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, 2002

                           Commission File No. 0-28998

                                 --------------

                               ELBIT SYSTEMS LTD.

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

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

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

                                 --------------

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

                                 NOT APPLICABLE

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

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

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

     Indicate the number of outstanding  shares of each of the issuer's  classes
of capital or common  stock as of the close of the period  covered by the annual
report:

                                38,819,578 SHARES

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

            YES       |X|                    NO         |_|

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

            ITEM 17   |_|                    ITEM 18    |X|


<PAGE>



                                TABLE OF CONTENTS

                                                                            Page

            International Disclosures Standards................................2
Item 1.  Identity of Directors, Senior Management and Advisors.................2
Item 2.  Offer Statistics and Expected Timetable...............................2
Item 3.  Key Information.......................................................2
            Selected Financial Data............................................2
            Forward Looking Statements.........................................4
            Risk Factors.......................................................4
Item 4.  Information on the Company...........................................10
            Business Overview.................................................10
            Major Activities..................................................11
            Revenues..........................................................13
            Systems and Products..............................................13
            Principal Subsidiaries............................................16
            Current Business Operations.......................................20
                Fixed Wing and Helicopter Systems.............................
                Helmet Mounted Systems........................................
                UAV, Tactical and Security Systems............................
                Ground C4I and Battlefield Systems............................
                Combat Vehicle Systems........................................
                Electro-Optical and Countermeasures Systems...................
                Systems.......................................................
                Technology Spin-Offs..........................................
            Property, Plant and Equipment.....................................35
            Organizational Structure
            Governmental Regulation...........................................36
            Buy-Back..........................................................37
            Financing Terms...................................................38
            Intellectual Property.............................................39
            Research and Development..........................................40
            Manufacturing.....................................................40
            Purchasing........................................................41
            Customer Satisfaction and Quality Assurance.......................41
            Service and Warranty..............................................42
            Marketing and Sales...............................................42
            Competition.......................................................43
            Major Customers...................................................43
            Conditions in Israel..............................................44
Item 5.  Operating Financial Review and Prospects - Management's Discussion
            and Analysis......................................................47
            General...........................................................47
            Trends............................................................49
            Operating Results.................................................49
            2002 Compared to 2001.............................................53
            2001 Compared to 2000.............................................57
            Conditions in Israel..............................................60
            Liquidity and Capital Resources...................................60
            Impact of Inflation and Exchange Rates............................62
Item 6.  Directors, Senior Management and Employees...........................63
            Directors and Executive Officers..................................63
            Compensation of Directors and Officers............................69
            Board Practices...................................................69
            Employees.........................................................70
            Share Ownership...................................................70
Item 7.  Major Shareholders and Related Party Transactions....................72
            Major Shareholders................................................72
            Related Party Transactions........................................74
Item 8.  Financial Information................................................80
            Consolidated Statements and Other Financial Information...........80
            Legal Proceedings.................................................80
            Dividend Distributions............................................80
Item 9.  Offer and Listing....................................................80
            Share Listings and Trading Prices.................................80
Item 10. Additional Information...............................................82
            General Provisions of Israeli Law and Related Provisions of
               Articles of Association........................................82
            Approval of Certain Transactions..................................84
            Indemnification of Directors and Officers.........................84
            Material Contracts................................................86
            Exchange Controls and Other Limitations Affecting
               Security Holders...............................................86
            Taxation..........................................................87
            Documents on Display..............................................90
Item 11. Quantitative and Qualitative Disclosure of Market Risk...............90
Item 12. Description of Securities Other than Equity Securities...............90
Item 13. Defaults, Dividend Arrearages and Delinquencies......................91
Item 14. Material Modifications to the Rights of Security Holders and
            Use of Proceeds...................................................91
Item 15. Controls and Procedures..............................................91
Item 16. [Reserved]...........................................................91
Item 17. Financial Statements.................................................91
Item 18. Financial Statements.................................................91
Item 19. Exhibits.............................................................92



                                      (ii)
<PAGE>


                                     PART I

INTERNATIONAL DISCLOSURES STANDARDS

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



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, 1998, 1999, 2000, 2001 and 2002 are derived from Elbit
Systems' audited consolidated financial statements of which the financial
statements as of December 31, 2001 and 2002 and for each of the years ended
December 31, 2000, 2001 and 2002 appear later in this Form 20-F. The audited
financial statements have been prepared in accordance with U.S. GAAP.


<PAGE>

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31
                                                                                    ----------------------
                                                                      1998       1999        2000       2001        2002
                                                                      ----       ----        ----       ----        ----
INCOME STATEMENT DATA:                                                 (U.S. dollars in millions except per share data)
<S>                                                                    <C>       <C>         <C>        <C>         <C>
Net revenues.............................................              $415      $436        $591       $765        $827
Cost of revenues.........................................               307       320         433        554         605
Restructuring expenses - (inventory write-off)...........                --        --          10         --          --
Gross profit.............................................               108       116         148        211         222
Research and development costs, net......................                32        33          44         59          57
Marketing, selling, general and administrative expenses,
net......................................................                38        44          65         98         107
Acquired in-process research and development.............                --        --          40         --          --
Restructuring costs......................................                --        --          12         --          --
Operating income (loss)..................................                38        40         (13)        54          58
Finance income (expense).................................                --         2          --         (3)         (3)
Pre-tax income (loss)....................................               $38       $41        $(13)       $50         $54
Taxes on income..........................................                 9        10           6         11           9
Net income (loss)........................................               $28       $31        $(21)       $41         $45
                                                                        ===       ===        =====       ===         ===
Earnings (loss) per share:
Basic net income (loss) per share........................             $1.13     $1.23      $(0.65)     $1.07       $1.17
Weighted average number of shares used in computation
(in thousands)...........................................            24,654    25,128      31,572     37,975      38,489
Diluted net income (loss) per share......................             $1.04     $1.16      $(0.65)     $1.04       $1.13
Weighted average number of shares used in computation
(in thousands)...........................................            26,879    26,488      31,572     39,359      39,863


BALANCE SHEET DATA:                                                                     DECEMBER 31
                                                                                        -----------
                                                                      1998       1999        2000       2001        2002
                                                                      ----       ----        ----       ----        ----
                                                                                  (U.S. dollars in millions)

Cash and short-term cash investments.....................               $57       $45         $55        $42         $78
Long-term deposits and loans.............................                17        17           4          3           4
Working capital..........................................                41        20          74        121         198
Short-term debt..........................................                 2        12          51         47          31
Long-term debt...........................................                 2         1          58         69          73
Shareholders' equity.....................................               157       185         341        378         411
Total assets.............................................              $354      $457        $827       $901        $936
                                                                       ====      ====        ====       ====        ====

</TABLE>

                                       3
<PAGE>



FORWARD LOOKING STATEMENTS

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

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

RISK FACTORS

GENERAL RISKS RELATED TO OUR BUSINESS

OUR REVENUES DEPEND ON A CONTINUED LEVEL OF GOVERNMENT BUSINESS. A significant
portion of our revenues come from contracts or subcontracts with domestic and
foreign government agencies. A reduction in the level of the purchase of our
systems, products, services and upgrade projects by these agencies, mainly the
Israeli Ministry of Defense (IMOD) and the U.S. Department of Defense (DOD),
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. The risk that governmental purchases of our systems, products,
services and upgrade projects may decline is affected by the possibility that
government purchasing agencies may:

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

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

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

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



                                       4
<PAGE>

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

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

-    unexpected changes in regulatory requirements;

-    our and our subcontractors' inability to obtain export licenses;

-    imposition of tariffs and other barriers and restrictions;

-    burdens of complying with a variety of foreign laws;

-    political and economic instability; and

-    changes in diplomatic and trade relationships.

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

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

OUR CONTRACTS MAY BE TERMINATED FOR CONVENIENCE OF THE CUSTOMER. Our contracts
with the Government of Israel and other governments often contain provisions
permitting termination for convenience of the customer. Our subcontracts with
non-governmental prime contractors sometimes contain similar provisions. In
general, in order to reduce risks of financial exposure resulting from the early
termination of a contract, we attempt to flow down these requirements to our
subcontractors and expend funds for projects according to the contract
performance schedule. If the customer were to make an early termination for
convenience, in most cases we would be entitled to reimbursement for our
incurred contract costs and a proportionate share of our fee or profit for work
actually performed. If, however, we are not entitled to such compensation, it
could cause us to suffer corresponding losses.



                                       5
<PAGE>

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

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

WE SOMETIMES HAVE RISKS RELATING TO FINANCING FOR OUR PROGRAMS. A number of our
major projects require us to arrange, and sometimes to provide guarantees in
connection with, the customer's financing of the project. These include
guarantees of Elbit Systems as well as guarantees provided by financial
institutions relating to advance payments received from customers. See below -
Item 4. Information on the Company - Financing Terms.

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

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



                                       6
<PAGE>

resources. Consequently, these competitors may be better positioned to take
advantage of economies of scale and develop new technologies. Some of these
competitors are also our suppliers in some programs.

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

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

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

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

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

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

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

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

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

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 - Business Overview. We
intend to continue to acquire businesses that complement our operations. Elbit
Systems' growth may place significant demands on our management and our
operational, financial and marketing resources. In connection with acquisitions
and the opening of new facilities we have increased and may continue to increase
the number of our employees. In addition, we have expanded and may continue to
expand the scope and geographic area of our operations. We believe this growth
will increase the complexity of our operations and the level of responsibility
exercised by both existing and new management personnel. Failure to successfully
integrate and manage our



                                       7
<PAGE>

growth may have a material adverse effect on our business, financial condition,
results of operations or prospects.

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

RISKS RELATED TO OUR ISRAELI OPERATIONS

CONDITIONS IN ISRAEL MAY AFFECT OUR OPERATIONS. Political, economic and military
conditions in Israel directly affect our operations. Since the establishment of
the State of Israel in 1948, a number of armed conflicts have taken place
between Israel and its Arab neighbors and a state of hostility, varying in
degree and intensity, has led to security and economic problems for Israel
although currently no direct conflict with such countries exists. Israel has
signed peace agreements with Egypt in 1979 and with Jordan in 1994. Syria and
Lebanon have not signed peace agreements with Israel. Since 2000, there has been
an increase in hostilities between Israel and the Palestinians, which has
adversely affected the peace process and has negatively influenced Israel's
economy as well as its relationship with several other countries. There is no
assurance that the current situation with the Palestinians will improve or, if
it did, that the political and economic situation in Israel would improve as a
result.

BOYCOTTS COULD LIMIT OUR ABILITY TO SELL INTERNATIONALLY. We could be adversely
affected by the interruption or reduction of trade between Israel and its
trading partners. Some countries, companies and organizations continue to
participate in a boycott of Israeli firms and others doing business with Israel
or with Israeli companies. Also, over the past two years there have been calls
in Europe and elsewhere to reduce trade with Israel. To date, these measures
have not had a material adverse effect on 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
through the age of 45 are obligated to perform up to 37 days of military reserve
duty annually. They also may be called to active duty at any time under
emergency circumstances. Many of Elbit Systems' officers and employees currently
perform annual reserve duty, some beyond the age of 45. Since we began
operations, we have operated effectively under these requirements, including
during hostilities in recent years with the Palestinians and the war in Iraq.
However, no assessment can be made as to the full impact of such requirements on
our workforce or business if conditions should change.



                                       8
<PAGE>

ISRAEL'S ECONOMY MAY CONTINUE TO BE UNSTABLE. Over the years, Israel's economy
has been subject to a number of factors that have affected its stability. These
include a period of severe inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. For these and other reasons, the Government of Israel has
intervened in different sectors of the economy. Such intervention has included
employing fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and foreign currency exchange rates.
The Israeli Government has periodically changed its policies in all of these
areas and has recently initiated further economic reforms. These policies may
make it more difficult for us to operate our business as we have in the past. In
addition, in the last two years Israel's economy has suffered from a recession
and high rate of unemployment, resulting from the global economic slowdown, the
continued hostilities with the Palestinians and the impact of the recent war in
Iraq. If such economic slowdown continues, it could adversely affect our results
of operations.

CHANGES IN THE U.S. DOLLAR - NEW ISRAELI SHEKEL (NIS) EXCHANGE RATE. The change
in the exchange rate between the NIS and the U.S. dollar was 7.3% in 2002, 9.3%
in 2001 and -2.7% in 2000 . For the first five months of 2003 the dollar-NIS
exchange rate decreased by 7.7%. While most of our sales and expenses are
denominated in dollars, a portion of our expenses is paid in NIS and most of our
sales to customers in Israel are in NIS. Our primary expenses paid in NIS that
are not linked to the dollar are employee expenses in Israel and lease payments
on some of our Israeli facilities. As a result, a change in the value of the NIS
compared to the dollar could affect our research and development expenses,
manufacturing labor costs and general and administrative expenses. See below -
Item 5. Operating Financial Review and Prospects - Management's Review and
Analysis - Impact of Inflation and Exchange Rates - Inflation and Devaluation.

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

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

IT MAY BE DIFFICULT TO ENFORCE A NON-ISRAELI JUDGMENT AGAINST US, OUR OFFICERS
AND DIRECTORS. We are incorporated in Israel. Most of our executive officers and
directors are nonresidents of the United States, and a substantial portion of
our assets and the assets of these persons are located outside the United
States. Therefore, it may be difficult for an investor, or any other person or
entity, to enforce against us or



                                       9
<PAGE>

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.

ITEM 4.     INFORMATION ON THE COMPANY

BUSINESS OVERVIEW

We develop, manufacture and integrate advanced, high-performance defense
electronic and electro-optic systems for customers throughout the world. Elbit
Systems focuses on designing, developing, manufacturing and integrating command,
control, communication, computer and intelligence (C4I) systems and
intelligence, surveillance and reconnaissance (ISR) systems for defense and
homeland security applications. We also perform upgrade programs for airborne,
ground and naval defense platforms, often as a prime contractor.

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

     Our major areas of operations include:

     o    fixed-wing and helicopter systems and upgrades;

     o    helmet mounted systems;

     o    unmanned air vehicle (UAV) integrated systems;

     o    tactical and security systems;

     o    ground C4I and battlefield systems;

     o    combat vehicle systems and upgrades;

     o    electro-optic and countermeasures systems and products; and

     o    technology spin-offs for commercial applications.

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



                                       10
<PAGE>

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

     The recent military actions in Iraq and Afghanistan and ongoing terrorist
activities have caused a shift in the defense priorities for many of our major
customers. While we continue to perform platform upgrades, more emphasis is
being placed on ISR, including information systems, intelligence gathering,
border and perimeter security, UAVs, space and satellite based defense
capabilities and homeland security issues. We believe our existing systems,
products and capabilities place us in a position to meet emerging customer
requirements in many of these areas. We also believe that some types of upgrade
programs and electronic and electro-optic systems, particularly those that
emphasize information gathering, analysis and distribution, will continue to be
a significant portion of defense budgets in many countries.

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

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

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

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

MAJOR ACTIVITIES

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



                                       11
<PAGE>

     o    fixed wing aircraft such as the F-4, F-5, F-15, F-16, F-18, T-38,
          T-45, MiG-21, SU-25, SU-30, C-130, A-4, A-10, Mirage, AL-X, AM-X,
          IAR-99, AT-63 Pampa, Beachcraft and Gulfstream-V; and

     o    helicopters such as the CH-47, CH-53, Cobra, Puma, Super Puma, OH-58
          Kiowa Warrior, AH-64 Apache, RAH-66 Comanche, H-60 Black Hawk, S-70
          Blackhawk, Linx, EC225 and EC725 and the V-22 Osprey tilt rotorcraft.

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

     UAV INTEGRATED SYSTEMS. We design and supply integrated UAV systems.
Through our Silver Arrow subsidiary we design and manufacture a variety of UAV
platforms, including the Hermes family of UAVs. We also design and supply C4I
ground stations systems for UAVs.

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

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

     COMBAT 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 combat vehicle systems include fire control
systems, electric gun and turret drive systems, command and control systems,
FLIRs, sights, lasers, laser warning systems, displays, life support systems and
hydraulic systems for tanks, personnel carriers and other combat vehicles. We
also supply training systems for tanks and fighting vehicles. Tank and combat
fighting vehicle programs containing our systems and products include the
Merkava, M1 Abrams, Centurion, Patton, Paladin, M-60, T-55, T-72, Bradley A-3,
MLRS, AMX-30, SK-105, ULAN and LAV.

     ELECTRO-OPTIC AND COUNTERMEASURES SYSTEMS. Through El-Op, our wholly-owned
subsidiary, we design and manufacture a full range of electro-optics sensors and
systems for space, air, land and sea applications. The range of electro-optics
products includes space cameras and specialized sensors, airborne reconnaissance
and observation systems, FLIRs for ground, naval and airborne applications,
laser designators based on diode pumped technology used in manned and unmanned
airborne vehicles and



                                       12
<PAGE>

ground and naval platforms, including products for detection, identification and
intelligence gathering as well as for ground vehicle upgrades. El-Op's ISR
related business activities - space cameras, airborne reconnaissance and
observation & surveillance - share a broad infrastructure of technologies that
provide image intelligence, long range observation solutions for space, air, sea
and ground based sources. In the space area, El-Op also maintains in-house
Israel's national space electro-optics infrastructure and is currently a
principal subcontractor for the Israeli Ofek satellites. In addition, El-Op
supplies dedicated satellite payloads for space research and advanced
multi-spectral and high resolution pan-chromatic cameras for commercial
satellites.

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

REVENUES

     The table below shows Elbit Systems' consolidated revenues for groups of
major areas of operations for the years ended December 31, 2000, 2001 and 2002:

                                                         2000(1)   2001    2002
                                                         ----      ----    ----
Fixed Wing, Helicopter
   and Helmet Mounted Systems:                            $258     $334    $373
UAV, Tactical, Security, Ground C4I and Battlefield
   Systems:                                                114      106     123
Combat Vehicle Systems:                                    112      126     136
Electro-Optic Systems:                                      91      163     148
Other (mainly non-defense engineering and production):      16       36      48
                                                          ----     ----    ----
Total:                                                    $591     $765    $828
                                                         =====     ====    ====


(1) El-Op's revenues are included beginning in the third quarter of 2000.

SYSTEMS AND PRODUCTS

     The following is a brief description of our main systems and products in
major areas of activity:

     FIXED WING 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.



                                       13
<PAGE>

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

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

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

     STORES MANAGEMENT SYSTEMS - for operating and releasing airborne weapons.

     DIGITAL VIDEO RECORDING DEVICES - for mission and maintenance debriefing.

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

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

     SIMULATORS - for airborne and ground flight training.

     VIRTUAL TRAINING AIDS - for flight simulator training.

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

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

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

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

     UAV SYSTEMS - for tactical and medium altitude long endurance missions.

     UAV PLATFORMS - for medium and short-range applications.

     UAV GROUND CONTROL STATIONS - for integration and operation of UAV systems
     and for increasing observation capabilities of UAVs.

     TACTICAL AND SECURITY SYSTEMS
     -----------------------------

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

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



                                       14
<PAGE>

     NAVAL VESSEL COMBAT MANAGEMENT SYSTEMS - for presenting to different
     command levels integrated tactical information and operation of weapon
     systems.

     SUBMARINE ELECTRONIC WARFARE SYSTEMS - for threat identification and use of
     electronic countermeasures, through electro-magnetic and other means.

     SHIPBOARD DECOY COUNTERMEASURE LAUNCHING SYSTEMS - for chaff and flair
     based threat countermeasures.

     HOMELAND SECURITY SYSTEMS - for electronic and electro-optical perimeter
     and access control.


     GROUND C4I AND BATTLEFIELD SYSTEMS
     ----------------------------------

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

     BATTLEFIELD MANAGEMENT SYSTEMS - for peace-keeping operations and
     maneuvering forces, including combat vehicles, engineering corps and
     logistic support personnel.

     HEADQUARTERS MANAGEMENT SYSTEMS - for C4I activities among between
     battalion and general headquarters command levels.

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

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

     INFORMATION TECHNOLOGY AND INTEGRATED INTELLIGENCE GATHERING SYSTEMS - for
     border control, crime prevention and other governmental applications.

     COMBAT VEHICLE SYSTEMS
     ----------------------

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

     ELECTRIC GUN AND TURRET DRIVE SYSTEMS - for controlling electrically driven
     turrets and guns, using brushless technology.

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

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



                                       15
<PAGE>

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

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

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

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

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

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

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

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

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

     PAYLOADS - for observation, target acquisition, target engagement training
     and fire controls using stabilized line-of-sight systems, incorporating
     lasers and thermal and TV cameras.

     COUNTERMEASURES SYSTEMS - for airborne and naval applications.

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




                                       16
<PAGE>

PRINCIPAL SUBSIDIARIES

     EL-OP

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

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

     EFW

     We conduct most of our business in the United States through our
wholly-owned subsidiary, EFW Inc. (EFW) and EFW's subsidiaries. EFW was
incorporated in Delaware in 1992 and is based in Fort Worth, Texas. In 1993, EFW
acquired most of the assets of General Dynamics Corporation's (General Dynamics)
Electronics Manufacturing Center in Fort Worth, which mainly manufactured and
supplied electronic components for F-16 aircraft. Since then, EFW has expanded
its activities to a number of additional areas involving tactical aircraft,
helicopters and ground vehicles, including programs for the V-22 Osprey tilt
rotorcraft, the Bradley A-3 fighting vehicle, the Multiple Launch Rocket System,
the Apache helicopter, the UH-60 Blackhawk helicopter, the A-10 aircraft, the
C-130 transport aircraft as well as additional systems for the F-16. EFW is
involved in a number of joint projects with Elbit Systems and with other U.S.
defense companies.

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

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

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

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

     Major customers of EFW and its subsidiaries include Lockheed Martin
Corporation (Lockheed Martin), the Boeing Company (Boeing), United Defense LP
(UDLP), the U.S. Army, U.S. Navy, U.S. Air



                                       17
<PAGE>

Force, U.S. Marine Corps, the IMOD, Gulfstream Aircraft Corporation and Bayer
Pharmaceutical Company. Recent contract awards include production and retrofit
of digitized computer systems for the U.S. Army's Multiple Launch Rocket System,
development and supply of smart displays for the UH-60 Q/L Blackhawk helicopter,
redesign of the display electronic unit and the digital map for the V-22,
development and supply of commercial central interface units, color
multi-function displays and digital video recorders for the F-16, development
and supply of multi-function displays for the C-130, and supply of displays for
the A-10. See below "Current Business Operations - Fixed Wing and Helicopter
Systems - Helmet Mounted Systems and - Combat Vehicle Systems".

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

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

     VSI

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

     VSI is the prime contractor to Boeing and Lockheed Martin for the design
and manufacture of the Joint Helmet Mounted Cueing System (JHMCS) for the U.S.
Air Force and U.S. Navy F-15, F-16 and F/A-18 aircraft. VSI also has contracts
to supply helmet mounted systems for fighter aircraft to the Israel Air Force
(IAF), the Danish Air Force and other customers. In May 2003, VSI was selected
to develop a dual-seater version of the JHMCS. In addition, Lockheed Martin has
selected VSI as its team member to develop the helmet mounted system for the
U.S. Joint Strike Fighter (JSF). See below "Current Business Operations - Helmet
Mounted Systems".

     CYCLONE. Cyclone Aviation Products Ltd. (Cyclone) is a wholly-owned Israeli
subsidiary of Elbit Systems. Located near Karmiel, Israel, Cyclone designs and
produces composite and metal structural parts for civil and military aircraft.
Cyclone also performs maintenance, integration of systems and



                                       18
<PAGE>

upgrades for aircraft and helicopters. It also works with Elbit Systems in
supplying flight training services for the IAF. Cyclone's customers include the
IMOD, the U.S. Air Force, Boeing, Lockheed Martin, Vought Aircraft Industries
Inc., Bell Helicopters Textron Inc., Sikorsky Aircraft Company (Sikorsky),
Israel Aircraft Industries Ltd. (IAI) and other aircraft manufacturers and end
users around the world. See below "Current Business Operations - Fixed Wing and
Helicopter Systems - Civil Aviation and - Logistics Support Services".

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

     ORTEK . Ortek Ltd. (Ortek) is a wholly-owned Israeli subsidiary of Elbit
Systems. Located in Sderot, Israel, Ortek operates mainly in the field of
security and surveillance systems and tactical products including night vision
instruments based on starlight amplification. It develops and manufactures
electro-optical systems for day and night use, counter-terrorism systems and
other homeland security systems including for border, perimeter and access
control. See below "Current Business Operations - Tactical and Security Systems
and - Ground C4I and Battlefield Systems".

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

     SCD. Semi-Conductor Devices (SCD) is an Israeli investee partnership
equally owned by Elbit Systems and Rafael Armaments Development Authority Ltd.
(Rafael). Located in Leshem, Israel, SCD develops and manufactures infrared
detectors for thermal imaging equipment and laser diodes used in defense and
commercial applications. SCD also owns approximately 17%, on a fully-diluted
basis, of CyOptics Inc., a spin-off company engaged in the development of
optical communications components based on Indium Phosphide technology. See
below "Current Business Operations - Electro-Optical and Countermeasures Systems
and - Technology Spin-Offs".

     OPGAL. Opgal - Optronics Industries Ltd. (Opgal) is an Israeli investee
company owned 50.1% by Elbit Systems and 49.9% by a subsidiary of Rafael.
Located in Karmiel, Israel, Opgal focuses mainly on commercial applications of
thermal imaging and electro-optic technologies. Its developments include



                                       19
<PAGE>

an enhanced vision system designed to assist in landing aircraft under limited
visibility conditions. See below "Current Business Operations - Fixed Wing and
Helicopter Systems - Civil Aviation and - Electro-Optical and Countermeasures
Systems. In addition, Opgal is supplying its fever detection and alarm (FDA)
system to authorities in several countries for use in identifying passengers
with high fever levels who may have been exposed to the SARS disease.

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

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.

     FIXED WING 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. Since our airborne systems are mainly used in upgrading and
modernizing fighter aircraft and helicopters, they extend 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.

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

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

     FIXED WING AVIONICS SYSTEMS AND UPGRADE PROGRAMS

     In January 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 will be performed
over a period of approximately four years. Under the contracts Elbit Systems
supplies avionics systems, equipment and logistic support for 76 AL-X light
attack and trainer aircraft to be manufactured by Embraer for the Brazilian Air
Force. This followed completion by Elbit Systems of a development



                                       20
<PAGE>

contract for the AL-X. The avionics system for the AL-X includes an advanced
mission computer, liquid crystal displays, head-up display and a navigation
system. In addition, Elbit Systems is supplying simulators, planning mission
stations and debriefing stations. Maintenance and logistic support to the
Brazilian Air Force are provided mainly through Elbit Systems' Brazilian
subsidiary Aeroeletronica - Industria de Componentes Avionicos S.A. (AEL),
located in Porto Alegre, Brazil. Program funding is to be 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".

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

     In 2001, Elbit Systems received an order for additional work in connection
with the upgrade of MiG-21 aircraft for the Romanian Air Force. The remaining
items to be delivered mainly include spare parts and ongoing support. Elbit
Systems was awarded the basic contract to upgrade MiG-21 aircraft for the
Romanian Air Force in 1993. To date, the total contract value amounts to
approximately $385 million. We have completed deliveries of the upgraded
aircraft under the contract. The upgraded aircraft have now flown more than
30,000 flights. Approximately $16 million of the total contract payments remain
to be paid through 2003. We received promissory notes for payments under the
contract, which are guaranteed by the Romanian Ministry of Finance. We also
obtained an insurance policy from IFTRIC, covering up to 82.5% of our financial
exposure under the contract, subject to the terms of the policy. The contract
contains buy-back provisions. As of December 31, 2002, there was not a material
amount remaining as backlog for this program.

     In 2001, Elbit Systems began work on a contract with the Romanian aircraft
company Craiova, S.A. to supply the avionics systems for four IAR-99 training
aircraft of the Romanian Air Force. The production and assembly of the aircraft
is completed, and the aircraft currently are undergoing flight acceptance tests,
which are anticipated to be completed during 2003.

     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 agreement reached in early 2003
between Lockheed Martin and the Argentinean Government to resume the program,
Elbit Systems may resume work during 2003, with deliveries to be completed by
2006.

     In 2001, Elbit Systems and TAM, the Georgian aircraft manufacturer,
conducted the maiden flight of an upgraded SU-25 "Scorpion" aircraft. The
upgraded aircraft contains new avionics systems developed by Elbit Systems,
including a stores management system tested for demonstration to potential
customers.



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<PAGE>

     In 2000, Elbit Systems received a contract in the amount of approximately
$66 million for the avionics upgrade of F-5 aircraft of the Royal Thai Air
Force. Elbit Systems is the prime contractor for the project which consists of
upgrading the avionics of 31 F-5 aircraft, supply of additional equipment and
providing maintenance and logistics support services to the Royal Thai Air
Force. The program is in the final stages of flight tests. Deliveries are
expected to be completed by the end of 2003.

