences |                         | 
|                                           |                         | 
|                                           |                         | 
|                                           |                         | 
|                                           |                         | 

|Note 22- |  | RELATED
PARTIES TRANSACTIONS AND BALANCES
|-------- |  | -----------------------------------------

|                                       | Year ended December 31, | 
|-------------------------------------- | ----------------------- | 
|Transactions:                          |                         | 
|                                       |                         | 
|Income -                               |                         | 
|Sales to affiliated companies (*)      |                         | 
|Participation in expenses              |                         | 
|                                       |                         | 
|Cost and expenses -                    |                         | 
|Supplies from affiliated companies(**) |                         | 
|Participation in expenses              |                         | 
|Financial expenses                     |                         | 

|                                            | December 31, | 
|------------------------------------------- | ------------ | 
|Balances:                                   |              | 
|                                            |              | 
|Trade receivables and other receivables (*) |              | 
|Trade payables (**)                         |              | 

208



---

ELBIT SYSTEMS LTD. AND
ITS SUBSIDIARIES

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

|Note 22- |  | RELATED
PARTIES TRANSACTIONS AND BALANCES (Cont.)
|-------- |  | -------------------------------------------------

| | The
purchases from 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 the Company's
related parties in respect of 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.
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

209



---

|Item 19. |  | Exhibits.
|-------- |  | ---------

|     |                                                                                                                       |        
|---- | --------------------------------------------------------------------------------------------------------------------- | -------
|     |                                                                                                                       |        
|(a)  | Index to Financial Statements                                                                                         |        
|     |                                                                                                                       |        
|     |                                                                                                                       | Page   
|     | Report of Independent Registered Public Accounting Firm                                                               | 145-149
|     | Consolidated Balance Sheets at December 31, 2006 and 2005                                                             | 150-151
|     | Consolidated Statements of Income                                                                                     | 152    
|     | Consolidated Statements of Shareholders' Equity                                                                       | 153-154
|     | Consolidated Statements of Cash Flows                                                                                 | 155-156
|     | Notes to Consolidated Financial Statements                                                                            | 157-209
|     | Schedule II - Valuation and Qualifying Accounts                                                                       | S-1    
|     |                                                                                                                       |        
|(b)  | Exhibits                                                                                                              |        
|     |                                                                                                                       |        
|1.1  | Elbit Systems' Memorandum of Association (1)                                                                         
|1.2  | Elbit Systems' Restated Articles of Association (2)                                                                  
|8.1  | Elbit Systems 2007 Stock Option Plan (3)                                                                             
|8.2  | Elbit Systems' Post Merger Stock Option Plan (Summary in English) (1)                                                
|8.3  | Principal Operating Subsidiaries of Elbit Systems                                                                    
|10.1 | Consent of Kost Forer Gabbay & Kasierer                                                                              
|10.2 | Consent of Somekh Chaikin                                                                                            
|10.3 | Consent of Brightman Almagor & Co. (Tadiran Systems)                                                                 
|10.4 | Consent of Brightman Almagor & Co.(Tadiran Spectralink)                                                              
|10.5 | Consent of Hoberman, Miller, Goldstein & Lesser, P.C.                                                                
|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.

_________________

|(1) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Filed
as an exhibit to Elbit Systems Report on Form 6-K for November 2005, which was filed by
Elbit          Systems with the Securities and Exchange Commission on December 1, 2005,
and incorporated herein by          reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Filed
as an exhibit to Elbit Systems Report on Form 6-K for December 2006, which was filed by
Elbit          Systems with the Securities and Exchange Commission on December 7, 2006,
and incorporated herein by          reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

210



---

SIGNATURES

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

Dated: June 14, 2007

| | ELBIT SYSTEMS LTD.
By: /s/ Joseph Ackerman
        Name: Joseph Ackerman
        Title: President and Chief Executive Officer
        (Principal Executive Officer)
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

211



---

ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Schedule II  Valuation and Qualifying Accounts
(In thousands of U.S. dollars)

|                                                 | Column A | Column B | Column C | Column D | Column E
|------------------------------------------------ | -------- | -------- | -------- | -------- | --------
|
|Year Ended December 31, 2006:                    |          |          |          |          |         
|Provisions for Losses on Long-Term Contracts (*) | 14,563   | 3,959    | 8,714    |         | 9,808   
|Provisions for Claims and Potential Contractual 
|Penalties and Others                             | 2,502    | 820      | 1,345    |         | 1,977   
|Allowance for Doubtful Accounts                  | 3,221    | 513      | 344      |         | 3,390   
|Valuation Allowance on Deferred Taxes            | 18,774   | 6,703    | 592      |         | 24,885  
|Year Ended December 31, 2005:                   
|Provisions for Losses on Long-Term Contracts (*) | 10,351   | 5,492    | 5,829    | 4,549    | 14,563  
|Provisions for Claims and Potential Contractual 
|Penalties and Others                             | 2,537    | 1,714    | 1,749    | -        | 2,502   
|Allowance for Doubtful Accounts                  | 3,064    | 301      | 250      | 106      | 3,221   
|Valuation Allowance on Deferred Taxes            | 3,445    | 870      | 994      | 15,453   | 18,744  

S-1



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|                                                 | Column A | Column B | Column C | Column D | Column E
|------------------------------------------------ | -------- | -------- | -------- | -------- | --------
|
|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   
|                                                 |          |          |          |          |         

| |  | * |  | An amount of $7,636, $7,549 and $5,494 as of December 31, 2004, 2005 and 2006,
respectively, is presented as a deduction from inventories, and an amount of $2,715,
$7,014 and $4,314 as of December 31, 2004, 2005 and 2006, respectively, is presented as
part of other accrued expenses in the category of Cost Provisions and Other.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

S-2