     In 1998, the Turkish Government awarded a contract to a group including
Elbit Systems, IAI as prime contractor, and Singapore Technologies Aerospace
Ltd., to upgrade 48 of the Turkish Air Force's F-5 aircraft. In 1997, Elbit
Systems received a subcontract in the amount of approximately $65 million from
IAI for the Turkish Air Force's F-4 aircraft upgrade program. Elbit Systems
performed the avionics integration and supplied avionics systems for that
program. Elbit Systems deliveries under both programs were completed in 2002.

     F-16 PROGRAMS

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

     In recent years, Elbit Systems, EFW, El-Op and Cyclone have received a
number of orders to supply additional systems and equipment, as well as to
repair equipment, for F-16 aircraft of the IAF and other Lockheed Martin
customers. Elbit Systems is supplying items to Lockheed Martin for the new IAF
F-16 aircraft (F-16I). These items include mission computers, helmet mounted
systems, display systems, stores management systems and other equipment. El-Op
was awarded a contract in 2001 to supply the head-up display for the F-16I.
El-Op also supplies aerial reconnaissance systems for the F-16.

     During the last two 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. Cyclone manufactures the leading edge
flap for U.S. Air Force F-16 aircraft. During 2002, Cyclone was awarded orders
for the supply of other structural parts for the F-16, including the horizontal
stabilizer, the rudder, the ventral fin and the engine access doors. As of
December 31, 2002, our overall F-16 related systems and components backlog,
which extends through 2005, totaled approximately $175 million.

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

     FIXED WING ELECTRO-OPTIC SYSTEMS. El-Op supplies laser designators for a
range of airborne platforms. In 2000, El-Op was awarded a contract by the U.S.
Navy to supply laser designators for the U.S. Navy's F-18 aircraft. The contract
calls for deliveries through 2003. El-Op also has supplied laser designators for
other fighter aircraft.

     AERIAL RECONNAISSANCE SYSTEMS. El-Op supplies airborne reconnaissance
systems for a range of fighter aircraft including the F-16.  In 2000, El-Op
was awarded a contract to supply advanced



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<PAGE>

airborne reconnaissance systems for the Turkish Air Force's RF-4E aircraft. Due
to schedule delays the program is expected to be completed during 2004.

     HELICOPTER UPGRADE PROGRAMS

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

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

     In 2001, Elbit Systems received an order for delivery of additional
modified helicopters and spare parts for the Romanian Air Force's Puma IAR 330
helicopter upgrade program. The original contract for the program was awarded in
1996. The program included development and production of avionics systems and
conversion of utility helicopters to attack helicopter capability. We completed
performance under the contract in 2002. The overall value of the contract is
approximately $118 million. Approximately $50 million remains to be paid through
2004. To secure remaining payments under the contract, we received promissory
notes guaranteed by the Romanian Ministry of Finance. We also obtained an
insurance policy from IFTRIC covering up to 82.5% of our financial exposure
under the contract, subject to the policy's terms. The contract contains
buy-back provisions. Through December 31, 2002, we did not have a material
amount remaining as backlog for this project.

     In 2000, EFW signed a contract with the U.S. Army to perform the initial
phase of the upgrade of OH-58D helicopters under a Commercial Operations and
Support Savings Initiative (COSSI) program. The program was completed during
2002.

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

     DIGITAL MAPS AND DISPLAYS FOR EUROCOPTER. In 2000, Elbit Systems received a
contract from Eurocopter S.A. (Eurocopter) to supply digital map systems and
displays for French search and rescue helicopters. Deliveries were completed in
2002. Following completion of a display development contract



                                       23
<PAGE>

received in 2001, in April 2003, we received an order from Eurocopter to supply
120 smart displays, to be delivered over a two-year period.

     ELECTRO-OPTIC PRODUCTS FOR HELICOPTERS. El-Op supplies several products for
heliborne applications. These include laser range-finders and target designators
including those based on solid state diode pumped laser technology. In February
2002, El-Op was awarded a contract to develop and supply its Laser Obstacle
Ranging & Display Systems (LORD) for IAF helicopters. Performance of the
contract is through 2005. El-Op is developing the laser for the future RAH-66
Comanche U.S. Army combat helicopter and a laser designator for an upgrade of
the OH-58D Kiowa Warrior surveillance helicopter. El-Op also supplies the
laser-spot tracker integrated with the fire-control system, as well as display
monitors, for the AH-64 Apache helicopter. In addition, El-Op's laser designator
is a central component in the night targeting system of the AH-IW Super Cobra
helicopter. El-Op also supplies electro-optic payloads for a variety of
helicopters.

     CIVIL AVIATION

     EFW's New Hampshire operations design and manufacture a range of
altimeters, pressure monitors, other cockpit indicators and avionics test
equipment for commercial as well as military aircraft. In 2001, the U.S. Federal
Aviation Administration (FAA) certified the installation of the Enhanced Vision
System (EVS) on General Dynamics' Gulfstream-V business jet. The EVS is designed
and produced by EFW's New Hampshire operations and utilizes an advanced FLIR
system developed together with Opgal. EVS projects an image on the pilot's
head-up display, providing FLIR picture overlaying the outside view in a
conformal manner. It is designed to improve flight safety and situational
awareness and allows the pilot to detect lights and ground features such as
runways, aircraft and buildings at night and in low visibility conditions.
During 2002, EVS entered full scale production and currently is being installed
on Gulfstream-V aircraft. In May 2003, EVS was installed and became
operational on the Gulfstream-IV.

     Cyclone manufactures structural parts for several types of commercial
aircraft. One of Cyclone's contracts for newly designed commercial aircraft
parts was with Fairchild - Dornier GmbH (Dornier). Cyclone was to supply belly
fairings for the new "728" aircraft to be manufactured by Dornier. In April of
2002, Dornier notified Cyclone of cessation of Dornier's operations, and in July
2002, Dornier entered into insolvency proceedings. As a consequence, Elbit
Systems wrote off $6.3 million (pre-tax) in the second quarter of 2002.

     FLIGHT TRAINING SERVICES

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

     SIMULATORS

     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



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<PAGE>

simulators for the Romanian Ministry of Defense. See above "Fixed Wing Avionics
Systems and Upgrade Programs". In April 2002, Elbit Systems was awarded a
contract by Havelsan S.A., the Turkish defense contractor, to supply simulator
sub-systems for the Turkish Air Force's F4-E trainer aircraft. Delivery is to
take place during 2003. In May 2003, Havelsan exercised its option for
sub-systems for a second simulator to be delivered in 2004.

     LOGISTIC SUPPORT SERVICES

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

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

     HELMET MOUNTED SYSTEMS

     FIXED WING HELMET MOUNTED SYSTEMS

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

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

     VSI has been selected by Lockheed Martin to design the helmet mounted
system for the U.S. Joint Strike Fighter (JSF) Program, and contract award is
anticipated during 2003. The JSF helmet



                                       25
<PAGE>

mounted system is expected to contain the most advanced helmet mounted display
ever designed and will be used as the aircraft's primary flight and weapon
delivery system.

     VSI also performs helmet mounted display programs for other customers. In
2000, VSI was awarded a contract by the Danish Government to supply the helmet
mounted systems for Lockheed Martin's F-16 Mid-Life Upgrade (MLU) Program for
the Danish Air Force. The Government of Norway ordered the same system in 2002.
Following the Danish and Norwegian awards, other MLU countries such as the
Netherlands, Belgium and Portugal have indicated a desire to use the same
system.

     HELICOPTER HELMET MOUNTED SYSTEMS

     Elbit Systems' Night Vision Goggles Head-Up Display (NVG/HUD) system allows
helicopter pilots continuous head-up operation, which greatly improves
night-flying safety. The NVG/HUD is operational in the IAF, having been
integrated into various assault and attack helicopters. Over the past ten years
Elbit Systems and EFW have supplied more than 3,000 NVG/HUD systems for a
variety of U.S. Army programs. In recent years, we also received contracts to
supply NVG/HUD systems for customers and end users in Korea, Australia, Canada,
the U.K. and other countries. In December 2002, EFW was selected to supply
NVG/HUDs for the Agusta 129 helicopter over a five-year period. Also, in October
2002, EFW was selected by the U.S. Army as the prime contractor to supply the
NVG/HUD to the U.S. Army over a five-year period.

     In 2000, EFW acquired Honeywell's display and orientation products
business, which mainly includes supply of the Integrated Helmet Display and
Sighting System (IHADSS) for the U.S. Army and other users of Apache helicopters
and for the Italian-made Agusta 129 helicopter. In November 2002, Boeing awarded
EFW a contract to develop new electronics for the IHADSS. This contract is to be
completed in 2004.

     Elbit Systems designed and produces MIDASH, a modular integrated display
and sight helmet for attack and reconnaissance helicopters. MIDASH provides
attack and reconnaissance helicopter pilots with wide field of view, see-through
binocular night vision, symbology and line of sight aiming for both day and
night operation. MIDASH is being supplied as part of our Sikorsky S-70
helicopter upgrade program and was supplied as part of our Romanian Puma IAR 330
program. See above "Fixed Wing and Helicopter Programs and Systems -
Helicopter Upgrade Programs".

     UAV, TACTICAL AND SECURITY SYSTEMS

     UAV INTEGRATED SYSTEMS

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

     Silver Arrow develops and manufactures several types of UAV platforms for
the IDF and other customers. These include the Hermes family of UAVs, including
the Hermes 1500, the Hermes 450S and the Hermes 180. We also are involved in
smaller UAVs, such as the Skylark and the Seagull. The Hermes 1500 is a



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<PAGE>

medium altitude long endurance UAV for maritime patrol and other types of
support missions. The Skylark is a man packed UAV for close range, over the hill
surveillance and reconnaissance. The Seagull is a foldable and canister
deployable tactical close range UAV. The Hermes 450S supplies real time
intelligence data to ground forces. The Hermes 180 is a tactical close range UAV
designed for brigade-level intelligence, surveillance, target acquisition and
reconnaissance missions. Elbit Systems also develops and supplies ground control
stations for the operation of UAVs, including advanced systems based on C4I
technology. In addition, we supply to the IDF the latest generation of
surveillance UAVs, based on the Hermes 450S. Silver Arrow's U.K. subsidiary, UEL
Engines Ltd., produces engines for UAVs.

     In June 2003, the IMOD awarded Elbit Systems with a contract to supply UAV
systems for the IDF. The contract, in the amount of $47 million, is to be
performed over a three-year period.

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

     ISRAELI GOVERNMENT PROJECT. Elbit Systems received contracts from the
Israeli Government to act as the prime contractor under a program to develop and
supply integrated defense electronic systems. We completed the first phase of
this program in 2002. During 2002 and early 2003, we received additional orders.
As of December 31, 2002, we had a backlog of approximately $84 million for the
program, to be performed mainly through 2005.

     PRECISION GUIDANCE SYSTEMS

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

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

     In March 2003, under an order received by EFW from Northrop Grumman
Corporation (NG), our semi-active laser seeker was successfully tested with NG's
Brilliant Anti-armor (BAT) munitions. These monitors are used in connection with
the Hunter UAV.

     HOMELAND SECURITY SYSTEMS

     We are involved in the homeland security market that includes airports,
coastal authorities and other sensitive facilities . These efforts are a natural
extension of our expertise gained in the development of our C4I and battlefield
defense systems, UAVs and electro-optic systems. National and local governments
are allocating greater resources in this area in light of increasing terrorist
threats



                                       27
<PAGE>

around the world. This has led to increased opportunities for systems and
products that meet the growing demand for perimeter and homeland security
solutions.

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

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

     El-Op currently is applying its defense based technologies to develop a
Multi-Spectral Infrared Countermeasure System (MUSIC) for commercial aircraft
applications in preventing terrorism. MUSIC enables identification of
shoulder-launched missiles resulting in a break of the missile lock on the
target.

     NAVAL SYSTEMS

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

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

     In 1998, Elbit Systems signed a contract with Ingalls Shipbuilding of
Pascagoula, Mississippi, as part of Ingalls upgrade of Venezuelan Navy LUPO
frigates. Under the contract Elbit Systems is responsible for the overall
integration of the ship combat management systems, sensors and EW systems. We
supply the hardware and software of the command and control system. The frigates
were successfully commissioned to the Venezuelan Navy in 2002. Remaining
activities under the contract are anticipated to be completed during 2003.

     We develop advanced naval training simulators. Our simulators address the
need to improve training due to the high cost of activating naval forces. Our
naval training systems provide realistic simulations of combat conditions at
sea. They are used in on-shore facilities for training in naval tactical command
decision procedures, anti-submarine warfare and electronic warfare. Our training
systems are currently used by the Israeli Navy and several other navies. In
December 2002, Elbit Systems supplied a new trainer system to the Israeli Navy.

     El-Op supplies electro-optic products for naval applications to several
customers. In January 2003, El-Op was awarded a contract by the IMOD to upgrade
electro-optics observation and surveillance



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<PAGE>

systems for the Israeli Navy through 2004. El-Op also supplies electro-optic
shipboard payloads to several navy and maritime forces for both observation and
fire control applications.

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

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

     GROUND C4I AND BATTLEFIELD SYSTEMS

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

     GROUND FORCES AND BATTLEFIELD SYSTEMS

     Our ground C4I and battlefield 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
and map systems among others. We also provide products for facilitating
operations in the battlefield based on commercial off-the-shelf technology
(COTS).

     The IDF selected Elbit Systems to develop and deliver the hardware building
blocks for the IDF's ground command and control systems. These building blocks
are based on "ruggedization" of COTS circuit boards for application in harsh
military environments, as well as specialized displays and communication
controllers.

     In December 2002, Elbit Systems was awarded a contract by the IMOD to serve
as prime contractor for the IDF's Battle Management Systems for Battalion Combat
Teams program. The program includes the development, supply and support of
advanced electro-optical sensors, multi-functional displays, command and control
software, information and dissemination systems and advanced mission computers.
The program will enable coordination among the IDF's main battlefield tanks,
armored fighting vehicles and infantry fighting vehicles. It will provide
situational awareness to maneuvering



                                       29
<PAGE>

forces and improve the overall operational capabilities of fighting units. The
first phase of the program, including initial deployment, will be performed over
a two-year period.

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

     In 2000, ESL Advanced Information Technology GmbH (AIT), Elbit Systems'
wholly-owned Austrian subsidiary, received a contract to supply artillery
command and control systems for the Austrian Army. We anticipate completing
deliveries under the contract in 2003.

     In 1997, the Royal Netherlands Army (RNLA) and Alcatel Telecon Nederland BV
awarded Elbit Systems a contract to develop and deliver an artillery command and
control system. The system is used in connection with the RNLA's artillery and
multi-launcher range systems and is the first widespread use of our ground C4I
systems by a NATO customer. We completed deliveries under that contract in 2000
and received follow-on orders from the RNLA for enhancements and updates, which
we completed during 2002.

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

     GOVERNMENTAL INFORMATION TECHNOLOGY AND INTELLIGENCE GATHERING SYSTEMS

     We acquired the assets of the Government Systems Division of Elron Telesoft
(formerly part of the NCC Group) in January 2002. These activities include
computerized communication systems, information technology and image
intelligence processing for defense and other governmental applications in
Israel and abroad.

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



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<PAGE>

enforcement and government information resources and from corresponding
governmental financial intelligence units in other countries.

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

     COMBAT VEHICLE SYSTEMS

     NATURE OF OUR COMBAT VEHICLE SYSTEMS

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

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

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

     We significantly increased our capabilities for combat vehicle systems
through the Merger in 2000 with El-Op, 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.



                                       31
<PAGE>

     MERKAVA

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

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

     During 2000 through 2002, we were awarded several orders for the
development and supply of electronic and optical systems and electrical drive
systems for the Merkava. El-Op is the prime contractor to the IMOD for all
Merkava tank fire control systems. In May 2002, El-Op was awarded a contract to
upgrade the firing computer of the IDF's Merkava and M-60 tanks. Kinetics also
supplies several systems, including the life support system, for Merkava
programs. As of December 31, 2002, we had a total of $183 million in our backlog
relating to Merkava orders, to be supplied through 2005.

     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 UDLP, the
prime contractor for the program, to develop and supply the turret and hull
processors, the gunners' and commanders' hand stations, the position interface
box and the map operational software. EFW completed the development contracts
and was awarded multi-year production contracts by UDLP for those systems. These
contracts are to be performed through 2004.

     TURKISH M-60 MODERNIZATION PROGRAM. In November 2002, a contract between
the Turkish Government and Israeli Military Industries Ltd. (IMI) became
effective for the M-60 A-1 Tank Modernization Program. IMI's contract is to be
performed over a six-year period. Under the program, Elbit Systems is to develop
and supply the fire control system, the electric gun and turret drive system as
well as other items. Elbit Systems will also supply logistic support and
know-how transfer to local industry. In April 2003, Elbit Systems received an
initial interim payment in connection with the program. The IMOD intends to act
as the Israeli project management office for the program and is currently in the
process of finalizing a subcontract between the IMOD and Elbit Systems for our
portion of the program. Should the subcontract be finalized, it is expected to
be in an amount material to Elbit Systems. The program also calls for Elbit
Systems to perform buy back activities in Turkey. See below "Buy Back".

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

     MULTIPLE LAUNCH ROCKET SYSTEM (MLRS). EFW is a subcontractor to Lockheed
Martin for the U.S. Army MLRS M270A1 upgrade program. EFW supplies the fire
control system that includes an on-board computer processor, a 14-inch color
flat panel display, a mass storage device and a keyboard. Following EFW's
completion of development, in 2002 and 2003 Lockheed Martin awarded EFW
production and retrofit contracts. EFW currently has more than 300 systems under
contract to be performed through 2004. The equipment developed for MLRS is also
directly compatible with the High Mobility Artillery Rocket System to be used by
the U.S. Army and U.S. Marine Corps.



                                       32
<PAGE>

     THERMAL IMAGING SYSTEMS. In 2000, El-Op was awarded a contract to supply
the thermal imaging module for the Danish Army's Leopard 2/A5 tanks. The
contract was completed in 2002. El-Op has sold more than 700 thermal imaging
systems for the Leopard 2/A5 commander sight to customers including the armed
forces of Germany, the Netherlands and Sweden.

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

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

     ELECTRO-OPTICAL AND COUNTERMEASURES SYSTEMS

     ELECTRO-OPTICS

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

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

     SPACE

     El-Op is actively expanding space applications for its technology and
products. El-Op has developed a variety of cameras for the Ofek Satellite,
including the Ofek-5 launched in June 2002, and for other initiatives of the
Israel Space Agency. In 2000, EROS A1, a commercial reconnaissance satellite,
began transmitting images taken by an advanced digital camera developed and
manufactured by El-Op. EROS A1 was launched by ImageSat International N.V. in
which El-Op owns a minority interest. See below "Technology Spin-Offs". In 1999,
El-Op won an international solicitation for the development of an advanced
electro-optic multi-spectral space camera for the Korean Space Agency.

     In April 2003, El-Op entered into a teaming agreement with AeroAstro, Inc.,
a U.S. company engaged in development of advanced micro and nano space systems
and components, focusing on remote



                                       33
<PAGE>

sensors and optical systems. Elbit Systems anticipates making a minority equity
investment in AeroAstro following receipt of applicable regulatory approvals.

     TECHNOLOGY SPIN-OFFS

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

     MediGuide

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

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

     Starling - In 2001, Rafael and Elbit Systems established a joint venture
known as Starling Advanced Communications. The purpose of the joint venture is
to combine the expertise of both parties to develop products in the area of
internet communications through satellite transmissions and broad band
information transfer for commercial aircraft. Rafael contributes expertise in
the area of aerial antennas, and Elbit Systems contributes expertise in the area
of satellite communications and broad band information transfer for aircraft.
Rafael assigned its interest in Starling to RDC Rafael Development Corporation
Ltd. (RDC), an Israeli company jointly owned by Rafael and Elron.

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

     RedC - El-Op owns an approximately 38% equity interest in RedC Optical
Networks Inc. (RedC). The other major shareholder is MRV Communications Inc.
Through its wholly-owned Israeli subsidiary, RedC designs, develops and produces
optical amplifiers for dense wave-length multiplexing (DWDM) optical networks
for telecommunication vendors.



                                       34
<PAGE>

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

PROPERTY, PLANT AND EQUIPMENT

     Elbit Systems' executive offices and main research and development
facilities are located on approximately 471,000 square feet of property in the
Advanced Technology Center in Haifa, Israel. Elbit Systems owns its headquarters
building in Haifa, which contains approximately 197,000 square feet. The
remainder of our facilities in Haifa is leased. Elbit Systems also has ownership
and long-term leasehold rights in a facility of approximately 65,000 square feet
near our headquarters building in Haifa. Our main manufacturing operations are
located in a facility of approximately 169,000 square feet in Karmiel, Israel
that is leased from Elbit Ltd. See below - Item 7. Major Shareholders and
Related Party Transactions - Agreements Related to the Demerger - Lease
Agreement. Elbit Systems also leases approximately 41,000 square feet in Petach
Tikva, Israel.

     During 2001, we began working on construction of a new building to house
Elbit Systems offices and operations, to be adjacent to and connected with our
current headquarters building in Haifa. The building will cover approximately
348,000 square feet of building space, including underground parking facilities.
We will own half of the building and lease the other half from Matam - Advanced
Technology Center Ltd. (Matam). We intend to consolidate in the new facility
most of our operations currently spread throughout numerous buildings, most of
which are leased, in the Advanced Technology Center in Haifa. The building is
expected to be completed in 2004. Total costs to Elbit Systems for the land and
construction are estimated to be approximately $20 million.

     El-Op owns approximately 445,000 square feet of property and leases
approximately 56,000 square feet of its facilities in Rehovot, Israel. These
facilities contain El-Op's headquarters, offices, development facilities and
manufacturing operations. El-Op is completing construction of a new 117,000
square feet facility adjacent to its existing main building in Rehovot. The new
building is anticipated to be completed during 2003 and will consolidate El-Op's
premises in Rehovot. Total building costs to El-Op for the new facilities are
estimated to be approximately $14.7 million.

     EFW owns approximately 25 acres of property in Fort Worth, Texas. That
property includes a 155,000 square foot facility containing EFW's offices and
manufacturing operations. EFW's New Hampshire subsidiary owns properties in
Merrimack and Nashua, New Hampshire covering a total of approximately 71 acres.
This includes buildings containing offices and manufacturing operations of
approximately 410,000 square feet. EFW's Alabama subsidiary owns property
covering approximately 38 acres, on which are located offices and manufacturing
facilities of approximately 64,000 square feet. The operation in Warner Robins,
Georgia occupies approximately 13,000 square feet of leased facilities.

     Cyclone owns approximately 1,406,100 square feet of property near Karmiel,
Israel. This includes approximately 210,000 square feet on which its offices,
manufacturing, maintenance and hangar facilities are located. In January 2002,
Kinetics moved to newly owned office, laboratory and manufacturing facilities in
Airport City, Israel, covering approximately 32,000 square feet. Silver Arrow
leases facilities in Rishon Le-Zion, Israel, covering approximately 26,000
square feet. Ortek owns



                                       35
<PAGE>

approximately 109,000 square feet of property in Sderot, Israel, which includes
approximately 16,000 square feet of offices and manufacturing facilities.

     AEL owns approximately 282,000 square feet of property in Porto Alegre,
Brazil, including offices and buildings covering approximately 21,000 square
feet.

     Over the last two years the average annual investment in our facilities,
other than the new building projects in Haifa and Rehovot, amounted to
approximately $30 million, most of which was used to purchase machinery and
equipment. Although we believe that our current facilities are adequate for our
operations as now conducted, completion of the planned projects in Haifa and
Rehovot will allow us to consolidate our physical plant more efficiently.

ORGANIZATIONAL STRUCTURE

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


<TABLE>
<CAPTION>
------------   ----------    ----------    ----------     ---------      ---------     ---------      ---------
<S>             <C>             <C>          <C>           <C>            <C>           <C>             <C>
   EFW            El-Op       Cyclone        Ortek          Silver        Kinetics        SCD           Opgal
(Delaware)      (Israel)      (Israel)      (Israel)        Arrow         (Israel)      (Israel)       (Israel)
   100%           100%          100%          100%         (Israel)         51%           50%           50.1%
                                                            100%
------------   ----------    ----------    ----------     ---------      ---------     ---------      ---------1

------------
    VSI
(California)
    50%
------------
</TABLE>


GOVERNMENTAL REGULATION

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

     ISRAELI EXPORT REGULATIONS. Israel's defense export policy regulates the
sale of a number of our systems and products. Current Israeli policy encourages
exports to approved customers of defense systems and products such as ours, as
long as the export is consistent with Israeli Government policy. A permit is
required for an export and must be obtained to initiate a sales proposal. We
also must receive a specific export license for any hardware eventually
exported. In 2002, approximately 50% of our revenue was derived from exports
subject to Israeli export regulations.

     U.S. AND OTHER EXPORT REGULATIONS. EFW's export of defense products,
military technical data and technical services to Israel and other countries is
subject to applicable approvals of the U.S. Government. Such approvals are
typically in the form of an export license or a technical assistance agreement
(TAA). Other U.S. companies wishing to export defense products or military
related services


                                       36
<PAGE>


and technology to our Israeli entities are also required to obtain such licenses
and TAAs. This applies to data required by our Israeli entities to perform work
for U.S. programs. An application for an export license or a TAA requires
disclosure of the intended sales of the product and the use of the technology.
The U.S. Government may deny the export license or TAA if it determines that a
transaction is counter to U.S. policy or national security. Other governments'
export regulations also affect our business from time to time, particularly with
respect to end user restrictions of our suppliers' governments. Recently, some
European governments have indicated the possibility of limiting defense exports
to Israel.

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

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

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

BUY-BACK

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

     Elbit Systems is required to make or facilitate local purchases or goods
and services only if the local suppliers can meet the commercial and technical
competitive terms of the specific procurement. Thus, the local industry must be
able to meet the price of other international suppliers for the procurement in
question as well as to meet the required delivery schedule and technical
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 five



                                       37
<PAGE>

or more 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
is significantly less due to the application of the multiplier factors.

     Although failure to meet a best efforts buy-back obligation may limit our
ability to be awarded future business from the applicable customer, buy-back
generally is not linked to delivery payments or subject to specific contractual
monetary penalties. The buy-back activities are a normal part of doing business
in the defense industry with these customers. Over the number of years that we
have been performing buy-back activities, we have not experienced significant
difficulties in meeting our buy-back obligations, and therefore these buy-back
activities are not believed to represent a material financial risk to our
operations. Elbit Systems' maximum aggregate buy-back undertakings as of
December 31, 2002 were approximately $715 million, to be fulfilled over an
11-year period.

FINANCING TERMS

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

     ADVANCE PAYMENT GUARANTEES. In some cases where we receive advances prior
to incurring contract costs or making deliveries, the customer may require
guarantees against advances paid. These guarantees are issued either by
financial institutions or by us. We have received substantial advances from
customers under some of our contracts. If a contract is canceled for default and
there has been an advance or progress payment, we may be required to return
payments to the customer as provided in the specific guarantee. As part of the
guarantees we provide to receive progress payments or advance payments, some of
our customers require us to transfer to them title in inventory acquired with
such payments. In addition, we receive payments for some of our projects in
currencies other than U.S. dollars. In such cases, we sometimes elect to adopt
measures to reduce the risk of exchange rate fluctuations. As of December 31,
2002, the balance of customer advances that were covered by guarantees amounted
to approximately $192 million. While we attempt to obtain appropriate insurance
regarding such guarantees, we sometimes are unable to fully insure all risks.

     PERFORMANCE GUARANTEES. A number of projects require us to provide
performance guarantees in an amount equal to a percentage of the contract price.
Some of our contracts contain clauses that impose penalties or reduce the amount
payable to us if there is a delay or failure in completion of a phase of work,
including in some cases during the warranty period.

     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



                                       38
<PAGE>

contracts for development effort, schedule extensions beyond our control,
termination for the customer's convenience, potential for monetary penalties for
late deliveries and liability for subcontractors.

     AUDIT REGULATIONS. The IMOD audits our books and records relating to its
contracts with us. Our books and records and other aspects of projects related
to U.S. defense contracts are subject to audit by the U.S. Defense Contract
Audit Agency. Such audits review compliance with applicable government
contracting cost accounting and other applicable standards. Some other customers
obtain similar rights under specific contract provisions.

INTELLECTUAL PROPERTY

     PATENTS, TRADEMARKS AND TRADE SECRETS. We hold more than 250 patents in
Israel, the United States and other countries relating to approximately 100
different inventions. El-Op alone holds approximately 150 patents on some 70
different products or applications. Our technology spin-off companies often rely
in part on our patented technology. In a few cases we hold trademarks relating
to specific products. A significant part of our intellectual property assets
relates to unique applications of advanced software-based technologies,
development process and production technologies. These applications are often
not easily patentable, but are considered as our trade secrets and proprietary
information. We take a number of measures to guard our intellectual property
against infringement as well as to avoid infringement of other parties'
intellectual property.

     GOVERNMENT RIGHTS IN DATA. The Israeli Government usually retains specific
rights to technologies and inventions resulting from our performance under
Israeli Government contracts. This generally includes the right to disclose the
information to third parties, including other defense contractors that may be
our competitors. Consistent with common practice in the defense industry,
approximately 30% of our revenues in 2002 was dependent on products
incorporating technology that a government customer may disclose to third
parties. When the Israeli Government funds research and development, it usually
acquires rights to data and title to inventions. We often may retain a
non-exclusive license for such inventions. The Israeli Government usually is
entitled to receive royalties on export sales to the extent that such sales
result from government financed development. However, if only the end product is
purchased, we normally retain the principal rights to the technology. Sales of
our products to the U.S. Government and some other customers are subject to
similar conditions. Subject to applicable law, regulations and contract
requirements, we attempt to maintain our intellectual property rights and
provide customers with the right to use the technology only for the specific
project under contract.

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



                                       39
<PAGE>


RESEARCH AND DEVELOPMENT

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

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

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

     In addition to the R&D funded by our customers, we invest in our own
research and development activities. This investment generally has increased in
recent years 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, 2000, 2001 and 2002:

                                                 2000(1)    2001      2002
                                                 -------    ----      ----
                                                 (U.S. dollars in millions)

Total Investment                                   $53.3    $67.9    $62.6
Less Government of Israel Participation*             9.0      9.1      5.6
Net Investment                                     $44.3    $58.8    $57.0
                                                   =====    =====    =====
------------
*See below - "Conditions in Israel - Chief Scientist Funding"

(1) includes El-Op beginning in the third quarter of 2000

MANUFACTURING

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



                                       40
<PAGE>

material supply. In New Hampshire we also manufacture commercial avionics and
medical equipment in FAA and U.S. Food and Drug Administration approved
facilities.

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

PURCHASING

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

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

CUSTOMER SATISFACTION AND QUALITY ASSURANCE

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

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

     Representatives of our customers generally test our products before
acceptance. Branches of the IDF and other customers have authorized us to accept
our products on their behalf. In addition, in 2001, Elbit Systems was certified
for Software Compatibility Maturity Model Level 3 by the U.S. Software
Engineering Institute, indicating a high level of software maturity and software
development capability. Elbit Systems is certified for ISO-9001:2000 and 14001
by the Israeli National Standards Institute, including ISO-9000-3 for software.
El-Op is certified for ISO-9001 and 14001. Cyclone and Silver Arrow are
certified for ISO-9001. Our processes are based on a state of the art tool case
and CAD-CAM tools. This infrastructure, together with well defined development
methodology and management tools, assists us in ensuring high quality and on
time implementation of projects.



                                       41
<PAGE>

     EFW maintains its own quality assurance department. EFW is certified for
ISO-9001 by the American National Standard Institute. Its New Hampshire
operations are certified for ISO 9001 and ISO 9002.

     Boeing has awarded both Elbit Systems and EFW its Preferred Supplier Silver
Rating. Boeing has also awarded Cyclone its Preferred Supplier Gold Rating, and
EFW received Lockheed Martin's Select Supplier Award. These awards indicate
compliance with quality and performance criteria.

SERVICE AND WARRANTY

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

     We generally provide a one-year warranty for our systems and products
following delivery to the customer. See above "Current Business Operations -
Fixed Wing and Helicopter Systems - Logistic Support Services". We maintain
reserves for warranty obligations specifically determined for each project based
on our experience and engineering estimates.

MARKETING AND SALES

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

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

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

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



                                       42
<PAGE>

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

                                          Year Ended December 31
                                          ----------------------
                                     2000(1)       2001          2002
                                     ----          ----          ----
         Israel                        27%           30%          27%
         United States                 32%           27%          32%
         Europe                        21%           23%          18%
         Others                        20%           20%          23%

------------
(1) includes El-Op beginning in the third quarter of 2000

COMPETITION

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

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

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

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

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

MAJOR CUSTOMERS

     Sometimes, our revenues from an individual customer account for more than
10% of our revenues in a specific year. The table below sets forth the
percentage of net revenues attributable to such customers for the periods
indicated:

                                       43
<PAGE>

                                            Year Ended December 31
                                            ----------------------
                                           2000(1)  2001      2002
                                           ----     ----      ----
IMOD                                       26%       20%      18%
------------------------------

(1) includes El-Op beginning in the third quarter of 2000

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 FUNDING

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

     Under the terms currently applying to OCS funding, companies receiving
funding must pay the Israeli Government a royalty of usually 2% to 3.5% 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 end when 100% to 150% of
the dollar value of the grant is repaid. For grants provided starting in 1999,
the recipient must also pay interest payments to the Chief Scientist on the
amount of the grant. The annual interest payment rate is LIBOR. The terms of
Israeli Government participation also require that the manufacture of products
developed with government grants be performed in Israel, unless a special
approval has been granted. Separate Israeli Government consent is required to
transfer to third parties technologies developed through projects in which the
Government participates.



                                       44
<PAGE>

     In May 2002, El-Op reached agreement with the OCS to join a new 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 new initiative, companies are
required to reach agreement with the OCS on an unconditional prepayment for
existing OCS funded programs in exchange for a release by the OCS from all
obligations. Under El-Op's agreement with the OCS, El-Op is paying $10.6 million
over a five-year period beginning in 2002 in exchange for a release of El-Op's
obligations to pay further royalties.

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

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

     NATIONAL INSURANCE INSTITUTE. Israeli employees and employers are required
to pay predetermined sums to the National Insurance Institute, which is similar
to the U.S. Social Security Administration. These amounts also include payments
for national health insurance. The payments to the National Insurance Institute
are equal to approximately 14.6% of wages. The employee contributes
approximately 66% and the employer contributes approximately 34%.

     ENFORCEMENT OF JUDGMENTS

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

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

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

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

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



                                       45
<PAGE>
     o    the judgment is no longer subject to a right of appeal.

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












                                       46
<PAGE>




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

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

GENERAL

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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



                                       47
<PAGE>


     IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS

     Consistent with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," goodwill is not amortized and is tested
at least annually for impairment. Prior to 2002, goodwill was amortized using
the straight-line method over its estimated period of useful life. As of
December 31, 2002, our goodwill and assembled work force amounted to $32.5
million.

     Based on the results of a goodwill impairment evaluation that was made
during the fourth quarter of 2002, we concluded that no impairment loss was
required to be recorded in 2002.

     Consistent with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we evaluate long-lived assets for impairment and assess
their recoverability based upon anticipated future cash flows. We concluded that
no impairment loss was required to be recorded in 2002. As of December 31, 2002,
our long-lived assets amounted to $276.2 million, including $73.2 million in
intangible assets.

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

INVESTMENT IN AFFILIATES, PARTNERSHIP AND OTHER ENTITIES.

     We evaluate investments in affiliates, partnerships and other entities.
When relevant factors indicate an other than temporary decline in the fair value
of these investments below their book values, we adjust the investment to the
estimated fair value. The value of these entities is subject to ongoing changes
resulting from their business conditions. In the fourth quarter of 2002, we
wrote-off $2.0 million representing our investment in Red C in which El-Op owns
an approximately 38% interest.

BACKLOG

     Our backlog includes firm orders received from customers for systems,
products and projects that have yet to be completed. Our policy is to include
orders in our backlog only when specific conditions are met. Examples of these
conditions may include, among others, proof of funding, receipt of advances,
letters of credit and guarantees from customers. As a result, in recent years
the actual amount of our remaining unfilled orders generally has exceeded the
level of backlog.

     We reduce system and product backlog on delivery or acceptance. We reduce
project backlog as 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. The method of backlog recognition used often
changes depending on the particular contract. As of December 31, 2002, we had a
backlog of approximately $1,689 million, of which 62% was for orders outside
Israel, as opposed to $1,566 million, of which 68% was for orders outside of
Israel, as of December 31, 2001. Backlog information and any comparisons of
backlog as of different dates may not necessarily represent an indication of
future sales.



                                       48
<PAGE>

TRENDS

     Since the terrorist attack on the World Trade Center in New York on
September 11, 2001, increased terrorist activities and recent hostilities in
Afghanistan and Iraq have caused many of our defense customers to shift their
priorities. Although the number of recent platform upgrade programs has not
grown, increasing attention is being given to ISR, as well as perimeter and
homeland security issues. This in turn leads to a greater focus on C4I related
systems and UAVs. Although there is no assurance, we believe that our systems,
products and capabilities position us to meet the emerging needs of customers in
many of these areas.

OPERATING RESULTS

THE IMPACT OF THE MERGER ON THE FINANCIAL RESULTS

     We completed our Merger with El-Op in July 2000. See below - Item 7. Major
Shareholders and Related Party Transactions - Related Party Transactions -
Agreements Related to the Merger. The Merger was accounted for under the
purchase method. The $180 million purchase amount exceeded the book value of
El-Op by $130 million. Of the excess, $21 million was attributed to the fair
value of the identifiable tangible assets, net of $4 million in deferred taxes.
The balance, in the amount of $109 million, was attributed to intangible assets,
net of $14 million in deferred taxes.

     In accordance with an independent appraisal, approximately $40 million of
the purchase amount was allocated to in-process research and development
projects and was written off immediately at the time of the Merger. This
allocation represented the estimated fair value of incomplete research and
development projects, which at the time of the Merger had not yet reached
technological feasibility and where the research and development in progress had
no alternative future uses.

     The present value allocated to the projects was determined, among other
factors, on the basis of the estimated discounted future net cash flows which
would be generated from the projects if they were to reach commercial
feasibility, based on their development stage as of the date of analysis. The
projects included in the analysis were mainly projects that were, at the Merger
date, in different stages of design, development, engineering and testing
activities. The projects were primarily in the areas of thermal imaging (night
vision), lasers, avionics, battlefield management, fire control systems, remote
sensing, airborne and UAV reconnaissance, enhanced landing systems and other
classified projects.

     The balance of the cost attributed to intangible assets was allocated as
follows - $58 million to developed technology and know-how, trade names and
assembled workforce, net of $14 million in deferred taxes, and $25 million to
goodwill. The amounts allocated to intangible assets will be amortized on a
straight line basis over their seven to 25-year estimated life. The weighted
average period of amortization for the intangible assets was determined to be 17
years, and the amortization will be reflected in the cost of sales and in the
general and administrative expenses. Due to allocation to group companies of
intangibles acquired that are subject to different tax rates and tax liabilities
attributed to some foreign subsidiaries at the date of the purchase, Elbit
Systems recorded additional goodwill and deferred tax liability in the amount of
$4.2 million.

     For proforma financial information regarding Elbit Systems and El-Op see
below - Item 18. Financial Statements - Note 1(C) (General).



                                       49
<PAGE>

RESTRUCTURING PROGRAM

     Following the completion of the Merger in the third quarter of 2000, we
adopted a program for organizational changes aimed at increasing the efficiency
and maximizing the utilization of the resources at our disposal and the
synergies resulting from the Merger. As part of this program, the combat vehicle
activities of Elbit Systems were transferred to El-Op, the UAV activities of
Elbit Systems and El-Op were combined into Silver Arrow, and the U.S. operations
were reorganized under EFW.

     In the third quarter of 2000, we began implementation of the reorganization
and cost reduction plan. The plan includes, among other things, the
consolidation of duplicate activities, adjustments in some of Elbit Systems' and
our subsidiaries' fixed assets, employment terminations and write-offs of
duplicate inventories and equipment and other related expenses. Pursuant to the
plan, we wrote-off inventories in the amount of $10.3 million and equipment in
the amount of $5.1 million. The equipment will not be used by us in the future
since it is less efficient than other equipment held by us. We also accrued and
paid $3.2 million for employment terminations of a total of 61 manufacturing,
marketing and corporate employees both in Israel and the U.S., and $3.5 million
relating to other restructuring related costs. We continue efforts to find ways
to increase efficiencies and maximize synergies resulting from the Merger. In
the event of future decisions involving charges of additional expenses, these
expenses will be recorded when the decisions are made and the related costs can
be estimated.

IMPACT OF PHANTOM OPTIONS

     During 2002, Elbit Systems' share price changed from a NASDAQ closing price
of $18.50 at the end of 2001 to $16.04 at the end of 2002. The "phantom" stock
options issued to employees in 2000 are accounted for as part of a "variable"
stock option plan, with the total benefit of unexercised options re-measured at
the end of each reporting period based on the share price on that date. See
below - Item 6. Directors, Senior Management and Employees - Share Ownership -
Elbit Systems' Stock Option Plans - Post Merger Plan; and Item 18. Financial
Statements - Notes 17 D - F (Phantom Share Options). As a result of this change
in the share price, the effect of the share price linked compensation on the
gross profit in 2002 was not material. The price of our shares may continue to
affect net income in the future as long as a substantial number of phantom
options remain unexercised.



                                       50
<PAGE>



SUMMARY OF FINANCIAL RESULTS

     The following table sets forth the consolidated income statement of Elbit
Systems and its subsidiaries for the periods listed. The consolidated financial
results for the year ended December 31, 2000 include results of the activities
of El-Op starting in the third quarter of 2000.


<PAGE>


<TABLE>
<CAPTION>
                                                                      For the year ended
                                                                          December 31
                                                       (In thousands of U.S. dollars except per share data)
                                                          2002                  2001                 2000
                                                   -------------------     -----------------  --------------------
                                                      $         %             $        %          $          %
                                                   --------  ---------     -------  --------  ---------   --------
<S>                                                <C>        <C>          <C>       <C>           <C>      <C>
Total revenues                                     $827,456   100.0        764,501   100.0     591,084     100.0
Cost of revenues                                    605,313    73.2        553,957    72.5     432,786      73.2
Restructuring expenses-(inventories write-off)           --     --               -       -      10,300       1.8
                                                   --------  ---------     -------  --------  ---------   --------
Gross profit                                        222,143    26.8        210,544    27.5     147,998      25.0
                                                   --------  ---------     -------  --------  ---------   --------

Research and development expenses, net               57,010     6.9         58,759     7.7      44,274       7.5
Marketing and selling expenses                       65,691     7.9         54,876     7.2      38,449       6.5
General and administrative expenses                  41,651     5.0         43,216     5.7      26,251       4.4
Acquired in-process research and
   development                                                                                  40,000       6.8
Restructuring costs                                      --      --             --     --       11,800       2.0
                                                   --------  ---------     -------  --------  ---------   --------
                                                    164,352    19.9        156,851     20.5    160,774      27.2
                                                   --------  ---------     -------  --------  ---------   --------
Operating income (loss)                              57,791     7.0         53,693     7.0     (12,776)     (2.2)

Finance income (expenses), net                       (3,035)   (0.4)        (2,617)    (0.3)       115       0.0
Other income (expenses), net                           (462)   (0.1)           774     0.1           3       0.0
                                                   --------  ---------     -------  --------  ---------   --------

Income (loss) before income taxes                    54,294     6.6         51,850     6.8     (12,658)     (2.1)
Taxes on income                                       9,348     1.1         11,003     1.4       6,227       1.1
                                                   --------  ---------     -------  --------  ---------   --------
                                                     44,946     5.5         40,847     5.3     (18,885)     (3.2)
Minority interest                                      (508)    0.1            547     0.1        (217)     (0.1)
Company's share of affiliated companies
 and partnership income (losses)                        675     0.1           (598)   (0.1)     (1,429)     (0.2)
                                                   --------  ---------     -------  --------  ---------   --------
Net income (loss)                                   $45,113     5.5        $40,796     5.3    $(20,531)     (3.5)
                                                   ========  =========     =======  ========  =========   ========


Diluted earnings (loss) per share                     $1.13                  $1.04              $(0.65)
                                                      =====                  =====             =======
Weighted average number of shares used
  in computation (in thousands)                      39,863                 39,359              31,572
                                                     ======                 ======              ======
</TABLE>



                                       51
<PAGE>


NON - U.S. GAAP DISCLOSURE

The following table sets forth Elbit Systems' results of operations, excluding
the non-recurring charge of $9.8 million (pre-tax) related to the agreement
between El-Op and the OCS signed in the second quarter of 2002, the tax
adjustment in 2002, the amortization of goodwill in 2001 and 2000 and
restructuring expenses and acquired in-process research and development in 2000.

<TABLE>
<CAPTION>
                                                                     For the year
                                                                  ended December 31
                                                 (In thousands of U.S. dollars except per share data)
                                                -------------------------------------------------------------
                                                    2002                 2001                 2000
                                                ------------------   ------------------    ------------------
                                                    $          %          $         %         $          %
                                                ---------   ------   ---------   ------    ---------   ------
<S>                                               <C>         <C>      <C>         <C>       <C>         <C>
GROSS PROFIT AS REPORTED                          222,143     26.8     210,544     27.5      147,998     25.0

Goodwill amortization in 2001 and 2000                  -        -         800      0.1          600      0.2
Restructuring expenses in 2000                          -        -           -        -       10,300      1.7
OCS charge                                          9,801      1.2           -        -            -        -
                                                ---------   ------   ---------   ------    ---------   ------
Gross profit excluding OCS charge
and goodwill amortization                         231,944     28.0     211,344     27.6      158,898     26.9
                                                =========   ======   =========   ======    =========   ======

OPERATING  PROFIT (LOSS) AS REPORTED               57,791      7.0      53,693      7.0      (12,776)    (2.2)

Goodwill amortization in 2001 and 2000                  -        -       2,760      0.4        2,012      0.4
Restructuring     expenses    and    acquired
in-process research and development in 2000            -        -           -         -       62,100     10.5
OCS charge                                          9,801      1.2           -        -            -        -
                                                ---------   ------   ---------   ------    ---------   ------
Operating  profit excluding OCS
charge and goodwill amortization                   67,592      8.2      56,453      7.4       51,336      8.7
                                                =========   ======   =========   ======    =========   ======

NET EARNINGS (LOSS) AS REPORTED                    45,113      5.5      40,796      5.3      (20,531)    (3.5)

Goodwill amortization in 2001 and 2000                 -        -        2,760      0.4        2,012      0.4
Restructuring expenses and acquired
in-process research and development                    -        -            -        -       56,800      9.6
Tax adjustment                                     (2,800)    (0.3)          -        -            -        -
OCS charge                                          7,840      0.9           -        -            -        -
                                                ---------   ------   ---------   ------    ---------   ------
Net earnings excluding OCS charge,
goodwill amortization in 2001 and
tax adjustment                                     50,153      6.1      43,556      5.7       38,281      6.5
                                                =========   ======   =========   ======    =========   ======



                                       52
<PAGE>

EARNINGS (LOSS) PER SHARE AS REPORTED                1.13                 1.04                 (0.65)

Goodwill amortization in 2001 and 2000                  -                 0.07                  0.06
Restructuring     expenses    and    acquired
in-process research and development in 2000             -                    -                  1.80
Tax adjustment                                      (0.07)                   -                     -
OCS charge                                           0.20                    -                     -
                                                ---------            ---------             ---------
Diluted earnings per share excluding
OCS charge, goodwill amortization
and tax adjustment                                   1.26                 1.11                  1.21
                                                =========            =========             =========
</TABLE>


2002 COMPARED TO 2001

     REVENUES

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

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

                                                    2001                  2002
                                                    ----                  ----
                                                    (U.S. dollars in millions)

     Fixed wing, helicopter and helmet
         mounted systems                             334.2                372.8
     UAVs, tactical, security, ground C4I and
         battlefield systems                         105.8                122.7
     Combat vehicles systems                         126.3                135.7
     Electro-optics systems                          162.7                148.1
     Others                                           35.5                 48.2
                                                      ----                 ----
       Total                                         764.5                827.5
                                                     =====                =====

     Revenues increased in 2002 mainly in fixed wing, helicopter and helmet
mounted systems, which increased by $38.6 million and in UAV, tactical,
security, ground C4I and battlefield systems, which increased by $16.9 million.

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

                                                    2001                  2002
                                                    ----                  ----

         Israel                                     30%                   27%
         United States                              27%                   32%
         Europe                                     23%                   18%
         Other countries                            20%                   23%


                                       53
<PAGE>

     We sell mainly to governmental entities and prime contractors under
government defense programs. Accordingly, the level of our revenues is subject
to governmental budgetary constraints.

     Revenues are generated mainly from sales to the United States, Israel, and
countries in Europe, Latin America and Asia. The recent economic situation in
Israel has created some uncertainty with respect to the Israeli Government
general and defense budgets. See above - Item 3. Key Information - Risks Factors
- Risks Related to Our Israeli Operations.

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

     GROSS PROFIT

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

     Gross profit included $9.8 million of non-recurring charges related to
El-Op's program with the OCS in 2002, and $0.8 million of goodwill amortization
in 2001. Excluding these charges, the gross profit and gross profit margin in
2002 were $231.9 million and 28.0%, respectively, as compared to $211.3 million
and 27.6%, respectively in 2001.

     Gross profit in 2001 included expenses of $2.9 million related to Elbit
Systems' share price linked compensation costs. The effect of the share price
linked compensation on the gross profit in 2002 was not material.

     As noted above, our gross profit for 2002 was also affected by the
write-off in the amount of approximately $6.3 million in the second quarter of
2002 relating to Cyclone's project with Dornier.

     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.

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

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



                                       54
<PAGE>

     In 2001, the OCS issued its new "Regulations for the Encouragement of
Research and Development in Industry" (rules for determining the level and
payment of royalties). The regulations allow large R&D intensive companies to
reach certain agreements with the OCS regarding determination of the amount and
payment schedule of royalties, subject to certain conditions. El-Op elected to
join the program. See above - Item 4. Information on the Company - Conditions in
Israel - Chief Scientist Funding - Research and Development. As of the date of
this report, Elbit Systems has not yet determined whether to join the OCS's new
program.

     The OCS's participation in our R&D expenses in the 2002 was lower than in
2001. We estimate that the level of participation by the OCS in the future may
be affected by changes in the OCS budget, as well as in our R&D programs.

     MARKETING AND SELLING EXPENSES

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

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

     GENERAL AND ADMINISTRATIVE (G&A) EXPENSES

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

     Due to changes in Elbit Systems' share price in the reported periods, our
G&A expenses included share price linked compensation expenses of $5.2 million
in 2001, while in 2002 these expenses were not material. Excluding goodwill
amortization and share price linked compensation, our G&A expenses in 2001 were
$36.0 million. We expect that G&A expenses may continue to be affected in the
future, due to changes in Elbit Systems' share price.

     As stated above, following the adoption of SFAS 142 effective January 1,
2002, we no longer amortize goodwill. In 2001, G&A expenses included
amortization of goodwill of approximately $2.0 million.

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

     OPERATING INCOME

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

     Excluding the non-recurring charge related to El-Op's OCS program in 2002
and goodwill amortization in 2001, our operating income and operating margin in
2002 (as a percentage of revenues) were $67.6 million and 8.2%, respectively,
compared to $56.5 million and 7.4% in the comparable period in 2001.



                                       55
<PAGE>

     The operating profit in 2001 included share price linked compensation
expenses of $9.1 million. In 2002, we had income related to share price linked
compensation that was not material.

     We expect that operating income may continue to be affected in the future
by changes in our share price due to our share price linked compensation
program.

     FINANCE EXPENSE (NET)

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

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

     TAXES ON INCOME

     Provision for taxes for 2002 was approximately $9.3 million, as compared to
a provision for taxes of $11.0 million in 2001.

     The provision for taxes in 2002 included reduction of tax expenses in the
amount of $2.8 million that was made in the third quarter of 2002, due to
adjustment of estimated taxes and completion of tax assessments for prior years
in respect of various Elbit Systems' group companies.

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

     NET EARNINGS AND EARNINGS PER SHARE (EPS)

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

     Net earnings in 2002, excluding non-recurring charges related to the OCS
program and prior years tax adjustments, were $50.2 million (6.1% of revenues),
as compared to $40.8 million (5.3% of revenues) in 2001. Excluding these charges
and adjustments, diluted EPS was $1.26 in 2002.

     Excluding amortization of goodwill, net earnings and diluted EPS in 2001
were $43.6 million and $1.11, respectively.

     Net earnings in 2001 included $7.1 million in expenses related to share
price linked compensation. In 2002 we had income related to share price linked
compensation that was not material.



                                       56
<PAGE>

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

2001 COMPARED TO 2000

     REVENUES

     Our revenues increased from $591.1 million in 2000 to $764.5 million in
2001.

     Our revenues generated by groups of areas of operations in 2000 and 2001
were as follows:

                                                  2000                 2001
                                                  ----                 ----
                                                  (U.S. dollars in millions)

    Fixed wing, helicopter and helmet
       mounted systems                            257.8                334.2
    UAV, tactical, security, ground C4I and
       battlefield systems                        113.8                105.8
    Combat vehicles systems                       111.8                126.3
    Electro-optics systems                         91.1                162.7
    Others                                         16.6                 35.5
                                                   ----                 ----
      Total                                       591.1                764.5
                                                  =====                =====

     The geographic breakdown of revenues in 2000 and 2001 was as follows:

                                                  2000                 2001
                                                  ----                 ----

         Israel                                    27%                  30%
         United States                             32%                  27%
         Europe                                    21%                  23%
         Other countries                           20%                  20%

     GROSS PROFIT

     Reported gross profit, in 2001 was $210.5 million (gross profit margin of
27.5%) as compared to $148.0 million (gross profit margin of 25.0%) in 2000.

     Excluding expenses of $2.9 million related to Elbit Systems' share price
linked compensation costs and $0.8 million of goodwill amortization, gross
profit in 2001 was $214.2 million, or 28.0% of revenues. In comparison, gross
profit in 2000, excluding $10.3 million of restructuring expenses related to the
El-Op Merger and $0.6 million of goodwill amortization, was $158.9 million, or
26.9% of revenues.



                                       57
<PAGE>

     The changes in the gross profit resulted mainly from the consolidation of
El-Op and the subsidiaries held by El-Op prior to the Merger for the first time
in the third quarter of 2000. Gross profit margin in 2001 was higher than that
reported in 2000 mainly due to the different mix of our projects and products
sold in the reported periods.

     In 2001, we reclassified our royalties' expenses to the OCS from sales and
marketing expense to cost of goods sold, as required under U.S. GAAP. The effect
of the change is an increase in the cost of goods sold, which is offset in full
by a decrease in the same amount in the sales and marketing expenses, resulting
in a lower gross profit and unchanged operating and net profit.

     The amount of royalties included in the cost of goods sold in 2001 and 2000
was $8.3 million and $6.7 million, respectively. Due to the new method of
recording royalties' expenses, the gross profit margin in 2000 decreased from
26.2% to 25.0%.

     R&D

     Gross R&D expenses in 2001 totaled $67.9 million (8.9% of revenues) as
compared with $53.3 million (9.0% of revenues) in 2000.

     Net R&D expenses (after deduction of the OCS participation) in 2001 totaled
$58.8 million (7.7% of revenues) as compared to $44.3 million (7.5% of revenues)
in 2000.

     The increase in the R&D expenses in 2001 was due mainly to the inclusion
for the first time in the third quarter of 2000 of the expenses of El-Op and the
subsidiaries held by El-Op prior to the Merger.

     MARKETING AND SELLING EXPENSES

     Marketing and selling expenses in 2001 were $54.9 million (7.2% of
revenues) as compared to $38.4 million (6.5% of revenues) in 2000.

     The increase in the marketing and selling expenses in the reported periods
was due mainly to the inclusion of the expenses of El-Op and the subsidiaries
held by El-Op prior to the Merger, starting in the third quarter of 2000, and
the increased revenue level. The marketing and sales expenses increased also as
a percentage of revenues, due to the higher level of resources required to
generate new sales. Should such market conditions continue in the future we
would expect marketing and sales expenses to maintain similar levels.

     The marketing and sales expenses in the reported periods reflect the
changes in the classification of royalties' expenses discussed in the gross
profit section above.

     G&A EXPENSES

     Reported G&A expenses in 2001 were $43.2 million (5.7% of revenues) as
compared to $26.3 million (4.4% of revenues) in 2000.

     As mentioned above, the increase in Elbit Systems' share price in 2001
affected its share price linked compensation costs, and our G&A expenses in 2001
included $5.2 million in share price linked compensation expenses.



                                       58
<PAGE>

     G&A expenses included amortization of goodwill of approximately $2.0
million in 2001 and $1.4 million in 2000. Excluding goodwill amortization and
share price linked compensation costs in 2001, G&A expenses in 2001 were $36.0
million (4.7% of revenues) as compared to $24.9 million (4.2% of revenues) in
2000.

     The changes in the G&A expenses in 2001 resulted mainly from the
consolidation of El-Op and subsidiaries held by El-Op prior to the Merger,
starting in the third quarter of 2000.

     OPERATING INCOME

     As a result of all of the above, reported operating income in 2001 was
$53.7 million (7.0% of revenues) as compared to a loss of $12.8 million in 2000.

     Excluding goodwill amortization in 2001, operating income totaled $56.5
million in 2001 (7.4% of revenues) as compared to operating income of $51.3
million (8.7% of revenues) excluding goodwill amortization, write-off of
in-process R&D and non-frequent charges due to our restructuring program in
2000.

     The operating profit in 2001 included share price linked compensation
expenses of $9.1 million.

     FINANCE INCOME (EXPENSE), NET

     Finance expense, net, in 2001 was $2.6 million as compared to $0.1 million
finance income, net, in 2000.

     The decrease in the finance income, net, resulted mainly from an increase
in our loans, principally as a result of the consolidation of El-Op and its
subsidiary companies starting in the third quarter 2000, as well as by the
increased financing required for the higher level of revenues, operating assets
and investments we made. Consequently, our finance income in 2001 remained
similar to that of 2000, and the increased finance expenses caused the change in
the net finance income.

     TAXES ON INCOME

     Provision for taxes for 2001 was approximately $11.0 million as compared to
a provision for taxes, excluding the effect of the write-off and the
restructuring expenses, of $11.5 million in 2000.

     Our tax rate in 2001 was 21.9% as compared to 23.3% in 2000. The change in
the tax rate was due mainly to the mix of the tax rates in the various tax
jurisdictions in which the companies generating the taxable income operate. Our
tax rate represents the weighted average tax rate to which Elbit Systems and our
subsidiaries are subject.



                                       59
<PAGE>

     We estimate that our tax assessments for the years ended 1999 and 2000 in
Israel and other jurisdictions will be finalized in 2002 and that its provisions
will be sufficient to cover the liabilities arising from such assessments.

     NET INCOME AND EPS

     Reported net income in 2001 was $40.8 million (5.3% of revenues) as
compared to a net loss of $20.5 million in 2000. Reported fully diluted EPS was
$1.04 in 2001, as compared to a net loss per share of $0.65 in 2000.

     Net earnings in 2001, excluding goodwill amortization, were $43.6 million
(5.7% of revenues) as compared to $38.3 million (6.5% of revenues) in 2000,
excluding goodwill amortization, write-off of in-process R&D and non-frequent
charges due to our restructuring program in 2000.

     Excluding goodwill amortization, fully diluted EPS in 2001 was $1.11 as
compared to $1.21 in 2000, excluding goodwill amortization, write-off of
in-process R&D and non-frequent expenses in 2000.

     The number of shares used for computation of fully diluted EPS in 2001 was
approximately 39.4 million shares as compared to approximately 31.6 million
shares in 2000. The increase in the number of shares was due mainly to the share
issuance made in the third quarter of 2000 in connection with the El-Op Merger
as well as to the exercise of approximately 600,000 options in 2001 and the
effect of the appreciation in our share price on the computation of the fully
diluted number of shares.

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 represents the cumulative cash flow of our various
projects in the reported periods. Project cash flows are affected by the timing
of the receipt of advances and the collection of accounts receivable from
customers. These relate to specific events during the project, while expenses
are ongoing. Our policy is to invest our cash surplus mainly in interest bearing
short and long-term deposits, in accordance with our projected needs.

     FINANCIAL RESOURCES. The financial resources available to us include
profits, collection of accounts receivable, advances from customers and
Government of Israel programs such as OCS and development grants. In addition,
Elbit Systems has access to bank credit lines in Israel and abroad based on our
capital, assets and activities. We also have the possibility of raising funds
through offering of shares to the public from time to time subject to market
conditions. For further information on the level and maturity of our borrowings,
see below - Item 18. Financial Statements - Note 10 (Short-Term Bank Credit and
Loans) and Note 13 (Long-Term Loans). In our opinion our working capital is
sufficient to support our current requirements.



                                       60
<PAGE>

     2002 CASH FLOW

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

     Net cash flow used for investment activities in 2002 was $51.0 million,
which was used mainly for procurement of property, plant and equipment, as well
as other assets. During 2002, we invested $22.1 million in equipment for our
various manufacturing plants, and $13.2 million in buildings, mainly those being
built at Elbit Systems' site in Haifa, Israel and El-Op's site in Rehovot,
Israel. These buildings are planned to house employees currently located in
various leased locations in the industrial parks in which the respective
companies are located.

     Net cash flow used for financing activities in 2002 was $29.3 million,
which was used mainly for reduction of short and long-term borrowings and
payment of $12.7 million in dividends during 2002.

     On December 31, 2002, we had total bank borrowings in the amount of $104.1
million, including $73.2 million in long-term loans, and $374 million in
guarantees issued on our behalf by banks, mainly as advance payment and
performance guarantees in the regular course of business. On December 31, 2002,
we had cash balances amounting to $77.9 million.

     As of December 31, 2002, we had working capital was $197.6 million, and our
current ratio was 1.54. Our ratio of equity to total assets was 44%.

     2001 CASH FLOW

     Our net cash flow from operating activities in 2001 was $41.2 million,
resulting mainly from net earnings and an increase in accounts payable, other
payables, and advances from customers, which was partly offset by an increase in
inventories and accounts receivable.

     Net cash flow used in investing activities in 2001 was $44.7 million, which
was used mainly for procurement of fixed assets.

     Net cash flow used in financing activities in 2001 was $6.7 million, which
was used mainly for repayment of debts and dividend payments. The use of funds
was partly offset by receipt of new long-term debt.

     On December 31, 2001, we had working capital of $120.9 million, our current
ratio was 1.31 and our equity ratio was 41.9%.

     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, 2002 and the subsequent
fiscal year. See above "Financial Resources". Our specific material commitments
for capital expenditures as of December 31, 2002 and May 31, 2003 were
approximately $28 million and $25 million respectively. These commitments were
mainly for the new building projects



                                       61
<PAGE>

in Haifa and Rehovot. See also below - Item 18. Financial Statements -
Consolidated Statements of Cash Flows and Note 8 (Property, Plant and Equipment)
to the Financial Statements.

IMPACT OF INFLATION AND EXCHANGE RATES

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

     NIS/U.S. DOLLAR EXCHANGE RATES. We attempt to manage our financial
activities in order to reduce material financial losses in U.S. dollar terms
resulting from the impact of inflation and exchange rate fluctuations on our
non-U.S. dollar assets and liabilities. Our income and expenses in Israeli
currency are translated into U.S. dollars at the prevailing exchange rates.
Consequently, we are affected by changes in the NIS/U.S. dollar exchange rates.
On December 31, 2002, we had exposure due to NIS denominated liabilities of $46
million in excess of NIS denominated assets.

     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 will 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 will also have a negative effect
on the profitability of fixed price contracts where we receive payments in NIS.

     In the past, our profitability was somewhat negatively affected when
inflation in Israel exceeded the devaluation of the NIS against the U.S. dollar
and at the same time we experienced corresponding increases in the U.S. dollar
cost of our operations in Israel. For example, in 1998, the rate of inflation
was 8.6% and the devaluation rate was 17.6%. However, in 1999 the rate of
inflation was approximately 1.3% and the rate of devaluation was -0.2%. In 2000,
the rate of inflation was approximately 0% and the devaluation rate was -2.7%.
In 2001 the inflation rate was approximately 1.4% and the devaluation rate was
9.3%. In 2002, the inflation rate was approximately 6.5% and the devaluation
rate was 7.3%. 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



                                       62
<PAGE>

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.

     FOREIGN CURRENCY EXPENSES

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

     Most of our assets and liabilities that are denominated in currencies other
than the NIS and the U.S. dollar were covered as of December 31, 2002 by
financial instruments (mostly forward contracts). On December 31, 2002, we had
contracts for the sale and purchase of such foreign currencies totaling $21.4
million. The results of financial derivative activities were not material.

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

ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

DIRECTORS AND EXECUTIVE OFFICERS

     The directors and executive officers of Elbit Systems as of May 31, 2003
are as follows:

BOARD OF DIRECTORS

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

Michael Federmann (Chairman)                  60            2000
Joseph Ackerman                               54            1996
Avraham Asheri                                65            2000
Rina Baum                                     58            2001
Aharon Beth-Halachmi                          67            2000


                                       63
<PAGE>

Doron Birger                                  52            2002
Ami Erel                                      56            1999
Dov Ninveh                                    56            2000
Nathan Sharony (External Director)            68            2002

The term of office of each director, other than the External Director, expires
at the annual general shareholders meeting to be held during 2003. The term of
office for the External Director expires in March 2005.

EXECUTIVE OFFICERS

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

Joseph Ackerman     54   President, Chief Executive Officer and Director
Yehuda Admon        58   Corporate  Vice  President and Co-General Manager
                          - El-Op
David Block Temin   48   Corporate Vice President and General Counsel
Itzhak Dvir         55   Corporate Vice President, General Manager - Silver
                         Arrow and General Manager - UAV, Tactical and Security
                         Systems
Jacob Gadot         56   Corporate Vice President and Chief Technology Officer
Joseph Gaspar       55   Corporate Vice President and Chief Financial Officer
Zeev Gofer          51   Corporate Vice President - Business Development and
                         Marketing
Ran Hellerstein     52   Corporate Vice President and Co-General Manager
                         - Airborne and Helmet Systems
Bezhalel Machlis    40   Corporate Vice President and General Manager
                         - Ground C4I and Battlefield Systems
Marco Rosenthal     56   Corporate Vice President - Manufacturing and Purchasing
Haim Rousso         57   Corporate  Vice  President and Co-General Manager
                         - El-Op
Gideon Sheffer      54   Corporate Vice President - Strategic Planning
Yoram Shmuely       43   Corporate Vice President and Co-General Manager
                         - Airborne and Helmet Systems
Arie Tal            65   Corporate Secretary
Timothy Taylor      51   President and Chief Executive Officer - EFW


     MICHAEL FEDERMANN. Michael Federmann has served as Chairman of the Board of
Directors since the El-Op Merger in 2000. He served as Chairman of the Board of
Directors of El-Op from 1988 until the Merger. He has held managerial positions
in the Federmann Group since 1969, and since January 2002 he has served as
Chairman and CEO of Federmann Enterprises Ltd. Currently, he also serves as
Chairman of the Board of Directors of Dan Hotels Corp. Ltd. (Dan Hotels). Mr.
Federmann is Deputy Chairman of the Board of Governors of the Hebrew University
in Jerusalem (the Hebrew



                                       64
<PAGE>

University) and a member of the Board of Governors and the Executive Committee
of the Weizmann Institute of Science. Mr. Federmann holds a bachelor's degree in
economics and political science from the Hebrew University.

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

     AVRAHAM ASHERI. Avraham Asheri has served as an economic advisor and a
director of several companies since 1998. He currently serves on the boards of
directors of Elron Electronic Industries Ltd. (Elron), Discount Mortgage Bank
Ltd., Kardan Nadlan Ltd., Scitex Corporation Ltd., ISAL Amlat Investment (1993)
and Meditor Pharmaceuticals Ltd. Mr. Asheri was President and Chief Executive
Officer of Israel Discount Bank from 1991 until 1998, and Executive Vice
President and member of its management committee from 1983. Prior to that, he
served for 23 years at the Israel Ministry of Industry and Trade and at the
Israel Ministry of Finance, including as Director General of the Israel Ministry
of Industry and Trade, Managing Director of the Israel Investment Center and
Trade Commissioner of Israel to the United States. Mr. Asheri holds a bachelor's
degree in economics and political science from the Hebrew University.

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

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

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

     AMI EREL. Ami Erel has served as President and Chief Executive Officer of
DIC since 2001. In addition, he has served as Chairman of the Board of Directors
of Elron since 1999. From 1999 until 2001, he was Chief Executive Officer of
Elron. He served as Chairman of the Board of Directors of Elbit



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<PAGE>

Systems from 1999 until the Merger in 2000. From 1997 to 1999, he served as
President and Chief Executive Officer of Bezeq - The Israel Telecommunications
Corp. Ltd. and as Chairman of the Board of Directors of PelePhone Communications
Ltd. from 1997 to 1998. He is a director of Property and Building Corporation
Ltd. and Super-Sol Ltd., as well as Chairman or a member of the boards of other
companies in the DIC group and the Elron group. Since 2000, Mr. Erel has served
as the Chairman of the Board of the Israel Association of Electronic and
Information Industries. Mr. Erel holds a bachelors of science degree in
electrical engineering from the Technion.

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

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

     YEHUDA ADMON. Yehuda Admon was appointed Corporate Vice President and
Co-General Manager of El-Op in 2000. From 1996 until 2000, he served as Vice
President and Division Manager of Elbit Systems' Combat Vehicles Division. He
joined Elbit Ltd. in 1992 and was Vice President and Division Manager of the
Combat Vehicles Division of EDS. Prior to that Mr. Admon was a career officer in
the IDF, where he served as Program Executive Officer for the Merkava Main
Battle Tank Programs, retiring with the rank of Brigadier General. Mr. Admon
holds a bachelor of science degree in mechanical 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.

     ITZHAK DVIR. Itzhak Dvir became Corporate Vice President, General Manager -
Silver Arrow in 2000 and General Manager - UAV, Tactical and Security Systems in
January 2003. From 2000 through 2002, he was General Manager - C4I and
Battlefield Systems. From 1996 until 2000, he was Vice President and Division
Manager - UAV and C3 Division. He 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



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<PAGE>

aeronautical engineering from the U.S. Air Force Institute of Technology at
Wright Patterson Air Force Base.

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

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

     ZEEV GOFER. Zeev Gofer was appointed Corporate Vice President - Business
Development and Marketing in April 2003. He previously served as Co-General
Manager - Aircraft and Helicopter Upgrades and Systems from 2000. From 1999
until 2000, he was Vice President of the 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.

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

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

     MARCO ROSENTHAL. Marco Rosenthal was appointed Corporate Vice President -
Manufacturing and Purchasing in 2001, having previously served as Vice President
- Operations and General Manager of



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<PAGE>

the Karmiel facility since 1999. From 1996 to 1999, he served as Vice President
- Material. Mr. Rosenthal joined Elbit Ltd. in 1975 and held various management
positions, including Vice President - Material of EDS and Director of the Sales
Department. Mr. Rosenthal holds a degree in technical engineering from the
Technion and a degree in business management from Haifa University.

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

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

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

     ARIE TAL. Arie Tal was appointed Corporate Secretary in 1996. He joined
Elbit Ltd. in 1986 and held various management positions, including Corporate
Secretary and Director of Business Development for EDS in North America. Prior
to that he served as a career officer in the IAF, including as Head of
Acquisition for several major programs, retiring with the rank of Colonel. Mr.
Tal holds a bachelor of science degree in aeronautical engineering from the
Technion and a master of science degree in aeronautics from Princeton
University.

     TIMOTHY TAYLOR. Timothy Taylor was appointed President and Chief Executive
Officer of EFW in 2000 after serving as EFW's President and General Manager
since 1997. He joined EFW in 1994 and held the positions of Executive Vice
President and General Manager, Vice President - Strategic Planning and Business
Development and Vice President - Aircraft Systems. A 30-year veteran of the
aerospace industry, he previously held various management and strategic business
development positions with Allied Signal Inc. (now Honeywell) and GEC Marconi
Avionics (now BAE Systems). A native of the United Kingdom, Mr. Taylor received
his engineering degree in England before moving to the United States. He became
an U.S. citizen in 1996.



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<PAGE>

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, 2002:

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

All directors and officers
other than the President
(consisting of 25 persons)            $3,338,048(2)             $532,630

President                             $1,821,736(2)              $76,363

(1)  Directors, besides Joseph Ackerman, are paid in accordance with standard
     fees paid to External Directors in Israel, which currently includes an
     annual fee of $9,907 and a per meeting fee of $381. Such payments are made
     either directly to the director or to his or her employing company. Mr.
     Ackerman does not receive director fees.

(2)  Includes compensation resulting from the exercise of Elbit Systems stock
     options.

BOARD PRACTICES

     APPOINTMENT AND TERMINATION OF DIRECTORS.

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

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

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

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<PAGE>


     AUDIT COMMITTEE. Dov Ninveh (chairman), Avraham Asheri and Nathan Sharony
are currently members of the audit committee of the Board. The audit committee
and Elbit Systems' internal auditor operate in accordance with an audit
committee charter that provides the framework for their audit and reporting
functions. See below - Item 10. Additional Information - General Provisions of
Israeli Law and Related Provisions - Internal Auditor and Audit Committee.

     NEW U.S. LEGISLATION AND NASDAQ RULES. Regulations proposed under the U.S.
Sarbanes-Oxley Act of 2002 and proposed NASDAQ regulations contain independence
criteria for members of audit committees as well as for a majority of board
members of publicly traded companies. If these regulations are adopted the
proposed independence criteria could impact some of our Board and audit
committee members.

EMPLOYEES

     Most of our employees are based in Israel, although we have a significant
amount of employees in the United States. The total number of employees
worldwide and the number of employees in the U.S. at the end of 2002, 2001 and
2000 were as follows:

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

2002                5,342                                  1,077
2001                5,040                                  1,040
2000                4,250                                    980

     Most of our Israeli employees have individual employment contracts.
However, by law some employees receive rights under a number of general
collective bargaining agreements. See above - Item 4. Information on the Company
- Conditions in Israel - Israeli Labor Laws. Approximately 500 of El-Op's
employees are covered by a collective bargaining agreement extending through the
end of 2004. Union collective bargaining agreements whose term is in the process
of being finalized apply to approximately 200 of Cyclone's employees.
Approximately 110 of EFW's employees in Fort Worth are subject to union
collective bargaining agreements expiring in November 2005. We believe our
overall relationship with our employees is satisfactory.

SHARE OWNERSHIP

ELBIT SYSTEMS' STOCK OPTION PLANS

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



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POST MERGER PLAN

     OPTIONS GRANTED. Under the Post Merger Plan, 5,000,000 options were
authorized to be granted to approximately 800 key employees of Elbit Systems and
wholly-owned subsidiaries. Approximately 4,500,000 of these options were
granted to employees through a trustee in 2000. 400,000 of the options were
granted to Joseph Ackerman, Elbit Systems' President and CEO. No other directors
were granted options, but executive officers other than Mr. Ackerman were
granted an aggregate of 560,000 options under the Plan. Approximately 500,000 of
the options under the Post Merger Plan were issued to the Plan's trustee in
reserve for future grants to key employees, as determined from time to time by
Elbit Systems' President. As of May 31, 2003, 125,840 of these reserve options
were issued to employees. In addition, options that have lapsed or are canceled
before exercise may be added to the reserve and re-granted under the Post Merger
Plan. The general terms of these options are the same as those for other options
granted under the Post Merger Plan. Half of the options granted to any employee
under the Post Merger Plan are exercisable into one Elbit Systems ordinary share
per option in consideration for the employee's payment to Elbit Systems of the
exercise price.

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

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

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

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



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<PAGE>


     1996 PLAN

     OPTION GRANTS. A total of 2,422,000 options were issued to employees under
the 1996 Plan, as amended. Each option was exercisable into one Elbit Systems
ordinary share, and this Plan did not include phantom options. In December 1996,
1,500,000 options were granted (the Initial Grant), in July 1997, 20,000 options
were granted (the July 1997 Grant), in May 1998, 720,000 options were granted
(the May 1998 Grant), and in March 1999, 16,000 options were granted (the March
1999 Grant). Joseph Ackerman received 150,000 options under the Initial Grant
and 90,000 options under the May 1998 Grant. No other director received options
under the 1996 Plan, but executive officers other than Mr. Ackerman were granted
an aggregate of 465,000 options. All of the options under the 1996 Plan were
vested in December 2002.

ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

MAJOR SHAREHOLDERS

PERCENTAGES

     The Company had, as of May 31, 2003, 39,065,834 ordinary shares outstanding
(This amount includes 385,900 shares held by Elbit Systems as treasury shares.)
The following table sets forth specific information as of May 31, 2003, to the
best of our knowledge, concerning:

     o    beneficial ownership of more than 5% of Elbit Systems' outstanding
          ordinary shares; and

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


The Federmann Group                      12,100,000            30.97%
99 Hayarkon Street
Tel-Aviv, Israel(1)

Elron Electronic Industries Ltd.          7,815,446            20.00%
Azrieli Center, 42nd Floor
Tel-Aviv, Israel(2)

Bank Hapoalim Group                       2,665,993             6.82%
Tel-Aviv, Israel(3)

Bank Leumi Group
Tel-Aviv, Israel(3)                       2,274,421             5.82%

All officers and directors
as a group (23 persons)                     306,061(4)            *

----------
* less than 5%


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<PAGE>


(1)  The Federmann Group includes Federmann Enterprises Ltd. (Federmann
     Enterprises), an Israeli company that holds 21.15% of Elbit Systems'
     shares, and Heris Aktiengesellschaft (Heris), a Liechtenstein company that
     holds 9.82% of Elbit Systems' shares.

     Federmann family owned companies own all of Federmann Enterprises. Bella
     Federmann owns approximately 14% of the voting rights in Federmann
     Enterprises. Michael Federmann, son of Bella Federmann, and his family
     members own approximately 61% of the voting rights in, and approximately
     62% of the equity of, Federmann Enterprises. Irit Federmann-Landau,
     daughter of Bella Federmann, owns approximately 22.5% of the voting rights
     in, and approximately 17% of the equity of, Federmann Enterprises. Shmuel
     Federmann, Bella Federmann's brother-in-law, and Shmuel Federmann's
     children, Ami and Ronit, own approximately 2% of the voting rights in, and
     20% of the equity of, Federmann Enterprises.

     Ownership of Heris is held, directly and through wholly-owned subsidiaries,
     by Federmann Enterprises (approximately 85.5% of the equity and voting
     rights) and by Irit Federmann-Landau (approximately 14.5% of the voting and
     equity rights).

     Michael Federmann, Chairman of Elbit Systems' Board, is also a director and
     CEO of Federmann Enterprises and Heris.

(2)  Elron is a multinational, high technology holding company whose business is
     conducted through a group of high technology operating companies. The
     principal shareholders of Elron are DIC, the Bank Leumi Group and the Clal
     Insurance Group, which as of May 31, 2003 held approximately 38.51%, 8.17%,
     and 2.15%, respectively, of the voting power of Elron.

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

     On May 19, 2003, private companies controlled by Oudi Recanati, Leon Y.
     Recanati, Judith Yovel Recanati and Elaine Recanati completed a sale of all
     of the shares of IDBH held by them, constituting approximately 51.7% of the
     outstanding share capital of IDBH, to a group comprised of: (i) Ganden
     Investments I.D.B. Ltd. (Ganden), a private Israeli company controlled by
     Nochi Dankner and his sister, Shelly Dankner-Bergman, which, following this
     transaction, holds 31.02% of the equity of and voting power in IDBH; (ii)
     Manor Investments - IDB Ltd. (Manor), a private Israeli company controlled
     by Ruth Manor, which, following this transaction, holds 10.34% of the
     equity of and voting power in IDBH; and (iii) Avraham Livnat Investments
     (2002) Ltd. (Livnat), a private Israeli company controlled by Avraham
     Livnat, which, following this transaction, holds 10.34% of the equity of
     and voting power in IDBH. Ganden, Manor and Livnat, owning in the aggregate
     approximately 51.7% of the equity of and voting power in IDBH, entered into
     a shareholders agreement relating, among other things, to their joint
     control of IDBH, the term of which is until May 19, 2023.

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

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

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



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<PAGE>

(4)  This includes 277,200 shares underlying options that are currently
     exercisable or that will become exercisable within 60 days of the date of
     the filing of this Form 20-F. A portion of the underlying options are
     "phantom options" that have been calculated based on Elbit Systems' May 31,
     2003 share price of $18.63.

RIGHTS IN SHARES, SIGNIFICANT CHANGES IN SHAREHOLDERS AND CONTROLLING
SHAREHOLDERS

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

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

RELATED PARTY TRANSACTIONS

     AGREEMENTS RELATING TO THE MERGER

     There are three major agreements relating to the Merger:

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

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

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

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



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     MERGER AGREEMENT

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

     REPRESENTATIONS AND ADJUSTMENTS TO THE MERGER CONSIDERATION

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

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

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

SHAREHOLDERS AGREEMENT

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

     BOARD MEMBERS. The parties agreed to vote to cause Elbit Systems' Board to
     have 11 members, consisting of four directors nominated by Elron, four
     directors nominated by the Federmann Group, the two External Directors and
     the President of Elbit Systems. All Board committees will be equally
     represented by the Board nominees of Elron and the Federmann Group. Should
     the holdings of Elbit Systems' issued share capital of only one of the
     parties fall below 15%, but not below 5%, the number of directors that
     party will have the right to nominate to the Board will be reduced
     proportionally. The other party will have the right to nominate all other
     members of the Board and to appoint the Chairman of the Board and the
     President and the Chief Executive Officer.



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

     PRESIDENT AS A BOARD MEMBER. Elbit Systems' President and Chief Executive
     Officer serves as a director, provided that he may not vote on any Board
     resolution if his vote determines whether the resolution passes. The
     President is invited to participate in all Board meetings.

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

     PRESIDENT. Joseph Ackerman continues as Elbit Systems' President and Chief
     Executive Officer for a period of three years from the Merger closing date,
     as specified in his employment agreement. The agreement was automatically
     extended for another three-year period since neither party provided advance
     notice of termination by December 31, 2002. Following termination of Mr.
     Ackerman's employment, Elron will nominate a candidate for the office of
     President and Chief Executive Officer, after consulting with the Federmann
     Group. The President and Chief Executive Officer will be elected by the
     Board, and his appointment is subject to shareholder approval.

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

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

     RESTRICTIONS ON SALES AND PURCHASES OF ELBIT SYSTEMS SHARES

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

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

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

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



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

     FIRST REFUSAL AND TAG ALONG RIGHTS

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

     (a)  sell more than 15% of Elbit Systems' issued share capital, and

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

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

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

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

     TASE RULES. All of the above mentioned transfers of Elbit Systems shares
are subject to restrictions on disposition in accordance with TASE rules.

     TERMINATION OF THE AGREEMENT. The parties agreed that if the Merger
Agreement becomes void, the Shareholders Agreement will also become void. After
the Merger, the Shareholders Agreement will remain in effect until the earlier
of:

     (a)  December 18, 2014; or

     (b)  the date any party's holdings fall below 5% of Elbit Systems' issued
          share capital, provided that all the rights and obligations of that
          party under the Shareholders


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          Agreement have not been previously transferred or transferred
          concurrently with such reduction to a new party, in which case the
          Shareholders Agreement will not terminate but will bind the new party.

REGISTRATION RIGHTS AGREEMENT

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

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

     TERMINATION OF REGISTRATION RIGHTS. The respective registration rights of
Elron and the Federmann Group terminate if such shareholder and its affiliates
collectively cease to own at least 5% of the then issued and outstanding Elbit
Systems ordinary shares or such shares of any successor corporation. In
addition, the Federmann Group agreed not to exercise its registration rights
during the TASE restriction period applicable to the Elbit Systems' ordinary
shares the Federmann Group received as consideration in the Merger.

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

AGREEMENTS RESULTING FROM THE DEMERGER

     DEMERGER. In connection with Elbit Ltd.'s demerger in November 1996, Elbit
Systems, Elbit Ltd. and Elbit Medical Imaging Ltd. (EMI) and some of their
subsidiaries, entered into a number of agreements in order to implement the
demerger and define their ongoing relationship. In May 2002, Elbit Ltd. became a
wholly-owned subsidiary of Elron. The following is a summary of those agreements
to which Elbit Systems is a party and that are still in effect.

     SPIN-OFF AGREEMENT. Elbit Systems, EMI and Elbit Ltd. implemented the
demerger under a Spin-Off Agreement. Elbit Ltd. transferred its
healthcare-related operations to EMI and its defense-related operations to Elbit
Systems, while retaining its remaining businesses. Elbit Ltd. assigned its
rights and obligations under its defense related contracts to Elbit Systems.
Responsibility for obligations that could not be related to any of their
respective fields of activity were distributed among the companies in proportion
to the respective net equity of each of the companies in their pro forma balance
sheets as of


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December 31, 1995. Each company assumed responsibility relating to its
particular business with respect to liens on assets, indemnities granted for
certain activities, legal claims and employee obligations and benefits. EMI,
Elbit Systems and Elbit Ltd. each agreed to indemnify or compensate the others
with respect to third-party claims relating to a field of activity of the
indemnifying party. Each of the three companies agreed to act in accordance with
the applicable Israeli tax provisions regarding the demerger.

     TECHNOLOGY AND CROSS LICENSE AGREEMENT. Elbit Systems, Elbit Ltd. and EMI
entered into a Technology Assignment and Cross License Agreement. This agreement
enabled the companies to own or use the technology required to pursue and
develop their respective fields of activity. Under this agreement, Elbit Ltd.
transferred to Elbit Systems the rights to Elbit Ltd.'s intellectual property
relating to defense activities. Elbit Systems, EMI and Elbit Ltd. each granted a
license to the other parties and their respective subsidiaries that chose to
become parties to the agreement. This license gives the parties the
non-exclusive, non-transferable, royalty-free, worldwide right to use the
transferred intellectual property for their respective activities that do not
conflict with each granting party's activities as conducted at the time the
demerger was completed. In addition, the agreement entitles Elbit Systems, EMI
and their respective subsidiaries to use the name "Elbit" in their current and
future business activities, provided such activity is not the same as or similar
to the activity conducted by another party to the agreement. Elbit Ltd. is
entitled to register the name "Elbit" as a part of a trade name or copyright.
Each party also agreed to protect all proprietary information transferred to it
pursuant to the agreement for a period of ten years.

     LEASE AGREEMENT. Under a lease agreement, Elbit Systems currently leases
from Elbit Ltd. approximately 170,000 square feet of office and manufacturing
space in Karmiel, Israel. The lease expires in October 2006 and may be
terminated earlier by Elbit Systems upon twelve months' prior written notice.
The monthly rent is an amount in NIS equal to approximately $0.548 per square
foot linked to the U.S. dollar and the U.S. CPI, payable quarterly at the
beginning of each quarter. In the event that the area leased is substantially
reduced, the monthly rent will be determined by the parties.

TRANSACTIONS WITH ELRON AND AFFILIATED COMPANIES

     There are a number of insurance policies that Elbit Systems has taken with
some of our affiliated companies, including Elron, in order to obtain more
favorable terms than would have otherwise been available.

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

TRANSACTIONS WITH OFFICERS AND DIRECTORS

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



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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

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

DIVIDEND DISTRIBUTIONS

     Elbit Systems does not have a declared dividend policy. The Company's
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:

         2000       $0.32 per share
         2001       $0.32 per share
         2002       $0.34 per share

ITEM 9.     OFFER AND LISTING.

SHARE LISTINGS AND TRADING PRICES

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

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

                      NASDAQ                       TASE (1)
                 HIGH        LOW               HIGH        LOW
                 ----        ---               ----        ---

1998            $14.50      $12.50            $14.80      $12.48
1999            $18.47      $12.38            $18.41      $12.17
2000            $19.38      $11.28            $19.18      $11.75
2001            $19.37      $13.72            $18.77      $15.53
2002            $19.31      $14.98            $18.92      $14.32


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     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)
                                    ------                       -------
                               HIGH      LOW               HIGH         LOW
                               ----      ---               ----         ---
2001
First Quarter                 $15.56    $12.81            $15.42      $13.05
Second Quarter                $15.58    $13.93            $18.39      $16.01
Third Quarter                 $16.88    $15.58            $19.56      $17.46
Fourth Quarter                $19.37    $17.59            $18.77      $18.31

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

2003
First Quarter                 $16.84    $14.51            $17.00      $14.77
Second Quarter
  (through May 31, 2003)      $19.33    $15.30            $19.52      $16.45

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

                                    NASDAQ                       TASE(1)
                                    ------                       -------
                               HIGH      LOW               HIGH         LOW
                               ----      ---               ----         ---

December 2002                 $17.39    $15.85            $17.24      $15.85
January 2003                  $16.36    $15.15            $16.21      $15.12
February 2003                 $15.73    $14.51            $15.69      $14.77
March 2003                    $16.84    $15.30            $17.00      $15.30
April 2003                    $18.32    $16.75            $18.34      $16.87
May 2003                      $19.33    $16.60            $19.53      $16.45

-------------
(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.


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     As of May 31, 2003, approximately 6.7% of Elbit Systems' outstanding
ordinary shares was held in the United States by approximately 260 holders
registered on the books of our transfer agent.

ITEM 10.    ADDITIONAL INFORMATION.

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

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

     APPOINTMENT OF DIRECTORS. Elbit Systems' directors are appointed by the
shareholders at the annual general shareholders meeting. They hold office until
the next 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 general shareholders meetings the Board may
appoint new directors to fill vacancies or increase the number of Board members,
however new External Directors must be elected at a general shareholders
meeting. Appointment of directors is subject to the terms of the Merger
Agreement and the Shareholders' Agreement relating to the Merger. See above -
Item 7. Major Shareholders and Related Party Transactions - Related Party
Transactions - Agreements Relating to the Merger. Under these agreements Elron
and the Federmann Group each appoints four members to the Board. The Chairman of
the Board is appointed from the Federmann Group nominees. The President of Elbit
Systems also serves on the Board, however, he is not entitled to vote on a
resolution if his vote would be the deciding vote for the resolution. The
Articles of Association authorizes a maximum of 17 and a minimum of five
directors. However, unless otherwise approved by the Board or a general
shareholders meeting or during an interim period following a director's
resignation, there are 11 directors, including two External Directors as
described in "External Directors" below.

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


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or revocation, as the case may be, will become effective on the later of the
date of receipt of the above notice or the date fixed in the notice.

     EXTERNAL DIRECTORS. Under the Companies Law publicly held Israeli companies
are required to appoint two "External Directors". Among other requirements,
External Directors must be residents of Israel and unaffiliated with Elbit
Systems and its principals. External Directors serve for a three-year term that
may be extended for an additional three-year term. They also are restricted as
to the number of corporations on whose boards they may serve at the same time.
Any committee of the Board must include at least one External Director. In
addition, any individual who previously served as a director of a company may
not later serve as an External Director of such company for a period of two
years following such directorship. Nathan Sharony currently serves as an
External Director of Elbit Systems, and his term of office ends in March 2005.
Joel Feldschuh resigned as an External Director in May 2003 due to his
anticipated nomination for an officer position with a company affiliated with
IDBH, a controlling shareholder of Elron. Elbit Systems is in the process of
nominating a replacement candidate for the second External Director for election
at a general meeting of shareholders.

     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
audit and reporting functions. For the potential impact of proposed U.S.
regulations relating to independence criteria of audit committee members, see
above - Item 6. Directors, Senior Management and Employees - Board Practices -
Potential Impact of New U.S. Legislation and NASDAQ Rules.

     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,
managing director, chief business manager, president, executive vice president,
vice president or other manager directly under the managing director. It also
includes any other person assuming the responsibilities of any of those
positions without regard to that person's title. 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 reveal to the company
any information or documents relating to the company's affairs that the Officer
Holder has received due to his or her position as an Office Holder. Under the
Companies Law voting agreements among directors are considered a breach of
fiduciary duty. In addition, all compensation arrangements between the company
and Office Holders who are not directors require approval of the Board.



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APPROVAL OF CERTAIN TRANSACTIONS

     APPROVAL PROCEDURES. The Companies Law requires that certain transactions,
actions and arrangements be approved as provided for in a company's articles of
association and in some cases by the audit committee and by the board of
directors. Sometimes shareholder approval is also required. The vote required by
the audit committee and the board of directors for approval of such matters is a
majority of the disinterested directors participating in a duly convened
meeting. An Office Holder with an interest in any such matter that is brought
for approval may not be present at the meeting where the matter is being
approved and may not vote on the matter, unless such meeting is a shareholders
meeting.

     PERSONAL INTEREST AND EXTRAORDINARY TRANSACTIONS. The Companies Law
requires that an Office Holder of a company promptly disclose 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. "Personal Interest" 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, directly or indirectly, a 5%
or greater shareholder, director or general manager or in which he or she has
the right to appoint at least one director or the general manager. An
"extraordinary transaction" is other than in the ordinary course of business,
other than on market terms, or is likely to have a material impact on the
company's profitability, assets or liabilities.

     APPROVAL OF TRANSACTIONS

     The Companies Law requires approval by both the audit committee and the
Board for the following transactions:

     (1)  proposed transactions in which an Office Holder has a direct or
          indirect Personal Interest or which are Extraordinary Transactions;

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

     (3)  terms of service of directors, including the terms of their employment
          as officers of Elbit Systems; or

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

     Matters referred to in (3) and, in some cases, matters referred to in (1),
(2), and (4) above, may also require shareholder approval, including, where
applicable, a specified percentage of non-interested shareholders.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

     INSURANCE AND INDEMNIFICATION UNDER THE COMPANIES LAW

     The Companies Law permits a company to obtain an insurance policy covering
liabilities of Office Holders resulting from a breach of the Office Holder's
duty of care to the company or to another


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person. This includes liabilities from the breach of his or her fiduciary duty
to the company, to the extent that the Office Holder acted in good faith and had
reasonable cause to believe that the act would not prejudice the company. It
also covers monetary liabilities charged against an Office Holder while serving
the company.

     The Companies Law also allows a company to indemnify an Office Holder in
connection with his or her activities as an Office Holder. This includes
indemnification for monetary liability incurred under a judgment, including a
settlement or arbitration decision approved by a court, in an action brought
against the Office Holder by a third party. It also includes reasonable
litigation expenses, including attorneys' fees, incurred in an action brought
against him or her by, or on behalf of, the company or others, or as a result of
a criminal charge of which he or she was acquitted or for a criminal charge for
which he or she may be found guilty but that does not involve criminal intent. A
company may not indemnify an Office Holder or enter into an insurance contract
that would provide coverage for any monetary liability incurred as a result of
the following:

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

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

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

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

     INSURANCE AND INDEMNIFICATION UNDER THE ARTICLES OF ASSOCIATION

     Elbit Systems' Articles of Association allows for directors and officers
liability insurance, subject to the provisions of the Companies Law. The
Articles of Association also permit similar insurance to be provided to our
subsidiaries' directors and officers. 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 prejudice 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
of a director or officer against:

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



                                       85
<PAGE>

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

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

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

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

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

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

     In 2001, Elbit Systems' shareholders approved the grant to members of our
Board of indemnification letters reflecting the above conditions and
limitations. Similar letters were also approved by the Board in 2001 for grant
to officers of Elbit Systems.

MATERIAL CONTRACTS

     Elbit Systems has not entered into material contracts since June 1, 2001,
other than in the ordinary course of business.

EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

     Non-residents of Israel may freely hold and trade Elbit Systems' ordinary
shares under general and specific permits issued under the Israeli Currency
Control Law, 1978. Elbit Systems' 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 Elbit Systems' 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.



                                       86
<PAGE>

TAXATION

     GENERAL

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

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

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

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

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

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

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

     INDUSTRY ENCOURAGEMENT. Under the Law for the Encouragement of Industry
(Taxes), 1969, a company qualifies as an "Industrial Company" if it is resident
in Israel and at least 90% of its income in a given tax year, with some
exceptions, comes from "Industrial Enterprises" owned by that company. An
Industrial Enterprise is defined as an enterprise whose primary activity in a
particular tax year is industrial manufacturing activity. We believe Elbit
Systems qualifies as an Industrial Company. The principal


                                       87
<PAGE>

benefits of this status are amortization of the cost of know-how and patents,
under certain interpretations, deduction of expenses incurred in connection with
a public issuance of securities over a three-year period and an election under
certain conditions to file a consolidated tax return with additional related
Israeli Industrial Companies.

     INVESTMENT LAW

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

     An Approved Enterprise is entitled to several benefits, including Israeli
Government cash grants and tax benefits. The applicable tax benefits relate only
to taxable profits attributable to the specific Approved Enterprise. As of
December 31, 2002, Elbit Systems had three and El-Op had three active approved
programs eligible for tax benefits. These programs will expire during the years
2003 to 2007.

     CAPITAL GAINS TO A COMPANY

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

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

     CAPITAL GAINS TO A SHAREHOLDER

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

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



                                       88
<PAGE>

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

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

     ISRAELI TAX ON UNITED STATES SHAREHOLDERS

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

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

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



                                       89
<PAGE>

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

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

DOCUMENTS ON DISPLAY

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

ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.

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

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

ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

     Not applicable.



                                       90
<PAGE>

ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

     Not applicable.

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

     Not applicable.

ITEM 15.    CONTROLS AND PROCEDURES

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

ITEM 16.    [RESERVED]

ITEM 17.    FINANCIAL STATEMENTS.

     Not applicable.

ITEM 18.    FINANCIAL STATEMENTS.

     See Financial Statements attached.


                                       91
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS


To the Shareholders of Elbit Systems Ltd.


We have audited the  accompanying  consolidated  balance  sheet of Elbit Systems
Ltd.  (the  "Company")  and its  subsidiaries  as of December 31, 2002,  and the
related consolidated  statements of operations,  changes in shareholders' equity
and cash  flows for the year then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on these  financial  statements  based  on our  audits.  The  financial
statements of Elbit Systems Ltd. as of December 31, 2001 and for the years ended
December,  2001  and  2000  were  audited  by other  auditors  who  have  ceased
operations  as  a  foreign  associated  firm  of  the  Securities  and  Exchange
Commission  Practice  Section of the  American  Institute  of  Certified  Public
Accountants  and whose  report dated March 24,  2002,  expressed an  unqualified
opinion on those statements.

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

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

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


                                             LUBOSHITZ KASIERER
                              AN AFFILIATE MEMBER OF ERNST & YOUNG INTERNATIONAL

Haifa, Israel
March 10, 2003


                                      F-2
<PAGE>

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



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of

ELBIT SYSTEMS LTD.

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

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

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


                                                Luboshitz Kasierer

                                                Arthur Andersen

Haifa, Israel
March 24, 2002




                                     F-2(a)
<PAGE>

                ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                      --------------------------
                                                                         NOTE          2002              2001
                                                                        -----         --------         ---------
<S>                                                                      <C>           <C>              <C>
CURRENT ASSETS
  Cash and cash equivalents                                                            $76,280          $40,583
  Short-term bank deposits                                                               1,650            1,446
  Trade receivables, net                                                 (3A)          227,724          241,827
  Other receivables and prepaid expenses                                  (4)           34,376           36,209
  Inventories, net of advances                                            (5)          222,844          185,090
                                                                                      --------         ---------
         Total current assets                                                          562,874          505,155
                                                                                      --------         ---------

INVESTMENTS AND LONG-TERM RECEIVABLES
  Investments in affiliated companies and partnership                    (6A)           21,947           19,583
 Investments in other companies                                          (6B)           11,104           11,909
  Long-term receivables                                                  (3B)           20,859           64,804
  Long-term bank deposits and loan                                        (7)            3,686            3,433
 Severance pay fund                                                                      6,641            6,528
                                                                                      --------         ---------
                                                                                        64,237          106,257
                                                                                      --------         ---------

PROPERTY, PLANT AND EQUIPMENT, NET                                        (8)          202,961          184,722
                                                                                      --------         ---------

OTHER ASSETS, NET                                                         (9)
  Goodwill and assembled work-force, net                                                32,541           31,946
  Know-how and other intangible assets, net                                             73,228           73,337
                                                                                      --------         ---------
                                                                                       105,769          105,283
                                                                                      --------         ---------

                                                                                      $935,841        $ 901,417
                                                                                      ========        =========
</TABLE>

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



                                      F-3
<PAGE>


                ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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


<TABLE>
<CAPTION>

                                                                                                  DECEMBER 31,
                                                                                            --------------------------
                                                                               NOTE          2002              2001
                                                                              -----         --------         ---------
<S>                                                                         <C>               <C>             <C>

CURRENT LIABILITIES
  Short-term bank credit and loans                                             (10)           $30,915         $ 46,894
  Trade payables                                                                               83,463          108,617
  Other payables and accrued expenses                                          (11)           142,526          135,386
  Customers advances and amounts in excess of
     costs incurred                                                            (12)           108,418           93,342
                                                                                             --------         --------
         Total current liabilities                                                            365,322          384,239
                                                                                             --------         --------

LONG-TERM LIABILITIES
  Long-term loans                                                              (13)            73,173           69,202
  Advances from customers                                                      (12)            40,411           29,840
  Deferred income taxes                                                        (15)            16,413           21,989
  Accrued severance pay                                                      (14, 2M)          24,486           15,231
                                                                                             --------         --------
                                                                                              154,483          136,262
                                                                                             --------         --------
CONTINGENT LIABILITIES AND COMMITMENTS                                         (16)

MINORITY INTEREST                                                                               4,675            2,931
                                                                                             --------         --------

SHAREHOLDERS' EQUITY                                                           (17)
  Share capital

    Ordinary shares of NIS1 par value;  Authorized - 80,000,000 shares
       as of  December  31,  2002 and 2001;  Issued -  39,205,478  and
       38,739,093   shares  as  of   December   31,   2002  and  2001,
       respectively;  Outstanding -38,796,657 and 38,330,272 shares as
       of December 31, 2002 and 2001, respectively                                             11,154           11,054
  Accumulated other comprehensive loss                                                         (2,882)               -
  Additional paid-in capital                                                                  248,387          244,625
  Retained earnings                                                                           159,023          126,627
  Treasury stock- 408,821 shares as of December 31, 2002
     and 2001                                                                                  (4,321)          (4,321)
                                                                                             --------         --------
                                                                                              411,361          377,985
                                                                                             --------         --------

                                                                                             $935,841         $901,417
                                                                                             ========         ========
</TABLE>

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


                                      F-4
<PAGE>

                ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED
                                                                         -------------------------------------------
                                                                                        DECEMBER 31,
                                                                NOTE         2002           2001           2000
                                                               ------    -------------   -----------      ----------
<S>                                                             <C>           <C>           <C>           <C>
Revenues                                                        (18)          $827,456      $764,501      $ 591,084
Cost of revenues                                                (19)          605,313        553,957        432,786
Restructuring expenses (inventory write-off)                                        -              -         10,300
                                                                              -------        -------        -------
           Gross profit                                                       222,143        210,544        147,998
                                                                              -------        -------        -------

Research and development costs, net                             (20)           57,010         58,759         44,274
Marketing and selling expenses                                  (21)           65,691         54,876         38,449
General and administrative expenses                             (22)           41,651         43,216         26,251
Acquired in-process research and development                                        -              -         40,000
Restructuring costs                                                                 -              -         11,800
                                                                              -------        -------        -------


                                                                              164,352        156,851        160,774
                                                                              -------        -------        -------


         Operating income (loss)                                               57,791         53,693        (12,776)

Financial income (expenses), net                                (23)           (3,035)        (2,617)           115
Other income (expenses), net                                    (24)             (462)           774              3
                                                                              -------        -------        -------

       Income (loss) before taxes on income                                    54,294         51,850        (12,658)
Taxes on income                                                 (15)            9,348         11,003          6,227
                                                                              -------        -------        -------
                                                                               44,946         40,847        (18,885)
Equity in net (losses) earnings of affiliated companies and
   partnership                                                                    675           (598)        (1,429)
Minority interest in losses (gains) of
   subsidiaries                                                                  (508)           547           (217)
                                                                              -------        -------        -------
         Net income (loss)                                                    $45,113        $40,796       $(20,531)
                                                                              =======        =======       ========

  Earnings (loss) per share                                     (17)
   Basic net earnings (loss) per share                                          $1.17        $ 1.07        $ (0.65)
                                                                              =======        =======       ========
   Diluted net earnings (loss) per share                                        $1.13        $ 1.04        $ (0.65)
                                                                              =======        =======       ========
</TABLE>

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


                                      F-5
<PAGE>

                ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF CHANGES IN
                         SHAREHOLDERS' EQUITY

           (In thousands of U.S. dollars, except share data)

<TABLE>
<CAPTION>

                                                                                         ACCUMULATED
                                              NUMBER OF                   ADDITIONAL        OTHER
                                             OUTSTANDING       SHARE       PAID-IN      COMPREHENSIVE     RETAINED       TREASURY
                                                SHARES        CAPITAL      CAPITAL          LOSS          EARNINGS        SHARES
                                            -----------      --------     ----------    --------------    --------       --------
<S>                                       <C>              <C>          <C>              <C>              <C>             <C>
BALANCE AS OF JANUARY 1, 2000               25,422,396        $7,883       $52,697                   -    $127,924        $(3,613)
   Issuance of shares- in respect of
     merger with El- Op                     12,100,000         2,963       177,037                   -           -              -
  Exercise of options                          289,002            70           810                   -           -              -
  Tax benefit in respect
  of options exercised                               -             -           889                   -           -              -
 Capital reserve in respect of
     issuance of shares by
     development stage investees                     -             -         3,874                   -           -              -
  Amortization of  stock
     compensation                                    -             -           155                   -           -              -
  Dividends paid                                     -             -             -                   -      (9,430)             -
  Net loss                                           -             -             -                   -     (20,531)             -
                                            -----------      --------     ----------    --------------    --------       --------
BALANCE AS OF DECEMBER 31, 2000             37,811,398        10,916       235,462      -                   97,963         (3,613)
  Exercise of options                          585,860           138         3,162                   -           -              -
  Tax benefit in respect of
     options exercised                               -             -         1,363                   -           -              -
  Adjustment to capital reserve                      -             -        (3,874)                  -           -              -
  Amortization of stock
    compensation                                     -             -         8,512                   -           -              -
  Purchase of treasury shares                  (66,986)            -             -                   -           -           (708)
  Dividends paid                                     -             -             -                   -     (12,132)             -
  Net income                                         -             -             -                   -      40,796              -
                                            -----------      --------     ----------    --------------    --------       --------
BALANCE AS OF DECEMBER 31, 2001             38,330,272       $11,054      $244,625                   -    $126,627        $(4,321)
                                            ===========      ========     ==========    ==============    ========       ========

<CAPTION>

                                                TOTAL            TOTAL
                                            SHAREHOLDERS'    COMPREHENSIVE
                                               EQUITY        INCOME (LOSS)
                                            -------------    -------------
<S>                                              <C>            <C>
BALANCE AS OF JANUARY 1, 2000                  $184,891                -
   Issuance of shares- in respect of
     merger with El- Op                         180,000                -
  Exercise of options                               880                -
  Tax benefit in respect
  of options exercised                              889                -
 Capital reserve in respect of
     issuance of shares by
     development stage investees                  3,874                -
  Amortization of  stock
     compensation                                   155                -
  Dividends paid                                 (9,430)               -
  Net loss                                      (20,531)         (20,531)
                                            -------------    -------------
BALANCE AS OF DECEMBER 31, 2000                 340,728                -
  Exercise of options                             3,300                -
  Tax benefit in respect of
     options exercised                            1,363                -
  Adjustment to capital reserve                  (3,874)               -
  Amortization of stock
    compensation                                  8,512                -
  Purchase of treasury shares                      (708)               -
  Dividends paid                                (12,132)               -
  Net income                                     40,796           40,796
                                            -------------    -------------
BALANCE AS OF DECEMBER 31, 2001                $377,985           40,796
                                            =============    =============

</TABLE>


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

                                      F-6
<PAGE>

                ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                                                                         ACCUMULATED
                                              NUMBER OF                   ADDITIONAL        OTHER
                                             OUTSTANDING       SHARE       PAID-IN      COMPREHENSIVE     RETAINED       TREASURY
                                                SHARES        CAPITAL      CAPITAL          LOSS          EARNINGS        SHARES
                                            -----------      --------     ----------    --------------    --------       --------
<S>                                         <C>              <C>          <C>              <C>              <C>             <C>
  BALANCE AS OF DECEMBER 31, 2001           38,330,272        11,054       244,625                -       126,627          (4,321)
      Exercise of options                      466,385           100         4,040                -             -               -
     Tax benefit in respect of
        options exercised                            -             -           648                -             -               -
     Amortization of stock
       compensation                                  -             -          (926)               -             -               -
     Dividends paid                                  -             -             -                -       (12,717)              -
     Net income                                      -             -             -                -        45,113               -
      Minimum pension liability                      -             -             -           (2,882)            -               -
                                            -----------      --------     ----------    --------------    --------       --------

  BALANCE AS OF DECEMBER 31, 2002           38,796,657        $11,154     $248,387          $(2,882)      $159,023        $(4,321)
                                            ===========      ========     ==========    ==============    ========       ========

<CAPTION>

                                                TOTAL            TOTAL
                                            SHAREHOLDERS'    COMPREHENSIVE
                                               EQUITY        INCOME (LOSS)
                                            -------------    -------------
<S>                                              <C>            <C>
  BALANCE AS OF DECEMBER 31, 2001               377,985                -
      Exercise of options                         4,140                -
     Tax benefit in respect of
        options exercised                           648                -
     Amortization of stock
       compensation                                (926)               -
     Dividends paid                             (12,717)               -
     Net income                                  45,113           45,113
      Minimum pension liability                  (2,882)          (2,882)
                                            -------------    -------------

  BALANCE AS OF DECEMBER 31, 2002               $411,361          $42,231
                                            ============     =============

</TABLE>

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


                                      F-7
<PAGE>

                ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                               YEAR ENDED DECEMBER 31,
                                                                                        ------------------------------------
                                                                                           2002        2001          2000
                                                                                         --------      -------      ---------
<S>                                                                                       <C>         <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                                       $45,113     $40,796      $(20,531)
  Adjustments to reconcile net income (loss) to net cash provided by (used in)
       operating activities:
      Depreciation and amortization                                                        32,937      32,865        20,663
         Amortization of deferred stock compensation                                         (926)      8,512           155
      Acquired in-process research and development                                             -           -         40,000
      Deferred income taxes                                                                (5,620)     (2,694)       (6,482)
      Severance pay fund                                                                     (113)        167        (1,196)
      Increase (decrease) in provision for severance pay                                    6,373        (800)        9,266
      Gain (loss) on disposal of property and equipment                                       743        (327)         (575)
      Tax benefit in respect of options exercised                                             648       1,363           889
      Other adjustments                                                                       683        (117)         (921)
      Minority interests in gains (losses) of subsidiaries                                    508        (547)          217
      Equity in net losses (earnings)  of affiliated companies and partnership               (675)        598         1,429
    Changes in operating assets and liabilities:
       Decrease (increase) in trade receivables, other receivables and prepaid expenses    58,554      (9,963)      (18,975)
       Increase in inventories                                                            (55,106)    (72,165)      (25,228)
       Increase (decrease) in trade payable and accrued expenses                          (19,321)     37,004        (3,520)
       Increase (decrease) in advances received from customers                             42,999       6,489       (10,632)
       Chief Scientist                                                                      9,197          -              -
                                                                                          -------     -------      --------
  Net cash provided by (used in) operating activities                                     115,994      41,181       (15,441)
                                                                                          -------     -------      --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property, plant and equipment and other assets                              (46,003)    (45,244)      (40,374)
  Investment grants received for property, plant and equipment                                119       1,334         1,533
  Acquisition of subsidiaries and activities (Schedule A)                                  (5,280)     (3,344)       14,133
  Investments in affiliated companies and subsidiaries                                     (1,681)       (801)      (13,126)
  Proceeds from sale of property, plant and equipment and investments                         956       3,010         1,279
   Long-term loan granted                                                                    (714)         -              -
   Short-term loan repaid                                                                   1,371          -              -
  Long-term bank deposits paid                                                             (1,228)     (1,872)       (2,042)
  Long-term bank deposits repaid                                                            1,689       2,322        23,419
  Short-term bank deposits, net                                                              (204)        (57)         (638)
                                                                                          -------     -------      --------

         Net cash used in investing activities                                            (50,975)    (44,652)      (15,816)
                                                                                          -------     -------      --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Repayment of convertible debentures                                                          -           -           (283)
  Proceeds from exercise of options                                                         4,140       3,300           787
  Repayment of long-term credit for purchase of a building                                     -       (3,000)      (10,000)
   Purchase of treasury stock                                                                  -         (708)            -
  Repayment of long-term bank loans                                                        (3,249)    (13,049)       (1,852)
  Proceeds from long-term bank loans                                                        2,233      25,444        33,933
  Dividends paid                                                                          (12,717)    (12,132)       (9,430)
   Change in short-term bank credit and  loans                                            (19,729)     (6,517)       32,321
                                                                                          -------     -------      --------

         Net cash provided by (used in) financing activities                              (29,322)     (6,662)       45,476
                                                                                          -------     -------      --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       35,697     (10,133)       14,219
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR                                     40,583      50,716        36,497
                                                                                         --------      -------      ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                          $76,280     $40,583       $50,716
                                                                                         ========     ========      =========
</TABLE>

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

                                      F-8
<PAGE>

                ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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


<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                                          ----------------------------------------
                                                                          2002            2001           2000
                                                                          --------       ---------     -----------
<S>                                                                      <C>             <C>              <C>
             SUPPLEMENTARY CASH FLOWS ACTIVITIES:
               Cash paid during the year for:
                Income taxes                                             $ 21,730        $ 9,469          $ 9,360
                                                                        =========        =======          =======
                Interest                                                $   2,947        $ 6,649          $ 7,645
                                                                        =========        =======          =======


NON CASH TRANSACTIONS

  Debentures converted into shares                                       $       -       $      -           $ 93
                                                                        =========        =======          =======


SCHEDULE A:
Subsidiaries and activities acquired (*)

Estimated net fair value of assets acquired and liabilities
assumed at the date of acquisition was as follows:

     Working capital deficiency (working capital)
       (excluding cash and cash equivalents)                             $       -           $888        $(39,805)
       Property, plant and equipment                                          (275)        (1,886)        (80,493)
      Know-how and other intangible assets                                  (5,078)        (3,800)        (53,000)
      Goodwill and assembled work-force                                          -              -         (31,139)
      In-process research and development                                        -              -         (40,000)
      Long-term liabilities                                                      -          1,454          76,224
      Purchase of investments in credit                                         73              -               -
                                                                           -------        -------         -------

                                                                            (5,280)        (3,344)       (168,213)
                                                                           -------        -------         -------
      Investment in subsidiary prior to consolidation                            -              -           2,346
       Less - amounts acquired by issuance of shares                             -              -         180,000
                                                                           -------        -------         -------
                                                                           $(5,280)       $(3,344)        $14,133
                                                                           =======        =======         =======
</TABLE>

           (*)  El-Op in 2000 (see note 1C); AEL in 2001 (see note 1F);  Defense
                systems division of Elron Telesoft in 2002 (see note 1G).

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


                                      F-9
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1   -        GENERAL

           A.     Elbit Systems Ltd. (the "Company") is an Israeli corporation,
                  31%  owned  by the  Federmann  Group  and 20%  owned  by Elron
                  Electronic Industries Ltd. ("Elron"). The Company's shares are
                  traded  on the  Tel  Aviv  Stock  Exchange  and on the  NASDAQ
                  National  Market in the United  States.  The  Company  and its
                  subsidiaries  (the "Group") are engaged mainly in the field of
                  defense  electronics.  The  Company's  principal  wholly-owned
                  subsidiaries  are EFW Inc.  ("EFW")  and El-op  Electro-Optics
                  Industries Ltd. ("El-Op").

           B.     A majority  of the  Group's  revenues  were  derived in recent
                  years  from  direct or  indirect  sales to  governments  or to
                  government agencies. As a result, a substantial portion of the
                  Group's sales is subject to the special risks  associated with
                  sales to  governments or to government  agencies.  These risks
                  include,   among  others,  the  dependency  on  the  resources
                  allocated  by  governments  to  defense  programs,  changes in
                  governmental  priorities and changes in governmental approvals
                  regarding export licenses  required for the Group products and
                  for its suppliers.

           C.     In 2000,  the  Company  completed  its  merger  with El-Op and
                  issued 12,100,000 ordinary shares to El-Op  shareholders.  The
                  purchase  price  based  on the  market  value  of  the  shares
                  amounted to $180,000.

                  The merger was accounted for as a purchase and accordingly the
                  purchase  price  was  allocated  to the fair  value of  assets
                  acquired and liabilities assumed of El-Op.

                  El-Op is  engaged  primarily  in the  production  and sales of
                  military  products  and  systems  in the  electro-optical  and
                  electro-mechanical sectors.

                  The  excess of the  purchase  price over the fair value of the
                  net tangible assets acquired ("excess of cost"), in the amount
                  of $109,000 was allocated,  based  primarily on an independent
                  appraisal,  as follows:  $40,000 was  allocated to  in-process
                  research  and   development   ("R&D")  which  was  charged  to
                  operations  upon   completion  of  the  merger;   $58,000  was
                  allocated  to  know-how  ($45,000),  trademarks  ($8,000)  and
                  assembled  work-force  ($5,000);  $18,200  was  recorded  as a
                  deferred tax liability in respect of the  differences  between
                  the  allocation  of the  aforementioned  assets  and their tax
                  basis and the balance,  amounting to $29,200 was  allocated to
                  goodwill. These intangible assets are included in other assets
                  in the  consolidated  balance sheet and are  amortized  over a
                  period of 17 - 20 years,  (except for goodwill  and  assembled
                  work-force  which  commencing  January  1,  2002 are no longer
                  amortized - See Note 9). The Company began consolidating El-Op
                  from the third quarter of 2000.


                                      F-10
<PAGE>


                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1   -        GENERAL (CONT.)

               C.    (Cont.)

                     At  the  merger   date,   El-Op  was   conducting   design,
                     development,  engineering and testing activities associated
                     with  the   completion  of  numerous   projects   aimed  at
                     developing next-generation  technologies that were expected
                     to  address   emerging   market   demands  in  defense  and
                     commercial markets.  The value assigned to these assets was
                     determined by identifying significant research projects for
                     which  technological  feasibility had not been established,
                     including  development,  engineering and testing activities
                     associated with the following areas: thermal imaging (night
                     vision);  lasers; avionics;  battle field management;  fire
                     control    systems;    remote    sensing;    airborne/space
                     photography; enhanced landing systems; and other classified
                     projects for the U.S. and Israeli governments.

                     The  nature  of  the  efforts  to  develop   the   acquired
                     in-process  technology  into  commercially  viable products
                     principally  relates  to the  completion  of all  planning,
                     designing,   prototyping,   high-volume   verification  and
                     testing activities that are necessary to establish that the
                     proposed  technologies  meet  their  design  specifications
                     including  functional,  technical and economic  performance
                     requirements.

                     In  making  its  purchase  price   allocation,   management
                     considered   present  value   calculations  of  income,  an
                     analysis   of   project   accomplishments   and   remaining
                     outstanding    items   and   an   assessment   of   overall
                     contributions  as well as project risks. The value assigned
                     to  purchased  in-process   technology  was  determined  by
                     estimating  the costs to develop  the  acquired  technology
                     into commercially viable products, estimating the resulting
                     net cash flows from the projects,  and  discounting the net
                     cash flows to their present value.  The revenue  projection
                     used to value the  in-process R&D was based on estimates of
                     relevant market sizes and growth  factors,  expected trends
                     in  technology,  and the nature and expected  timing of new
                     product  introductions  by the Company and its competitors.
                     The  resulting  net cash flows from such projects are based
                     on  management's  estimates  of  cost of  sales,  operating
                     expenses and income taxes from such projects.


                                      F-11
<PAGE>


                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1   -        GENERAL (CONT.)

               C.    (Cont.)

                     Aggregate  revenues for the  developmental  El-Op  products
                     were  estimated to grow at a compounded  annual growth rate
                     of  approximately  30 percent for the five years  following
                     introduction, assuming the successful completion and market
                     acceptance  of  the  major  R&D  programs.   The  estimated
                     revenues for the in-process  projects were expected to peak
                     within five to six years of acquisition and then decline as
                     other new products and  technologies  are expected to enter
                     the market.

                     The estimated costs of goods sold and operating expenses as
                     a  percentage  of  revenues  are  expected to be lower than
                     El-Op's on a stand-alone  basis primarily due to production
                     efficiencies  expected to be achieved through  economies of
                     scale of the  combined  operations.  As a  result  of these
                     savings,  the  combined  company  has  the  possibility  of
                     achieving slightly higher margins in future periods.

                     The rates  utilized to discount the net cash flows to their
                     present  value  were  based on  estimated  cost of  capital
                     calculations.  Due to the  nature of the  forecast  and the
                     risks    associated   with   the   projected   growth   and
                     profitability  of the  developmental  projects,  a discount
                     rate of 18 to 20 percent was considered appropriate for the
                     in-process  R&D.  These rates are higher than the Company's
                     overall  weighted  average  cost  of  capital  due  to  the
                     inherent    uncertainties    surrounding   the   successful
                     development  of the purchased  in-process  technology,  the
                     useful  life of such  technology  and  the  uncertainty  of
                     technological advances that are unknown at this time.

                     If  none  of the  acquired  R&D  projects  is  successfully
                     developed,  the sales  and  profitability  of the  combined
                     company may be adversely  affected in future  periods.  The
                     failure of any  particular  individual  project  in-process
                     would not likely impact the Company's financial  condition,
                     results of operations or the  attractiveness of the overall
                     El-Op  investment.  Financial  results  will be  subject to
                     uncertain  market  events and  risks,  which are beyond the
                     Company's control, such as trends in technology, government
                     spending,  market size and growth and product  introduction
                     or other actions by competitors.


                                      F-12
<PAGE>


                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1   -        GENERAL (CONT.)

              C.    (Cont).

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

                     The  proforma  information  reflects  the  results  of  the
                     Company's  operations  assuming that the merger had been in
                     effect  as of  January  1,  2000 and  under  the  following
                     assumptions:

                     1.   Goodwill and other intangible  assets arising from the
                          merger of approximately  $83,000, is amortized over an
                          average period of 17 years.

                     2.   Excess of cost over equity purchased allocated to real
                          estate assets of approximately  $25,000,  is amortized
                          over a period of 25 years.

                     3.   Deferred  income taxes of  approximately  $18,000 have
                          been  recorded in respect of the  differences  between
                          the allocated value of the  aforementioned  assets and
                          their tax basis.

                     4.   The  cost  attributed  to  purchased   in-process  R&D
                          projects,  in the amount of approximately  $40,000 has
                          been   charged   to   operations   immediately   as  a
                          non-recurring item and is not included in the proforma
                          consolidated results.

                     5.   Intercompany  balances and material  transactions have
                          been eliminated.


                                      F-13
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1   -        GENERAL (CONT.)

              C.    (Cont).

                     6.   Management  fees of  approximately  $3,000  per annum,
                          which  pursuant to the merger  agreement  would not be
                          paid in the future,  were  eliminated  in the proforma
                          statements.
<TABLE>
<CAPTION>

                                                                                  YEAR ENDED DECEMBER 31,
                                                                                 --------------------------
                                                                                      2000 (UNAUDITED)
<S>                                                                                      <C>
                          Revenues - proforma                                            $699,114
                                                                                         ========
                          Net loss as reported                                           $(20,531)
                          Adjustments:
                          Elimination of the charge to operations for
                          purchased in-process research and development                    40,000
                          Other adjustments, net                                           (2,570)
                                                                                         --------
                          Net income - proforma (1)(2)                                    $16,899
                                                                                         ========
                          Basic net earnings per share - proforma                           $0.45
                                                                                         ========
                          Diluted net earnings per share - proforma                         $0.44
                                                                                         ========
</TABLE>

                         (1)  The   proforma  net  income  for  the  year  ended
                              December 31, 2000 includes restructuring expenses,
                              net of taxes, in the amount of $16,800.

                         (2)  Included  amortization  of goodwill and  assembled
                              work force in the amount of  approximately  $1,100
                              which as of  January  1, 2002 are no longer  being
                              amortized.

              D.     In 2000,  EFW  acquired  the assets and the  activities  of
                     Honeywell  Inc.  relating to head-up  displays and tracking
                     systems  for  helmets in  consideration  for  $14,000.  The
                     excess  of the  purchase  price  over  the  fair  value  of
                     identified net tangible assets  acquired,  in the amount of
                     $11,100, was allocated to technology and other identifiable
                     intangible  assets ($9,300),  to be amortized over a period
                     of 15 years and to goodwill ($1,800).

                     Pro forma  information  in  accordance  with  statement  of
                     financial  accounting  standards  SFAS No. 141 has not been
                     provided,   since  the  revenues  and  net  income  of  the
                     Honeywell Inc. head-up display  tracking  business were not
                     material in relation to total consolidated revenues and net
                     loss.


                                      F-14
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1   -        GENERAL (CONT.)

               E.    In the third  quarter  of 2000,  the  Company  commenced  a
                     program of restructuring its business, improving efficiency
                     and  reducing  expenses.   The  program  consisted  of  the
                     consolidation   of  redundant   activities,   reduction  of
                     workforce,   elimination  of  excessive   inventories   and
                     equipment  and  other  related  actions.  The  program  was
                     accounted in  accordance  with EITF Issue 94-3,  "Liability
                     Recognition for Certain Employee  Termination  Benefits and
                     Other Costs to Exit an Activity (including Certain Costs in
                     a Restructuring)",  SAB-100,  "Restructuring and Impairment
                     Charges" and SFAS No. 121 "Accounting for the Impairment of
                     Long-Lived  Assets and for Long-Lived Assets to be Disposed
                     of".  Pursuant  to  the  program,   the  Company  wrote-off
                     inventories  in the amount of $10,300 and  equipment in the
                     amount of  $5,100.  The  equipment  will not be used in the
                     future by the Company as this  equipment is less  efficient
                     than other equipment held by the Company.

                     Through  December 31, 2001, the Company paid $3,500 as part
                     of its  restructuring  plan. The amount  includes  payments
                     made  to  consultants,   travel  and  other   out-of-pocket
                     expenses.

                      In  addition,  the  Company  accrued  and paid  $3,200 for
                     employee  severance  benefits.  The Company's plan included
                     termination   of  the   employment   of  a   total   of  61
                     manufacturing,  marketing and corporate  employees  both in
                     Israel and in the U.S.

               F.    In  2001,   the  Company   acquired  a  62.5%  interest  in
                     Aeroeletronica  - Industrial de Componentes  Avionicos S.A.
                     ("AEL"),  a Brazilian company located in Porto Alegre,  for
                     approximately  $3,450.  In July 2002, the Company  acquired
                     the remaining  37.5%  interest for an additional  $900. The
                     consideration paid includes  approximately $1,200 (in cash)
                     held  in  escrow,   pending  final  resolution  of  certain
                     liabilities and  contingencies of AEL to be resolved over a
                     period of five years following the acquisition.  The excess
                     of cost over equity purchased of  approximately  $6,700 was
                     allocated  to land  ($1,200)  and  identifiable  intangible
                     assets ($5,500), to be amortized over a period of 8 years.

                     AEL serves as a center  for the  production  and  logistics
                     support of defense electronics for programs in Brazil.


                                      F-15
<PAGE>


                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1   -        GENERAL (CONT.)

              F.     (CONT.)

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

                     Pro forma  information in accordance  with SFAS No. 141 has
                     not been provided, since the revenues and net income of AEL
                     were  not  material  in  relation  to  total   consolidated
                     revenues and net income .


               G.    In January 2002,  the Company  acquired from Elron Telesoft
                     Inc. and its subsidiaries ("Elron Telesoft") the assets and
                     the  activities  of the Defense  Systems  Division of Elron
                     Telesoft ("the Government  Division") in consideration  for
                     $5,700.  The  excess of the  purchase  price  over the fair
                     value of net  tangible  assets  acquired  in the  amount of
                     approximately  $5,100 was allocated to technology and other
                     intangible assets to be amortized over an average period of
                     3 years.

                     The   Government   Division   is  engaged   mainly  in  the
                     development   of   communication    systems,    information
                     technology  and image  intelligence  processing for defense
                     and military applications.

                     The results of the  Government  Division have been included
                     in the  consolidated  financial  statements  from the first
                     quarter of 2002.

                     pro forma  information in accordance  with SFAS No. 141 has
                     not been provided, since the revenues and net income of the
                     Government  Division were not material in relation to total
                     consolidated revenues and net income .

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES

               The  consolidated  financial  statements  have been  prepared  in
               accordance with generally accepted  accounting  principles in the
               United  States  ("US  GAAP").  As  applicable  to  the  financial
               statements  of the Company,  such  principles  are  substantially
               identical to accounting  principles generally accepted in Israel,
               except as described in Note 26.



                                      F-16
<PAGE>


                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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


NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               A.    USE OF ESTIMATES

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


               B.    FINANCIAL STATEMENTS IN U.S. DOLLARS

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

                     Transactions  and balances  originally  denominated in U.S.
                     dollars   are   presented   at  their   original   amounts.
                     Transaction  and  balances  in other  currencies  have been
                     remeasured into U.S.  dollars in accordance with principles
                     set forth in SFAS No. 52.

                     Accordingly items have been remeasured as follows:

                     Monetary  items - at the  exchange  rate in  effect  on the
                     balance sheet date.

                     Nonmonetary items - at historical exchange rates.

                     Revenue and expense items - at the exchange rates in effect
                     as of the date of  recognition  of those  items  (excluding
                     depreciation  and other items  deriving  from  non-monetary
                     items).

                     All  exchange  gain  and  losses  from  the   remeasurement
                     mentioned   above  are   reflected  in  the   statement  of
                     operations in financial income or expenses.

                     Balances  linked  to the  Consumer  Price  Index in  Israel
                     ("CPI") are stated using the relevant published index.


                                      F-17
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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


NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               C.    PRINCIPLES OF CONSOLIDATION

                     The consolidated  financial statements include the accounts
                     of the Company and its subsidiaries.

                     The consolidated  subsidiaries include El-op, EFW and other
                     Israeli and non - Israeli subsidiaries.

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

              D.     CASH AND CASH EQUIVALENTS

                     All short-term  highly liquid  investments with an original
                     maturity  of  three  months  or less  are  considered  cash
                     equivalents.

              E.      SHORT-TERM BANK DEPOSITS

                     Short-term  bank deposits are disposits with  maturities of
                     more  than  three  months  but  less  than  one  year.  The
                     short-term bank deposits are presented at their cost.

              F.     INVENTORIES

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

                     Cost is determined as follows:
                     -  Raw materials, parts and supplies using the average cost
                        method.
                     -  Costs on long-term contracts represent recoverable costs
                        incurred for production,  allocable  operating  overhead
                        and, where appropriate, research and development costs.

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


                                      F-18
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               G.    INVESTMENT IN AFFILIATED  COMPANIES,  PARTNERSHIP
                     AND OTHER COMPANIES

                     Investments in non-marketable  shares of companies in which
                     the Group  holds  less than 20% and the Group does not have
                     the  ability  to  exercise   significant   influence   over
                     operating  and  financial  policies  of the  companies  are
                     recorded at the lower of cost or estimated fair value.

                     Investments  in companies  and  partnership  over which the
                     Group  can  exercise  significant   influence   (generally,
                     entities  in which the Group  holds  between 20% and 50% of
                     voting  rights) are  presented  using the equity  method of
                     accounting.  The Group generally  discontinues applying the
                     equity method when its investment  (including  advances and
                     loans)  is  reduced  to  zero  and  it has  not  guaranteed
                     obligations  of the  affiliate  or  otherwise  committed to
                     provide further financial support to the affiliate.

                     In  certain  investments,  the Group  applies  EITF  99-10,
                     "Percentage  Used to Determine  the Amount of Equity Method
                     Losses",  according to which the Company  recognizes equity
                     method  losses  based  on  the   ownership   level  of  the
                     particular investee security or loan held by the company to
                     which the equity method losses are being applied.

                     Management evaluates investments in affiliates, partnership
                     and other  companies  for evidence of other than  temporary
                     declines in value. When relevant factors indicate a loss in
                     value that is other than  temporary,  the Company records a
                     provision for the decline in value.

              H.     LONG-TERM TRADE RECEIVABLES

                     Long-term   trade   receivables   from   extended   payment
                     agreements  are  recorded   initially  at  their  estimated
                     present values  (determined  based on the original rates of
                     interest).   Imputed   interest  is  recognized  using  the
                     effective interest method and is included as a component of
                     interest income in the accompanying statements.

              I.     LONG-TERM BANK DEPOSITS

                     Bank  deposits  with  maturities  of more than one year are
                     presented at cost including accumulated interest.


                                      F-19
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              J.     PROPERTY, PLANT AND EQUIPMENT, NET

                     Property,  plant and equipment  are stated at cost,  net of
                     accumulated   depreciation  and  investment   grants.   For
                     equipment  produced for the Group's own use,  cost includes
                     materials,  labor  and  overhead,  but not in excess of the
                     fair  value  of  replacement  equipment.   Depreciation  is
                     calculated by the  straight-line  method over the estimated
                     useful life of the assets at the following annual rates:
                                                               %
                                                            -------
                     Buildings                               2 - 4  (mainly  4%)
                     Instruments,  machinery  and equipment 10 - 33
                     Office furniture and other              6 - 33
                     Motor vehicles                         15 - 33 (mainly 15%)

                     Land rights and leasehold  improvements  - over the term of
                     the lease.

                K.   IMPAIRMENT OF LONG-LIVED ASSETS

                     The Company's  long-lived  assets and certain  identifiable
                     intangible assets are reviewed for impairment in accordance
                     with  SFAS  No.  144  "Accounting  for  the  impairment  or
                     Disposal of Long-Lived  Assets"  whenever events or changes
                     in  circumstances  indicate that the carrying  amount of an
                     asset may not be recoverable.  Recoverability  of assets to
                     be  held  and  used  is  measured  by a  comparison  of the
                     carrying amount of an asset to the future undiscounted cash
                     flows expected to be generated by the asset. If an asset is
                     considered to be impaired,  the impairment to be recognized
                     is measured by the amount by which the  carrying  amount of
                     the assets exceed its fair value.

                L.   OTHER ASSETS

                     Other  assets   include  mainly   goodwill,   know-how  and
                     trademarks  acquired  in  connection  with the  purchase of
                     subsidiaries  and  activities.  Know-how and trademarks are
                     amortized  over  their  estimated  useful  lives  using the
                     straight-line method.

                     Goodwill represents excess of the cost of acquired entities
                     over the net of the amounts assigned to assets acquired and
                     liabilities assumed.  Goodwill that arose from acquisitions
                     prior to July 1, 2001,  was  amortized  until  December 31,
                     2001, on a  straight-line  basis over 10 - 20 years.  Under
                     SFAS No. 142, "Goodwill and Other Intangible Assets",  such
                     goodwill  shall no  longer  be  amortized  effective  as of
                     January 1, 2002.


                                      F-20
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                     SFAS No. 142 requires  goodwill to be tested for impairment
                     on adoption  and at least  annually  thereafter  or between
                     annual  tests in certain  circumstances,  and written  down
                     when  impaired,  rather  than being  amortized  as previous
                     accounting  standards  required.  Goodwill  attributable to
                     each of the  reporting  units is tested for  impairment  by
                     comparing  the fair value of each  reporting  unit with its
                     carrying  value.  If the  carrying  value  exceeds the fair
                     value, impairment is measured by comparing the implied fair
                     value of goodwill to its  carrying  value.  Fair value of a
                     reporting unit is determined  using  discounted cash flows.
                     Significant  estimates  used  in  the  methodology  include
                     estimates  of future cash  flows,  further  short-term  and
                     long-term growth rates and weighted average cost of capital
                     for each of the reportable units.

                     The  adoption  of SFAS  142 did not  affect  the  financial
                     position  and  results  of  operations  of the  Group as of
                     January 1, 2002.

               M.    SEVERANCE PAY

                     Under Israeli law and  employment  agreements,  the Group's
                     companies in Israel are required to make severance payments
                     and, in certain  situations,  pay  pensions  to  terminated
                     employees.  The  calculation  is  based  on the  employee's
                     latest  salary  and  the  period  of  his  employment.  The
                     companies'  obligation  for  severance  pay and  pension is
                     provided  by monthly  deposits  with  insurance  companies,
                     pension funds and by an accrual.

                     The  value  of  severance  pay  funds is  presented  in the
                     balance sheet and includes  profits  accumulated to balance
                     sheet date.  The amounts  deposited  may be withdrawn  only
                     after  fulfillment of the  obligations  pursuant to Israeli
                     severance  pay law or labor  agreements.  The  value of the
                     deposited funds are based on the cash surrendered  value of
                     these funds and include immaterial profits.

                     Severance  pay  expenses  for the years ended  December 31,
                     2000,  2001 and 2002,  amounted  to  approximately  $5,591,
                     $8,097 and $10,138, respectively.


                                      F-21
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               N.    REVENUE RECOGNITION

                     The Company  generates  revenues from  long-term  contracts
                     involving   the  design,   development,   manufacture   and
                     integration  of defense  systems and products and providing
                     support  and  services  for  such  systems  and   products.
                     Revenues from long-term  contracts are recognized  based on
                     SOP 81-1  "Accounting for Performance of  Construction-Type
                     and Certain  Production - Type Contracts" on the percentage
                     of completion method.

                     Sales and anticipated  profit under  long-term  fixed-price
                     production  type  contracts are recorded on a percentage of
                     completion basis,  generally using units of delivery as the
                     measurement  basis  for  effort   accomplished.   Estimated
                     contract  profit is included in earnings in  proportion  to
                     recorded sales.

                     Sales under certain long-term  fixed-price contracts which,
                     among  other  things   require  a  significant   amount  of
                     development effort in relation to total contract value, are
                     recorded using the cost-to-cost  method of accounting where
                     sales and profit are  recorded  based on the ratio of costs
                     incurred to  estimated  total costs at  completion  but not
                     before the Company achieves certain milestones.

                     Sales under cost-reimbursement-type  contracts are recorded
                     as costs are  incurred.  Applicable  estimated  profits are
                     included in earnings in the proportion  that incurred costs
                     bear to total estimated costs.

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

                     Amounts  representing  contract  change  orders,  claims or
                     other  items are  included  in sales  only when they can be
                     reliably  estimated and realization is probable.  Penalties
                     and awards  applicable  to  performance  on  contracts  are
                     considered  in estimating  sales and profit rates,  and are
                     recorded  when there is  sufficient  information  to assess
                     anticipated contract performance.


                                      F-22
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                     Anticipated  losses on  contracts  are  charged to earnings
                     when identified.

                     The Company  estimates the costs that may be incurred under
                     its basic warranty and records a liability in the amount of
                     such costs at the time revenue is recognized.  The specific
                     terms and  conditions of those  warranties  vary  depending
                     upon the product  sold and the country in which the Company
                     does business.  Factors that affect the Company's  warranty
                     liability   include   the   number  of   delivered   units,
                     engineering  estimates  and  anticipated  rates of warranty
                     claims. The Company  periodically  assesses the adequacy of
                     its recorded  warranty  liability and adjusts the amount as
                     necessary.

               O.    RESEARCH AND DEVELOPMENT COSTS

                     Research and development costs, net of participations,  are
                     charged to operations as incurred.

                     Group sponsored  research and  development  costs primarily
                     include  independent  research and  development and bid and
                     proposal efforts.

                     Under certain  arrangements  in which a customer  shares in
                     product  development  costs,  the  Group's  portion of such
                     unreimbursed     costs    is    expensed    as    incurred.
                     Customer-sponsored  research and development costs incurred
                     pursuant to contracts are accounted for as contract costs.

                     Certain group  companies in Israel receive  royalty-bearing
                     grants from the Government of Israel and from other sources
                     for  the   purpose  of  funding   approved   research   and
                     development  projects.  These grants are  recognized at the
                     time the  applicable  company is entitled to such grants on
                     the  basis of the costs  incurred  and are  presented  as a
                     deduction from research and development costs.

               P.     INCOME TAXES

                     The Group accounts for income taxes in accordance with SFAS
                     No. 109,  "Accounting  for Income  Taxes".  This  Statement
                     prescribes the use of the liability method whereby deferred
                     tax assets and liability  account  balances are  determined
                     based on differences  between  financial  reporting and tax
                     bases of assets and  liabilities and are measured using the
                     enacted  tax rates and laws that will be in effect when the
                     differences  are expected to reverse.  The Group provides a
                     valuation allowance,  if necessary,  to reduce deferred tax
                     assets to their estimated realizable value.


                                      F-23
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               Q.    CONCENTRATION OF CREDIT RISKS

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

                     The  majority of the Group's cash and cash  equivalents  is
                     invested in dollar  instruments  with major banks in Israel
                     and in the U.S.  Management  believes  that  the  financial
                     institutions   that   hold  the   Group   investments   are
                     financially  sound and  accordingly,  minimal  credit  risk
                     exists with respect to these investments.

                     The Group's trade  receivables  are derived  primarily from
                     sales to large and solid customers and governments  located
                     mainly in Israel,  the United States and Europe.  The Group
                     performs ongoing credit evaluations of its customers and to
                     date, has not  experienced  any unexpected  material losses
                     except for a one time loss in 2002 of approximately  $4,600
                     due to the insolvency of one of the Group's  customers.  An
                     allowance for doubtful  accounts is determined with respect
                     to  those  amounts  that the  Group  has  determined  to be
                     doubtful of collection and by a general reserve.

               R.     DERIVATIVE FINANCIAL INSTRUMENTS

                     The Group  accounts for  derivatives  and hedging  based on
                     SFAS No. 133,  "Accounting  for Derivative  Instruments and
                     Hedging  Activities".  SFAS No. 133 requires the Company to
                     recognize  all  derivatives  on the  balance  sheet at fair
                     value.  If the  derivative  meets the definition of a hedge
                     and is so designated, depending on the nature of the hedge,
                     changes in the fair  value of  derivatives  will  either be
                     offset  against  the  change  in fair  value of the  hedged
                     assets,  liabilities,  or firm commitments through earnings
                     or  recognized  in other  comprehensive  income  until  the
                     hedged item is  recognized  in  earnings.  The  ineffective
                     portion  of  a   derivative's   change  in  fair  value  is
                     recognized in earnings.

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


                                      F-24
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                     The Company enters into forward exchange contracts to hedge
                     certain firm commitments denominated in foreign currencies.
                     The  purpose  of the  Company's  foreign  currency  hedging
                     activities  is to protect  the  Company  from risk that the
                     eventual  dollar  cash flows from the sale of  products  to
                     international  customers  will  be  adversely  affected  by
                     changes in the exchange rates.

                     In addition, in order to ensure the dollar value of certain
                     assets and  liabilities,  the Group has enters into forward
                     exchange contracts.  As of December 31, 2002, the Group had
                     contracts with notional value of  approximately  $21,400 to
                     purchase  and  sell  foreign  currencies.  These  contracts
                     mature in 2003.

                     The fair  value of the  foreign  exchange  contracts  as of
                     December 31 , 2002 amounted to $1,178.

               S.    STOCK-BASED COMPENSATION

                     The  Company has  elected to follow  Accounting  Principles
                     Board  Opinion  No.  25 ("APB  25")  "Accounting  for Stock
                     Issued to Employees" and FASB  Interpretation  No. 44 ("FIN
                     44") "Accounting for Certain  Transactions  Involving Stock
                     Compensation"  in accounting  for its employee stock option
                     plans.  Under APB 25,  compensation  expense is  recognized
                     based on the intrinsic  value method where by  compensation
                     expense is equals to the excess if any of the quoted market
                     price of the stock at the grant  date of the award or other
                     measurement  date,  over the amount an employee must pay to
                     acquire the stock.  The Company  recognize the expense over
                     the vesting period of the award.

                     In respect of phantom  share  options the  Company  applies
                     compensation accounting under SFAS No. 123, "Accounting for
                     Stock-Based  Compensation"  as amended by SFAS No. 148, the
                     Company  is  required  to  disclose  pro forma  information
                     regarding stock based employee compensation cost net income
                     (loss) and basic and diluted  net income  (loss) per share,
                     as if the  Company had  accounted  for its  employee  share
                     options  under the fair value  method of SFAS 123. The fair
                     value for these  options  was  estimated  at the grant date
                     using a Black-Scholes


                                      F-25
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                     option  pricing model with the following  weighted  average
                     assumptions  for 2000,  2001 and 2002:  risk-free  interest
                     rates of 6%, 2% and 1.34% respectively,  dividend yields of
                     2.0%,  2.03% and 1.99%  respectively,  volatility of 49.5%,
                     33.8%  and  21.2%  respectively,  and  a  weighted  average
                     expected life of the options of 6 years.

                       Pro forma information under SFAS 123 is as follows:

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                      ---------------------------------------
                                                                        2002            2001            2000
                                                                      -------         --------       ---------
<S>                                                                   <C>             <C>            <C>
           Net income (loss) as reported                              $45,113         $ 40,796       $ (20,531)

           Stock based compensation as reported                          (926)           8,512             155
           Stock based compensation under
            SFAS 123                                                   (3,695)          (3,665)           (730)
                                                                      -------         --------       ---------
           Pro forma net income (loss)                                $40,492         $ 45,643       $ (21,106)
                                                                      =======         ========       =========
           Basic net income (loss) per share as
            reported                                                   $ 1.17           $ 1.07        $ (0.65)
                                                                      =======         ========       =========

           Pro forma basic net income (loss) per share                 $ 1.05           $ 1.20        $ (0.67)
                                                                      =======         ========       =========
           Diluted net income (loss) per share as
           reported                                                    $ 1.13           $ 1.04         $(0.65)
                                                                      =======         ========       =========

           Pro forma diluted net income (loss) per share               $ 1.02           $ 1.16         $(0.67)
                                                                      =======         ========       =========

</TABLE>


                                      F-26
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              T.      FAIR VALUE OF FINANCIAL INSTRUMENTS

                     The carrying  amount reported in the balance sheet for cash
                     and   cash   equivalents,    short-term   deposits,   trade
                     receivables,  other  receivables,  short-term  bank  loans,
                     short-term  trade payables and other  payables  approximate
                     their fair values due to the short-term  maturities of such
                     instruments.

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

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

                     It was not  practicable  to estimate  the fair value of the
                     Company's  investments  in shares of non-public  affiliates
                     and other Companies  because of the lack of a quoted market
                     price and the inability to obtain valuation of each Company
                     without incurring  excessive costs. The carrying amounts of
                     these Companies were $31,492 and $33,051 as of December 31,
                     2001 and 2002, respectively and represent the original cost
                     and,  in the  case of  affiliates,  include  the  Company's
                     equity in the  earnings or losses of the  affiliates  since
                     the dates of acquisition.

               U.    BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE

                     Basic net  earnings  (loss) per share is computed  based on
                     the weighted average number of ordinary shares  outstanding
                     during each year.  Diluted net earning  (loss) per share is
                     computed  based on the weighted  average number of ordinary
                     shares   outstanding   during  each  year,   plus  dilutive
                     potential ordinary shares considered outstanding during the
                     year.  Outstanding  stock  options  are  excluded  from the
                     calculation  of the diluted net earning (loss) per ordinary
                     share when such  securities  are  anti-dilutive.  The total
                     weighted   average   number  of  shares   related   to  the
                     outstanding   options  excluded  from  the  calculation  of
                     diluted  net loss  per  share  was 647 for the  year  ended
                     December 31, 2000 (2001 and 2002 - none).


                                      F-27
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               V.    IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

                     In June 2002, the FASB issued SFAS No. 146, "Accounting for
                     Costs Associated with Exit or Disposal  Activities,"  which
                     addresses  significant  issue  regarding  the  recognition,
                     measurement and reporting of costs associated with exit and
                     disposal activities,  including  restructuring  activities.
                     SFAS No. 146 requires  that costs  associated  with exit or
                     disposal  activities be  recognized  when they are incurred
                     rather  than  at the  date  of a  commitment  to an exit or
                     disposal  plan.  SFAS No. 146 is effective  for all exit or
                     disposal activities initiated after December 31, 2002. SFAS
                     No.  146 also  requires  liabilities  accrued in respect of
                     such cost to be measured at fair  value.  The Company  does
                     not expect the  adoption of SFAS No. 146 to have a material
                     impact on its results of operations or financial position.

                     In November 2002, the FASB issued FASB  Interpretation  No.
                     45, "Guarantor's Accounting and Disclosure Requirements for
                     Guarantees,  Including Indirect  Guarantees of Indebtedness
                     of Others,  an interpretation of FASB Statements No. 5, 57,
                     and 107 and Rescission of FASB  Interpretation No. 34 ("FIN
                     No.45").  FIN No. 45  elaborates on the  disclosures  to be
                     made by a guarantor  in its  interim  and annual  financial
                     statements about its obligations  under certain  guarantees
                     that it has issued.  It also  clarifies that a guarantor is
                     required to recognize,  at the inception of a guarantee,  a
                     liability for the fair value of the  obligation  undertaken
                     in issuing the  guarantee.  FIN No. 45 does not prescribe a
                     specific   approach   for   subsequently    measuring   the
                     guarantor's  recognized  liability  over  the  term  of the
                     related guarantee.  It also  incorporates,  without change,
                     the guidance in FASB Interpretation  No.34,  "Disclosure of
                     Indirect  Guarantees of Indebtedness  of Others",  which is
                     being superseded.  The disclosure  provisions of FIN No. 45
                     are effective for financial statements of interim or annual
                     periods  that  end  after   December  15,  2002,   and  the
                     provisions  for initial  recognition  and  measurement  are
                     effective on a prospective  basis for  guarantees  that are
                     issued or modified after December 31, 2002, irrespective of
                     a  guarantor's  year-end.  The Company  does not expect the
                     adoption  of FIN No.  45 to have a  material  impact on its
                     results of operations or financial position.


                                      F-28
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 2   -        SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              W.     RECLASSIFICATIONS

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

NOTE 3   -        TRADE RECEIVABLES, NET

              A.       Trade receivables
                                                            DECEMBER 31,
                                                     --------------------------
                                                        2002             2001
                                                     ---------         --------
              Open accounts (*)                      $177,465          $175,275
              Unbilled receivables                     53,670            69,752
              Less - allowance for doubtful accounts   (3,411)           (3,200)
                                                     --------          --------
                                                     $227,724          $241,827
                                                     ========          ========

              (*)      Includes affiliated companies   $9,647           $14,257
                                                     ========          ========

              B.     Long-term  trade  receivables  include  amounts  due to the
                     Company  in   connection   with  certain   contracts.   The
                     receivables are guaranteed by governmental  authorities and
                     their   majority    portion   is   insured   by   financial
                     institutions.   The  receivables  are  denominated  in  U.S
                     dollars,  payable over a period of one and a half years and
                     bear intrest rates of Libor + 1.5%.

NOTE 4   -        OTHER RECEIVABLES AND PREPAID EXPENSES

                                                            DECEMBER 31,
                                                     --------------------------
                                                        2002             2001
                                                     ---------         --------
              Prepaid expenses                        $12,244          $ 13,445
              Government departments                    5,915             4,937
              Employees                                 1,029               710
              Deferred income taxes                    11,675            11,631
              Other                                     3,513             5,486
                                                     --------          --------
                                                     $ 34,376          $ 36,209
                                                     ========          ========


                                      F-29
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 5   -        INVENTORIES, NET OF ADVANCES

                                                            DECEMBER 31,
                                                       ------------------------
                                                        2002             2001
                                                       --------        --------
              Cost of long-term contracts in progress  $205,318        $155,712
              Raw materials                              75,579          70,133
              Advances to suppliers and subcontractors   25,047          30,955
                                                       --------        --------
                                                        305,944         256,800
              Less -
                Cost of contracts in progress deducted
              from customer advances
                                                         10,658          10,961
                                                       --------        --------
                                                        295,286         245,839
              Less -
                Advances received from customers         67,624          49,969
                Provision for losses                      4,818          10,780
                                                       --------        --------
                                                       $222,844        $185,090
                                                       ========        ========

              (*)  The Company has  transferred  legal title of  inventories  to
                   certain customers as collateral for advances received.

NOTE 6   -  INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES

A.       INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD

                                                              DECEMBER 31,
                                                        ----------------------
                                                          2002           2001
                                                        --------      --------
                    SCD (1)                             $ 15,713      $ 13,036
                    VSI (2)                                3,893         2,030
                    Red C (3)                                  -         2,549
                    Opgal (4)                              2,028         1,894
                    Others (5)                               313            74
                                                        --------      --------
                                                        $ 21,947      $ 19,583
                                                        ========      ========

              (1)  Semi Conductor  Devices ("SCD"),  a partnership,  held 50% by
                   the Company and 50% by Rafael Armaments Development Authority
                   Ltd.  ("Rafael").  SCD  is  engaged  in the  development  and
                   production of various thermal detectors and laser diodes.


                                      F-30
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 6  -     INVESTMENTS  IN  AFFILIATED   COMPANIES,   PARTNERSHIP  AND  OTHER
              COMPANIES (CONT.)

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


                 (2)   Vision  Systems  International  LLC ("VSI")  based in San
                       Jose,  California is a limited  liability company that is
                       held  50% by EFW.  VSI  operates  in the  area of  helmet
                       mounted  display  systems  for fixed  wing  military  and
                       paramilitary aircraft.

                 (3)   Red C Optical  Networks Inc.  ("Red C") is engaged in the
                       multi-focal optic communications sector and is held 36.5%
                       by El-Op. Red C designs, develops and manufacture optical
                       amplifiers  for  dense  wave-length  multiplexing  (DWDM)
                       optical networks for  telecommunication  renders. In 2002
                       the investment in Red C was written off.

                 (4)   Opgal Optronics  Industries ("Opgal") Ltd., is an Israeli
                       company  owned  50.1%  by  the  Company  and  49.9%  by a
                       subsidiary of Rafael.  Opgal focuses mainly on commercial
                       applications   of  thermal   imaging  and   electro-optic
                       technologies.  The Company  jointly  controls  Opgal with
                       Rafael,  and therefore  Opgal is not  consolidated in the
                       Company's financial statements.

                 (5)   Mediguide Inc.  ("Mediguide") and its Israeli subsidiary,
                       Mediguide  Ltd.,  were  established in 2000 as a spin-off
                       from the Company, which holds the majority of Mediguide's
                       ordinary  shares.  In 2001  and  2002,  Mediguide  issued
                       preferred shares to other investors in consideration  for
                       approximately  $6,000  based on a pre-money  valuation of
                       $14,000 - $17,000. The preferred shares entitle the other
                       investors to preference rights in any liquidation  event.
                       Therefore,  the  Company  did not  record  any  gain as a
                       result  of  the  above   transaction.   In  addition  the
                       preferred   shares   entitle  their  holders  to  certain
                       participating  rights.  Accordingly based on the guidance
                       in EITF  96-16,  the  Company  ceased  consolidating  its
                       investment in Mediguide  and accounts for the  investment
                       in Mediguide under the equity method of accounting.

                 (6)   See Note 16(E) for guarantees.



                                      F-31
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 6   -   INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
             COMPANIES (CONT.)

             B.   INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE COST METHOD

                                                              DECEMBER 31,
                                                        ----------------------
                                                          2002           2001
                                                        --------      --------
                       Sultam (1)                        $3,500        $3,500
                       ISI (2)                            7,230         7,230
                       Other                                374         1,179
                                                        --------      --------
                                                        $11,104       $11,909
                                                        ========      ========

               (1)    Sultam Systems Ltd.  ("Sultam"),  held 10% by the Company,
                      is  engaged  in  the  development  and   manufacturing  of
                      military systems in the artillery sector.

               (2)    ImageSat  International  N.V. ("ISI"),  held 14% (10% on a
                      fully  diluted  basis) by the  Company,  is engaged in the
                      operation  of   satellite   photography   formations   and
                      commercial  delivery of  satellite  photography  for civil
                      purposes.

NOTE 7   -        LONG -TERM BANK DEPOSITS AND LOAN

                                                              DECEMBER 31,
                                                        ----------------------
                                                          2002           2001
                                                        --------      --------
             Deposits with bank for loans granted to
               employees (*)                             $2,037        $2,238
             Other deposits with bank                       935         1,195
             Long-term loan                                 714             -
                                                        --------      --------
                                                         $3,686        $3,433
                                                        ========      ========

              (*)    The  deposits  are linked to the Israeli  CPI,  bear annual
                     interest of 4% and are presented net of current  maturities
                     of $680 (2001 - $746).


                                      F-32
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

              NOTE 8   -   PROPERTY, PLANT AND EQUIPMENT, NET

                                                              DECEMBER 31,
                                                        ----------------------
                                                          2002           2001
                                                        --------      --------
            Cost (1):
              Land, buildings and
               leasehold improvements (2)               $127,932       $114,690
              Instruments, machinery
               and equipment (3)                         167,105        145,114
               Office furniture and other                 24,790         22,093
               Motor vehicles                             24,393         19,715
                                                        ---------      ---------
                                                         344,220        301,612
            Accumulated depreciation                    (141,259)      (116,890)
                                                        ---------      ---------
            Depreciated cost                            $202,961       $184,722
                                                        =========      =========

              Depreciation  expenses for the years ended December 31, 2000, 2001
              and 2002 amounted to $24,177, $24,517 and $26,525 respectively.

               (1)   Net of investment  grants received (mainly for instruments,
                     machinery and  equipment)  in the amounts of  approximately
                     $38,300  and  $38,420  as of  December  31,  2001 and 2002,
                     respectively.  Cost includes  assets fully  depreciated and
                     still in use in the amount of  $124,000  and of $134,000 as
                     of December 31, 2001 and 2002, respectively.

               (2)   Includes,  rights in  approximately  9,225 square meters of
                     land in,  Tirat  Hacarmel  Israel,  of which  approximately
                     2,300 square meters are owned while the  remaining  land is
                     leased from the Israel Land Administration  until the years
                     2014  to  2024  with an  option  to  renew  the  lease  for
                     additional  periods up to 49 years. The Company's rights in
                     the land have not yet been registered in its name.

                     Includes,  rights in approximately  10,633 square meters of
                     land in Rehovot, Israel. The land is leased from the Israel
                     Land  Administration  until the year of 2043 with an option
                     to renew the lease for  additional  periods up to 49 years.
                     The  Company's  rights  in  the  land  have  not  yet  been
                     registered in its name.

               (3)   Includes equipment produced by the Group for its own use in
                     the amount of $4,913 and $5,517 as of December 31, 2001 and
                     2002, respectively.

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


                                      F-33
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 9  -                  OTHER ASSETS, NET

              A.
<TABLE>
<CAPTION>
                                                        WEIGHTED-AVERAGE
                                                        NUMBER OF YEARS         DECEMBER 31,
                                                                             ---------------------
                                                                              2002          2001
                                                        ----------------     -------       --------
<S>                                                           <C>            <C>           <C>
                 Original cost:
                   Know-how (1)                               12.5                         $74,716
                                                                             $81,019
                   Trade marks (2)                             17              8,000         8,000
                   Goodwill and assembled work-force (3)                      37,578        36,983
                                                                             126,597       119,699

                 Accumulated amortization:
                   Know-how                                                   14,666         8,704
                   Trade marks                                                 1,125           675
                   Goodwill and assembled work-force                          5,037          5,037
                                                                             -------       --------
                                                                              20,828        14,416
                                                                             -------       --------
                 Amortized cost                                             $105,769      $105,283
                                                                            ========      =========

</TABLE>

                   (1)   Includes  mainly  know-how  acquired in the merger with
                         El-Op ($45,000),  know-how  acquired in the acquisition
                         of  AEL  and  the  Government  Division  ($10,600)  and
                         intangible assets acquired from Honeywell Inc. ($9,300)
                         (see Notes 1C, 1D, 1F and 1G).

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

                   (3)   Includes  mainly  intangible  assets  acquired  in  the
                         merger  with  El-Op  ($34,200)  and  intangible  assets
                         acquires from Honeywell Inc. ($1,800). Until January 1,
                         2002, goodwill and assembled  work-force were amortized
                         at an annual rate of 5% - 10%.

              B.      Amortization  expenses  amounted  to  $5,401,  $8,348  and
                      $6,412 for the years ended  December  31,  2000,  2001 and
                      2002, respectively.

              C.     The annual  amortization  expense  relating to  intangibles
                     existing as of December 31, 2002 for each of the five years
                     in the period  ending  December 31, 2007 is estimated to be
                     approximately $7,000.


                                      F-34
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 9  -         OTHER ASSETS, NET (CONT.)

              The following  information  is presented to reflect net income and
              earnings  per share  for all prior  periods  adjusted  to  exclude
              amortization of goodwill.
                                                              YEAR ENDED
                                                             DECEMBER 31,
                                                        ---------------------
                                                          2001          2000
                                                        -------      --------
             Reported net income (loss)                 $40,796      $(20,531)
             Goodwill amortization                        2,760         2,012
                                                        -------      --------
             Adjusted net income (loss)                 $43,556      $(18,519)
                                                        =======      ========

             Earnings per share
             Reported basic earnings (loss) per share   $  1.07      $  (0.65)
             Goodwill amortization                         0.08          0.06
                                                        -------      --------
             Adjusted basic earnings per share          $  1.15      $  (0.59)
                                                        -------      --------

             Reported diluted earnings (loss) per share $  1.04      $  (0.65)
             Goodwill amortization                         0.07          0.06
                                                        -------      --------
             Adjusted diluted earnings (loss) per share $  1.11         (0.59)
                                                        =======      ========


NOTE 10  -        SHORT-TERM BANK CREDIT AND LOANS

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                    --------------------------------------------
                                                      2002          2001      2002         2001
                                                    --------      -------   -------      -------
                                                        INTEREST RATE %
                                                    ---------------------
<S>                                                 <C>          <C>        <C>          <C>
              Short-term bank loans:
                In U.S dollars                      3 - 5        2.5 - 3    $12,683      $12,922
                In NIS unlinked                         -        4.7 - 8          -       13,273
                                                                            -------      -------
                                                                             12,683       26,195
                                                                            -------      -------
              Short-term bank credit:
                In NIS unlinked                     2.8 - 10.9   8            5,241        1,869
                In U.S dollars                      3.2 -  3.6   2 - 2.5      6,378       15,967
                                                                            -------      -------
                                                                             11,619       17,836
                                                                            -------      -------
              Current maturities of long-term loans                           6,613        2,863
                                                                            -------      -------
                                                                            $30,915      $46,894
                                                                            =======      =======
</TABLE>


                                      F-35
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 11  -   OTHER ACCOUNTS PAYABLES AND ACCRUED EXEPNSES
                                                              DECEMBER 31,
                                                        ------------------------
                                                           2002          2001
                                                        ---------      ---------

              Payroll and related expenses              $ 27,912       $ 25,736
              Provision for vacation pay                  20,492         18,380
              Government departments                      22,443         28,750
              Provision for warranty                      26,641         22,723
              Cost provisions and other                   45,038         39,797
                                                        ---------      ---------
                                                        $142,526       $135,386
                                                        =========      =========


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

                                                              DECEMBER 31,
                                                        ------------------------
                                                           2002          2001
                                                        ---------      ---------

               Advances received                        $227,111       $184,112
               Less -
                 Advances presented under long-term
                    liabilities                           40,411         29,840
                 Advances deducted from inventories       67,624         49,969
                                                        ---------      ---------
                                                         119,076        104,303
               Less -
                 Costs of contracts in progress           10,658         10,961
                                                        ---------      ---------
                                                        $108,418        $93,342
                                                        =========      =========


                                      F-36
<PAGE>

                               ELBIT SYSTEMS LTD.

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

NOTE 13  -        LONG-TERM LOANS

<TABLE>
<CAPTION>
                                                                                                      DECEMBER 31,
                                                            INTEREST          YEARS OF             ---------------------
                                            LINKAGE            %              MATURITY              2002          2001
                                         -----------        ---------        -----------           -------       -------
              <S>                        <C>                <C>              <C>                   <C>           <C>
              Banks                      U.S dollars        Libor +
                                                            0.5%-5%          2003 - 2007           $67,206       $70,719

              Banks                      NIS-unlinked       Israeli
                                                            Prime            2003 - 2036             3,383         1,346
              Office of chief            NIS-linked to
                 scientist               the Israeli-CPI    4%               2003- 2006              9,197             -
                                                                                                   -------       -------
                                                                                                    79,786        72,065
              Less-current maturities                                                                6,613         2,863
                                                                                                   -------       -------
                                                                                                   $73,173       $69,202
                                                                                                   =======       =======

</TABLE>

              The Libor rate as of December 31, 2002 was 1.34%.

              The Israeli Prime rate as of December 31, 2002 was 10.5%

              The  maturities  of these  loans  after  December  31, 2002 are as
              follows:

              2003 - current maturities                           $ 6,613
              2004                                                 54,278
              2005                                                  4,499
              2006                                                  4,506
              2007                                                  7,062
              2008 and thereafter                                   2,828
                                                                  -------
                                                                  $79,786
                                                                  =======

               In connection with bank credits and loans,  including performance
               guarantees  issued by banks and bank guarantees  securing certain
               advances from customers, the Company and certain subsidiaries are
               obligated  to meet certain loan  covenants.  Management  believes
               that the  Company and the  subsidiaries  meet the  conditions  of
               these covenants as of balance sheet date.

NOTE 14  -        BENEFIT PLANS

               Retirement Benefits:

               Subsidiaries in the U.S. sponsor defined benefit retirement plans
               ("Plans")   which   are   a   noncontributory   plans,   covering
               substantially  all of the U.S.  employees,  that provide  monthly
               pension to eligible  employees upon retirement,  in amounts based
               on years of service and average compensation.


                                      F-37
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 14  -        BENEFIT PLANS (CONT.)

               The following  table  reconciles the benefit  obligations,  Plans
               assets,  funded status and net asset  (liability)  information of
               the Plans:
                                                             DECEMBER 31,
                                                        ----------------------
                                                          2002           2001
                                                        -------        -------
              Benefit obligation at beginning of year   $22,358        $18,474
              Service cost                                2,067          1,766
              Interest cost                               1,678          1,461
              Actuarial losses                            2,955          1,338
              Benefits repaid                              (619)          (681)
                                                        -------        -------
              Benefit obligation at end of year          28,439         22,358
                                                        -------        -------

              Plans assets at beginning of year          16,167         17,846
              Actual return on plan assets               (1,560)        (1,121)
              Contributions by employer                   1,571            123
              Benefits repaid                              (619)          (681)
                                                        -------        -------
              Plans assets at end of year                15,559         16,167
                                                        -------        -------

              Funded status of Plans (underfunded)      (12,880)        (6,191)
              Unrecognized prior service cost               234            223
              Unrecognized net actuarial loss             7,582          1,508
                                                        -------        -------
              Net amount recognized                      (5,064)        (4,460)
                                                        =======        =======

              Net asset (liability) consists of:
              Accrued benefit liability                 (10,298)        (4,667)
              Intangible asset                              234            207
              Accumulated other comprehensive income      5,000              -
                                                        -------        -------
              Net amount recognized                     $(5,064)       $(4,460)
                                                        =======        =======

              Weighted average assumptions :
                 Discount rate as of December 31,          6.75%       7.38%
                 Expected long-term rate of return on
                   Plans assets                            9.00%       9.50%
                 Rate of compensation increase             3.00%       3.00%


                                      F-38
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 14  -        BENEFIT PLANS (CONT.)

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                                      -------------------------------
                                                                        2002        2001        2000
                                                                      -------     -------     -------
<S>                                                                    <C>         <C>         <C>
              Components of net periodic pension cost:
                 Service cost                                          $2,067      $1,766      $1,904
                 Interest cost                                          1,678       1,461       1,253
                 Expected return on Plan assets                        (1,597)     (1,666)     (1,680)
                Amortization of prior service cost                         28          24          25
                Recognized of net actuarial gain                         (340)        (38)       (312)
                One-time FAS 88 charge for 2001 SRP                         -         177           -
                                                                      -------     -------     -------
                 Net periodic pension cost                             $1,836      $1,724      $1,190
                                                                      =======     =======     =======
</TABLE>


DEFINED CONTRIBUTION PLAN

               The 401(k) savings plan ("401(k) plan") is a defined contribution
               retirement plan that covers all eligible employees, as defined in
               section 401(k) of the U.S.  Internal Revenue Code.  Employees may
               elect  to   contribute  a   percentage   of  their  annual  gross
               compensation   to  the  401(k)   plan.   The   Company  may  make
               discretionary   matching   contributions  as  determined  by  the
               Company.  Total  expense under the 401(k) plan amounted to $1,369
               for the year ended December 31, 2002 (2001 - $639).

NOTE 15  -        TAXES ON INCOME

               A.          APPLICABLE TAX LAWS

                     (1)    MEASUREMENT OF TAXABLE INCOME UNDER ISRAEL'S  INCOME
                            TAX (INFLATIONARY ADJUSTMENTS) LAW, 1985:

                            Results for tax purposes are measured and  reflected
                            in  accordance   with  the  change  in  the  Israeli
                            Consumer Price Index ("CPI").  As explained above in
                            Note 2B, the consolidated  financial  statements are
                            presented in U.S. dollars.  The differences  between
                            the change in the  Israeli  CPI and in the  NIS/U.S.
                            dollar  exchange  rate  cause a  difference  between
                            taxable income and the income before taxes reflected
                            in the consolidated financial statements.


                                      F-39
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15  -        TAXES ON INCOME (CONT.)

               APPLICABLE TAX LAWS (CONT.)

                            In accordance  with  paragraph 9(f) of SFAS No. 109,
                            the Company has not provided  deferred  income taxes
                            on  the  above  difference   between  the  reporting
                            currency   and  the  tax   basis   of   assets   and
                            liabilities.

                     (2)    TAX   BENEFITS    UNDER   ISRAEL'S   LAW   FOR   THE
                            ENCOURAGEMENT OF INDUSTRY (TAXES), 1969:

                            The Company and certain  subsidiaries  (mainly El-Op
                            and Cyclone) are "Industrial Companies",  as defined
                            by  the  Law  for  the   Encouragement  of  Industry
                            (Taxes),  1969,  and as such,  these  Companies  are
                            entitled   to   certain   tax    benefits,    mainly
                            amortization  of  costs  relating  to  know-how  and
                            patents over eight years,  accelerated  depreciation
                            and the  right to  deducte  for tax  purpose  public
                            issuance expenses.

                     (3)    TAX   BENEFITS    UNDER   ISRAEL'S   LAW   FOR   THE
                            ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959:

                            Four  expansion  programs of the  Company  have been
                            granted "Approved  Enterprise" status under Israel's
                            Law for the  Encouragement  of Capital  Investments,
                            1959. For these expansion programs,  the Company has
                            elected to receive grant.  Accordingly the income of
                            the Company  derived from the "Approved  Enterprise"
                            expansion programs is tax exempt for two-year period
                            and   subject  to  reduced  tax  rates  of  25%  for
                            five-year period commencing in the year in which the
                            Company first  generates  taxable income (limited to
                            twelve  years from  commencement  of


                                      F-40
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15  -        TAXES ON INCOME (CONT.)

               APPLICABLE TAX LAWS (CONT.)

                            production  or  fourteen  years  from  the  date  of
                            approval,  whichever is earlier). As of December 31,
                            2002, the tax benefits for these expansion  programs
                            will expire between 2002 to 2007.

                            Three expansion programs of El-Op have been granted,
                            such  "Approved   Enterprise"   status.   For  these
                            expansion   programs,    El-Op   has   elected   the
                            alternative  tax benefits  track.  In this track the
                            income   of  El-Op   derived   from  the   "Approved
                            Enterprise"  expansion  programs is tax exempt for a
                            two-year  period and subject to reduced tax rates of
                            25% for a five-year  period  commencing  in the year
                            which the company  first  generates  taxable  income
                            (limited  to  twelve  years  from   commencement  of
                            production  or  fourteen  years  from  the  date  of
                            approval,  whichever is earlier). As of December 31,
                            2002, the tax benefits for these expansion  programs
                            will expire between 2003 to 2005.

                            The  entitlement to the above benefits is subject to
                            the companies fulfilling the conditions specified in
                            the above refereed law, regulations  published there
                            under and the letters of approval  for the  specific
                            investments in "Approved Enterprises".  In the event
                            of failure  to comply  with  these  conditions,  the
                            benefits  may be canceled and the  companies  may be
                            required  to refund the amount of the  benefits,  in
                            whole or in part,  including interest.  (For liens -
                            see Note 16F).  As of December 31, 2002,  management
                            believes   that  the   companies   are  meeting  all
                            conditions of the approvals.

                            The tax-exempt income  attributable to the "Approved
                            Enterprise"   can  be  distributed  to  shareholders
                            without imposing tax liability on the companies only
                            upon the complete  liquidation of the companies.  As
                            of December 31,  2002,  retained  earnings  included
                            approximately  $74,000 in tax-exempt  profits earned
                            by the Group's "Approved Enterprise".  The Company's
                            Board of  Directors  has decided  that its policy is
                            not to  declare  dividends  out of  such  tax-exempt
                            income.  Accordingly,  no deferred income taxes have
                            been   provided  on  income   attributable   to  the
                            Company's "Approved Enterprise".

                            If the retained  tax-exempt income is distributed in
                            a manner other than on the complete  liquidation  of
                            the Company,  it would be taxed at the corporate tax
                            rate  applicable  to such  profits as if the Company
                            had not elected  alternative tax benefits (currently
                            - 25%) and an income tax liability would be incurred
                            of approximately $ 19,000 as of December 31, 2002.


                                      F-41
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15  -        TAXES ON INCOME (CONT.)

               A.          APPLICABLE TAX LAWS (CONT.)

                  (3)      Tax   benefits   under  the   Israel's  Law  for  the
               Encouragement of Capital Investments, 1959 (Cont.)

                            Income  from  sources   other  then  the   "Approved
                            Enterprise"   during  the  benefit  period  will  be
                            subject to tax at the regular  corporate tax rate of
                            36%.

                            Since the Company and El-Op are operating under more
                            than one  approval,  and since part of their taxable
                            income is not  entitled  to tax  benefits  under the
                            abovementioned  law and is taxed at the  regular tax
                            rate of 36%, the effective tax rate is the result of
                            a weighted  combination  of the  various  applicable
                            rates and tax  exemptions,  and the  computation  is
                            made for income  derived  from each  approval on the
                            basis of  formulas  specified  in the law and in the
                            approvals.

               B.          TAX ASSESSMENTS

                     1.     The  Company  and  El-Op  have  received  final  tax
                            assessments  through  December  31,  2000.  EFW  has
                            received final tax assessments  through December 31,
                            1997.

                     2.     The  Company  and El-Op have  received  in  previous
                            years  pre-rulings from the tax  authorities,  which
                            allowed  them to transfer  development  products and
                            assets to companies  under their  ownership  without
                            any tax  liability  pursuant  to section  104 of the
                            Israeli  Income  Tax  Ordinance.   The   pre-rulings
                            specify terms for the  companies to comply,  usually
                            for a two -  year  period.  Noncompliance  with  the
                            terms  of  the   pre-rulings   will  result  in  the
                            retroactive   cancellation  of  the   aforementioned
                            exemption   from  taxes.   Tax   implications   upon
                            non-compliance  are  estimated by  management  to be
                            immaterial to the Group's results.


                                      F-42
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15  -        INCOME TAXES (CONT.)

               C. NON - ISRAELI SUBSIDIARIES

                     Non-Israeli  subsidiaries  are  taxed  based on tax laws in
                     their countries of residence (mainly in the U.S.).

               D. INCOME (LOSS) BEFORE TAXES ON INCOME

<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                                                     DECEMBER 31,
                                                          ----------------------------------
                                                            2002         2001         2000
                                                          -------      -------     ---------
<S>                                                       <C>          <C>         <C>
                     Income (loss) before taxes on
                       income income:
                        Domestic                          $42,317      $44,212     $(13,779)
                        Foreign                            11,977        7,638        1,121
                                                          -------      -------     --------
                                                          $54,294      $51,850     $(12,658)
                                                          =======      =======     ========

               E. TAXES ON INCOME
                                                                      YEAR ENDED
                                                                     DECEMBER 31,
                                                          ----------------------------------
                                                            2002         2001         2000
                                                          -------      -------     ---------
                     Taxes on income:
                     Current taxes:
                        Domestic                          $11,654       $9,385       $8,710
                        Foreign                             6,114        3,048          879
                                                          -------       ------       ------
                                                           17,768       12,433        9,589
                                                          -------       ------       ------

                     Deferred income taxes:
                        Domestic                           (3,561)        (839)      (5,309)
                        Foreign                            (2,059)        (591)       1,947
                                                          -------       ------       ------
                                                           (5,620)      (1,430)      (3,362)
                                                          -------       ------       ------

                     Taxes in respect of prior years    (*)(2,800)           -            -
                                                          -------       ------       ------

                                                           $9,348      $11,003       $6,227
                                                          =======       ======       ======
</TABLE>

              (*)    A reduction of tax expenses due to adjustments of estimated
                     taxes and completion of tax  assessments for prior years in
                     respect of various Group companies.


                                      F-43
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15  -        INCOME TAXES (CONT.)

               F.    DEFERRED INCOME TAXES

                     Deferred  income  taxes  reflect  the  net  tax  effect  of
                     temporary differences between the carrying amount of assets
                     and  liabilities for financial  reporting  purposes and the
                     amounts   used  for   income  tax   purposes.   Significant
                     components of net deferred tax assets and  liabilities  are
                     as follows:
<TABLE>
<CAPTION>
                                                                                               DEFERRED
                                                                                        TAX ASSET (LIABILITY((1)
                                                                                       --------------------------
                                                                          TOTAL           CURRENT      NONCURRENT
                                                                        --------       -----------    ------------
<S>                                                                     <C>               <C>           <C>
                     As of December 31, 2002

                     Deferred tax assets:
                       Reserve and allowances                           $ 12,770          $ 4,797         $7,973
                       Inventory                                           6,878            6,878              -
                       Net operating loss carryforwards                    2,326                -          2,326
                                                                        --------          -------       --------
                       Valuation allowance (2)                            (2,326)               -         (2,326)
                                                                        --------          -------       --------
                       Net deferred tax assets                            19,648           11,675          7,973
                                                                        --------          -------       --------

                     Deferred tax liabilities:
                     Property, plant and equipment                        (9,209)               -         (9,209)
                     Other assets                                        (15,177)               -        (15,177)
                                                                        --------          -------       --------

                                                                         (24,386)               -        (24,386)
                                                                        --------          -------       --------

                     Net deferred tax assets (liabilities)              $ (4,738)         $11,675       $(16,413)
                                                                        ========          =======       ========

                     As of December 31, 2001

                     Deferred tax assets:
                       Reserve and allowances                           $  9,067          $ 4,308       $  4,759
                       Inventory                                           7,323            7,323              -
                       Net operating loss carryforwards                    4,248                -          4,248
                                                                        --------          -------       --------
                       Valuation allowance (2)                            (2,202)               -         (2,202)
                                                                        --------          -------       --------
                       Net deferred tax assets                            18,436           11,631          6,805
                                                                        --------          -------       --------

                     Deferred tax liabilities:
                     Property, plant and equipment                       (12,111)               -        (12,111)
                     Other assets                                        (16,683)               -        (16,683)
                                                                        --------          -------       --------
                                                                         (28,794)               -        (28,794)
                                                                        --------          -------       --------
                     Net deferred tax assets (liabilities)              $(10,358)         $11,631       $(21,989)
                                                                        ========          =======       ========

</TABLE>


                                      F-44
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15  -        INCOME TAXES (CONT.)

               F.    DEFERRED INCOME TAXES (CONT.)

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


                    (2) During  2002,   the  Company   increased  the  valuation
                        allowance  due to an increase in  accumulated  operating
                        loss carryforwards not expected to be utilized.


               G.    The Company's  Israeli  subsidiaries  have estimated  total
                     available  carryforward tax losses of approximately  $2,200
                     as of  December  31,  2002,  .  The  Company's  non-Israeli
                     subsidiaries  have  estimated  available  carryforward  tax
                     losses  of  approximately  $200 as of  December  31 2002 to
                     offset  against  future  taxable  profits for an indefinite
                     period.  Deferred  tax  assets  in  respect  of  the  above
                     carryforward  losses  amount  to  approximately  $2,400  in
                     respect of which a valuation allowance has been recorded in
                     the amount of approximately $2,400.


               H.    Reconciliation of the theoretical tax expense, assuming all
                     income is taxed at the statutory rate  applicable to income
                     of the  Company,  and the actual tax expense as reported in
                     the statements of operations, is as follows:
<TABLE>
<CAPTION>
                                                                                            YEAR ENDED
                                                                                            DECEMBER 31,
                                                                                 -----------------------------------
                                                                                   2002         2001          2000
                                                                                 -------      -------      ---------
                  <S>                                                            <C>          <C>          <C>
                  Income (loss) before taxes as reported in the
                     consolidated statements of operations                       $54,294      $51,850      $(12,658)
                  Statutory tax rate                                                 36%          36%            36%
                                                                                 =======      =======      ========
                  Theoretical tax expense (benefit)                              $19,546      $18,666       $(4,557)
                  Tax benefit arising from reduced rate as an
                     "Approved Enterprise"                                        (9,054)      (7,697)       (4,015)
                  Tax adjustment in respect of different tax rate for
                     foreign subsidiaries                                           (461)        (952)         (469)
                  Operating carryforward losses for which
                      valuation allowance was provided                             2,189          101           318
</TABLE>


                                      F-45
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15  -        INCOME TAXES (CONT.)

<TABLE>
<CAPTION>

                  <S>                                                            <C>           <C>           <C>
                  Increase (decrease) in taxes resulting from
                     nondeductible expenses                                         (263)           571        15,280
                  Difference in basis of measurement for
                     financial reporting and tax return purposes                     458            832          (684)
                  Taxes in respect of prior years                                 (2,800)             -             -
                  Other differences, net                                            (267)          (518)          354
                                                                                 -------       --------      --------
                  Actual tax expenses                                            $ 9,348       $ 11,003      $  6,227
                                                                                 =======       ========      ========
                  Effective tax rate                                               17.2%          21.2%             -
                                                                                 =======       ========      ========
</TABLE>

NOTE 16  -        CONTINGENT LIABILITIES AND COMMITMENTS

               A.          Royalty commitments

                     1.   The Company and certain Israeli subsidiaries partially
                          finance their  research and  development  expenditures
                          under  programs  sponsored  by the Office of the Chief
                          Scientist  of  Israel   ("OCS")  for  the  support  of
                          research  and  development   activities  conducted  in
                          Israel. At the time the participations  were received,
                          successful development of the related projects was not
                          assured.

                          In exchange for  participation  in the programs by the
                          OCS, the Company and the subsidiaries agreed to pay 2%
                          - 3.5% of total sales of products developed within the
                          framework of these  programs.  The  royalties  will be
                          paid up to maximum amount equaling 100% to 150% of the
                          grants  provided by the OCS,  linked to the dollar and
                          for  grants  received  after  January  1,  1999,  also
                          bearing annual interest at a rate based on LIBOR.  The
                          obligation  to pay these  royalties is  contingent  on
                          actual  sales of the  products  and in the  absence of
                          such sales, payment of royalties is not required.

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

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

                          Royalties  expenses  or  accrued  amounted  to $6,661,
                          $8,252   and   $14,471   in  2000,   2001  and   2002,
                          respectively.

                                      F-46
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 16  -        CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)

                     2.   In September 2001, the OCS issued "Regulations for the
                          Encouragement of Research and Development in Industry"
                          (rules  for  determining  the  level  and  payment  of
                          royalties) ("the regulations").  The regulations allow
                          large  R&D   intensive   companies  to  reach  certain
                          agreements with the OCS regarding determination of the
                          amount and payment  schedule of royalties,  subject to
                          certain conditions.

               A.          Royalty commitments (Cont.)

                     If the  Company  elects to adopt the  regulations,  it will
                     have to record a  significant  one-time  expense  resulting
                     from  accruing   liability   for  an  absolute   amount  of
                     royalties.

                     As of the date the financial  statement  was approved,  the
                     Company has not  concluded  discussions  or  finalized  any
                     agreements with the OCS with respect to the company.

                     In  May  2002  El-Op's  Board  of  Directors   approved  an
                     arrangement,  proposed by the OCS, according to which El-Op
                     will pay  commencing in 2002 an agreed amount of $10,632 in
                     exchange  for  a  release  from  all   obligations  to  pay
                     royalties  in the  future.  As a result  El-Op  recorded an
                     expense  for  the  agreed  amount  net of the  accrual  for
                     royalties previously recorded by El-OP.

               B.    Commitments in respect of long-term projects

                     In connection with long-term projects in certain countries,
                     the Company and certain  subsidiaries  undertook to use its
                     respective best efforts to make or facilitate  purchases or
                     investments  in those  countries at certain  percentages of
                     the amount of the projects.  The  companies'  obligation to
                     make or facilitate  third parties  making such  investments
                     and  purchases is subject to  commercial  conditions in the
                     local  market,   typically  without  a  specific  financial
                     penalty.  The maximum aggregate  undertaking as of December
                     31, 2002 amounted to $715,000 to be performed over a period
                     of up to 11 years, is typically tied to a percentage (up to
                     100%) of the amount of the specific contract.

                     In the  opinion of  management,  the  actual  amount of the
                     investments  and purchases is  anticipated  to be less than
                     that  mentioned  above,   since  certain   investments  and
                     purchases can result in reducing the overall undertaking on
                     more than a one to one basis.

                                      F-47
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 16  -        CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)

               C.    Legal claims

                     The  Company  and its  subsidiaries  are  involved in legal
                     claims   arising  in  the  ordinary   course  of  business,
                     including  claims by  employees,  consultants  and  others.
                     Company's  management,  based on the  opinion  of its legal
                     counsel,  believes  the amount of such  claims in excess of
                     the accruals recorded in the financial  statements will not
                     have a material adverse effect on the financial position or
                     results of operations of the Group.


               D.    Lease commitments

                     The future  mininum  lease  commitments  of the Group under
                     various   non-cancelable   operating  lease  agreements  in
                     respect of premises,  motor  vehicles and office  equipment
                     are as of December 31, 2002:

                             2003                                     $8,197
                             2004                                      8,985
                             2005                                      4,834
                             2006                                      4,156
                             2007 and there after                      3,877
                                                                     -------
                                                                     $30,049
                                                                     =======

                     Rent expenses for the years ended  December 31, 2000,  2001
                     and  2002   amounted   to  $7,411,   $7,978,   and  $9,215,
                     respectively.

              E.     The Company has provided,  on a  proportional  basis to its
                     ownership interest,  guarantees for two of its investees in
                     respect of credit  lines from  banks  amounting  to $10,600
                     (2001-  $10,700),  of which $10,200 (2001 - $9,700) relates
                     to a foreign  investee  owned 50% by El-Op.  The guarantees
                     will exist as long as the credit  lines are in effect.  The
                     Company  would be liable to perform under the guarantee for
                     any debt the investee  would be in default  under the terms
                     of the credit line.

                                      F-48
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 16  -        CONTINGENT LIABILITIES, AND COMMITMENTS (CONT.)

              F.     A  lien  on  the  Group's  Approved  Enterprises  has  been
                     registered in favor of the State of Israel. Grants received
                     in respect  of  projects  which have not yet been  approved
                     amount to approximately $3,600.(see note 15 A (3) above ).

              G.     Guarantees  in the amount of  approximately  $374,000  were
                     issued by banks  securing  certain  advances from customers
                     and performance bonds on behalf of Group companies.

              H.     Certain Group  companies  recorded fixed charges on most of
                     their  machinery and equipment,  mortgages on most of their
                     real estate and floating charges on most of their assets.

NOTE 17  -        SHAREHOLDER'S EQUITY

               A.   SHARE CAPITAL

                    Ordinary shares confer upon their holders voting rights, the
                    right to receive  dividends and the right to share in excess
                    sets as upon liquiation of the Company.

               B.   1996 EMPLOYEE STOCK OPTION PLAN

                    In 1996,  the Company  adopted an employee stock option plan
                    pursuant to which options to buy 2,100,000  ordinary  shares
                    may be granted to  employees.  In April  1998,  the  Company
                    amended the plan in order to be able to grant an  additional
                    322,000  options.  The exercise  price  approximates  market
                    price of the share at the grant date less 15%.  The  options
                    vested  over a period of two to four  years from the date of
                    grant and  expire no later  than six years  from the date of
                    grant.  The plan is implemented  in accordance  with Section
                    102 of the Israeli Income Tax Ordinance.

               C.   2000 EMPLOYEE STOCK OPTION PLAN

                     In 2000, the Company adopted another  employee stock option
                     plan for  employees  comprising  options to  purchase up to
                     2,500,000  ordinary shares. The exercise price approximates
                     market  price of the  shares  at the grant  date.  The plan
                     includes an  additional  2,500,000  options to be issued as
                     "phantom" shares options that grant the option holders a

                                      F-49
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

         NOTE 17  -        SHAREHOLDER'S EQUITY (CONT.)

                     number of shares  reflecting  the benefit  component of the
                     options  exercised,  as calculated at the exercise date, in
                     consideration for their par value only. Options vest over a
                     period  of one to four  years  from the  date of grant  and
                     expire no later than six years from the date of grant.

                     Any  options,   which  are  canceled  or  forfeited  before
                     expiration,  become  available  for  future  grants.  As of
                     December  31,  2002,  466,042  options of the Company  were
                     still available for future grants.

               D.    "PHANTOM" SHARE OPTIONS

                     The  phantom  share  options  are  considered  as part of a
                     variable  plan as defined in APB 25,  and  accordingly  the
                     compensation  cost  of  the  options  is  measured  by  the
                     difference between the market price of the Company's shares
                     and the  exercise  price of the options at the end of every
                     reporting  period and amortized by the  accelerated  method
                     over the remaining vesting period.

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

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                            -------------------------------------------------------------------------------------------------------
                                         2000                                2001                                 2002
                            -------------------------------     -------------------------------      ------------------------------
                                                 WEIGHTED                            WEIGHTED                           WEIGHTED
                                                 AVERAGE                             AVERAGE                            AVERAGE
                              NUMBER OF          EXERCISE         NUMBER OF          EXERCISE          NUMBER OF        EXERCISE
                               OPTIONS            PRICE            OPTIONS            PRICE             OPTIONS          PRICE
                            --------------     -----------      --------------     ------------      --------------  --------------
<S>                             <C>               <C>             <C>                 <C>               <C>                  <C>
Outstanding-beginning of
 the year                       1,471,830           $ 2.35          5,671,918         $  11.26           5,107,634           $11.93
  Granted                       4,530,662            12.32             98,840            12.91              27,000            14.92
  Exercised                      (268,753)            7.64           (598,348)           11.93            (558,901)            9.45
  Forfeited                       (61,821)            7.13            (64,776)           12.50             (64,009)           11.33
                                ---------         --------          ---------         --------           ---------           ------
  Outstanding - end of the
    year                        5,671,918         $  11.26          5,107,634         $  11.93           4,511,724           $12.26
                                =========         ========          =========         ========           =========           ======
Options exercisable at
   the end of the year             748,760       $    5.10            373,138         $   7.56           2,287,790           $12.18
                                =========         ========          =========         ========           =========           ======
</TABLE>

                                      F-50
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 17  -        SHAREHOLDER'S EQUITY (CONT.)

               E.    (Cont.)

                      The options outstanding as of December 31, 2002, have been
                      separated into ranges of exercise price, as follows:

<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                              ----------------------------------------------------   ---------------------------------
                                  NUMBER        WEIGHTED AVERAGE      WEIGHTED           NUMBER           WEIGHTED
                              OUTSTANDING AS        REMAINING          AVERAGE       OUTSTANDING AS        AVERAGE
                              OF DECEMBER 31,   CONTRACTUAL LIFE      EXERCISE       OF DECEMBER 31,      EXERCISE
      EXERCISE PRICE               2002              (YEARS)       PRICE PER SHARE        2002         PRICE PER SHARE
--------------------          ---------------   ----------------   ---------------   ---------------   ---------------
<S>                            <C>                     <C>             <C>             <C>                 <C>
$10.61-$12.16                    252,853               1.45            $10.71            242,478           $10.67
$12.18-$15.07                  2,135,897               3.92             12.35          1,024,368            12.39
$12.18-$15.07(*)               2,122,974               3.90             12.35          1,020,944            12.34
                              ---------------   ----------------   ---------------   ---------------   ---------------
                               4,511,724               3.77            $12.26          2,287,790           $12.18
                              ===============   ================   ===============   ===============   ===============

</TABLE>

                     (*)  Phantom share options.

                     Where the Company has recorded deferred stock  compensation
                     for options  issued  with an exercise  price below the fair
                     value  of  the  ordinary   shares,   the   deferred   stock
                     compensation  is  amortized  and  recorded as  compensation
                     expense  ratably  over the vesting  period of the  options.
                     Compensation expense (income) of approximately $155, $8,512
                     and $(926) were recognized  during the years ended December
                     31, 2000, 2001 and 2002, respectively.

               F.    The  weighted  average  exercise  price of options  granted
                     during the years ended  December  31,  2000,  2001 and 2002
                     were:

                                 EXCEEDS
                                  MARKET PRICE        LESS THAN MARKET PRICE
                                 -------------   ------------------------------
                                             YEAR ENDED DECEMBER 31,
                                 ----------------------------------------------
                                      2000            2001              2002
                                 -------------   -----------       ------------
                Weighted-average
                exercise price       $12.32          $12.91             $14.92


                                      F-51
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 17  -        SHAREHOLDER'S EQUITY (CONT.)

            G.    Computation of basic and diluted net earning (loss) per share


<TABLE>
<CAPTION>
                                YEAR ENDED                            YEAR ENDED                             YEAR ENDED
                            DECEMBER 31, 2002                      DECEMBER 31, 2001                     DECEMBER 31, 2000
                    -----------------------------------  ------------------------------------- -------------------------------------
                     NET INCOME
                         TO        WEIGHTED               NET INCOME TO    WEIGHTED
                    SHAREHOLDERS   AVERAGED      PER      SHAREHOLDERS     AVERAGED     PER     SHAREHOLDERS    AVERAGED      PER
                    OF ORDINARY    NUMBER OF    SHARE      OF ORDINARY      NUMBER     SHARE     OF ORDINARY     NUMBER      SHARE
                       SHARES       SHARES      AMOUNT       SHARES       OF SHARES    AMOUNT       SHARES      OF SHARES    AMOUNT
                    ===========  ============ ========== =============== =========== ========= =============== =========== =========
<S>                    <C>         <C>            <C>         <C>           <C>          <C>      <C>            <C>          <C>
Basic net earnings
(losses)               $45,113      38,489         $1.17      $40,796       37,975        $1.07    $(20,531)      31,572    $(0.65)

Effect of dilutive
 securities:
    Employee stock
options                      -       1,374                          -        1,384                        -            -
                       -------      ------                    -------       ------                 --------       ------
Diluted net
earnings (losses)      $45,113      39,863         $1.13      $40,796       39,359       $1.04     $(20,531)      31,572    $(0.65)
                       =======      ======         =====      =======       ======        =====    ========       ======    ======

</TABLE>

               H.    Treasury shares

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

               I.    Dividend policy

                           In the event that cash  dividends are declared by the
                     Company,  such  dividends will be paid in NIS or in foreign
                     currency subject to any statutory limitations.  The Company
                     has  decided  not to  declare  dividends  out of tax exempt
                     earnings.

                                      F-52
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 18  -        MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION

      A. Revenues are attributed to geographic areas based on location
            of the end customers as follows:
<TABLE>
<CAPTION>

                                                                                       YEAR ENDED DECEMBER 31,
                                                                                 -----------------------------------
                                                                                   2002          2001         2000
                                                                                 --------     --------      --------
<S>                                                                             <C>           <C>           <C>

            Europe                                                               $144,862     $179,560      $124,127
            U.S.                                                                  267,686      206,627       189,147
            Israel                                                                225,674      226,650       159,593
            Other                                                                 189,234      151,664       118,217
                                                                                 --------     --------      --------
                                                                                 $827,456     $764,501      $591,084
                                                                                 ========     ========      ========
      B.  Revenues are generated by the following product lines:
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                 -----------------------------------
                                                                                   2002          2001         2000
                                                                                 --------     --------      --------
             Airborne systems                                                    $372,756     $334,201      $257,884
             Armored vehicles systems                                             135,700      126,300       111,800
             Command, control, communications
               Systems                                                            122,700      105,800       113,700
             Electro-optical systems                                              148,200      162,700        91,100
             Others                                                                48,100       35,500        16,600
                                                                                 --------     --------      --------
                                                                                 $827,456     $764,501      $591,084
                                                                                 ========     ========      ========

      C.    Revenues from single customers, which exceed
                 10% of total revenues in the reported years:
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                 -----------------------------------
                                                                                   2002          2001         2000
                                                                                 --------     --------      --------
            Customer A                                                              18%           20%          26%

      D.    Long-lived assets by geographic areas:

                                                                                      DECEMBER 31,
                                                                                 ---------------------
                                                                                   2002          2001
                                                                                 --------     --------
            U.S                                                                   $83,814     $ 84,864
            Israel                                                                211,256      194,690
            Other                                                                  13,660       10,451
                                                                                 --------     --------
                                                                                 $308,730     $290,005
                                                                                 ========     ========
</TABLE>

                                      F-53
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 19  -        COST OF REVENUES

<TABLE>
<CAPTION>

                                                                                       YEAR ENDED DECEMBER 31,
                                                                                 -----------------------------------
                                                                                   2002          2001         2000
                                                                                 --------     --------      --------
             <S>                                                                 <C>          <C>           <C>
             Materials                                                           $237,918     $182,936      $133,900
             Labor                                                                195,213      187,558       148,063
             Subcontractors                                                       126,579      129,057        78,983
             Maintenance of buildings and services                                 30,643       28,824        15,374
             Other manufacturing expenses                                          37,655       31,342        30,644
             Depreciation                                                          20,662       20,979        12,713
             Royalties                                                             14,471        8,252         6,661
                                                                                 --------     --------      --------
                                                                                  663,141      588,948       426,338

             Amortization of intangibles assets                                     1,552        3,497         1,706
             Increase (decrease) in provision for costs, warranties and
             expected losses                                                       (4,257)          29         3,975
                                                                                 --------     --------      --------
                                                                                  660,436      592,474       432,019
                                                                                 --------     --------      --------
             Less:
                 Cost of equipment produced for  own use                            5,517        4,913         6,651
                 Increase (decrease) in inventories of
                    contracts in-progress                                          49,606       33,604        (7,418)
                                                                                 --------     --------      --------
                                                                                   55,123       38,517          (767)
                                                                                 --------     --------      --------
                                                                                 $605,313     $553,957      $432,786
                                                                                 ========     ========      ========

</TABLE>

NOTE 20  -        RESEARCH AND DEVELOPMENT COSTS, NET

<TABLE>
<CAPTION>

                                                                                       YEAR ENDED DECEMBER 31,
                                                                                 -----------------------------------
                                                                                   2002          2001         2000
                                                                                 --------     --------      --------
             <S>                                                                 <C>          <C>           <C>
             Total expenses                                                      $ 62,560     $ 67,871      $ 53,251
             Less - participations                                                  5,550        9,112         8,977
                                                                                 --------     --------      --------
                                                                                 $ 57,010     $ 58,759      $ 44,274
                                                                                 ========     ========      ========

</TABLE>

NOTE 21  -        MARKETING AND SELLING EXPENSES

<TABLE>
<CAPTION>

                                                                                       YEAR ENDED DECEMBER 31,
                                                                                 -----------------------------------
                                                                                   2002          2001         2000
                                                                                 --------     --------      --------
             <S>                                                                 <C>          <C>           <C>
              Salaries and related expenses                                       $24,692      $23,379       $14,205
              Constancy Fee's                                                      24,782       20,648        11,546
              Advertising and exhibitions                                           5,301        4,792         3,130
              Depreciation                                                          3,883        2,709         1,584
              Other                                                                 7,033        3,348         7,984
                                                                                 --------     --------      --------
                                                                                  $65,691      $54,876       $38,449
                                                                                 ========     ========      ========
</TABLE>

                                      F-54
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 22  -        GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------
                                                                         2002            2001            2000
                                                                        -------         -------         -------
<S>                                                                     <C>             <C>             <C>
             Salaries and related expenses                              $24,741         $27,113         $12,074
             Office expenses                                              7,198           7,060           4,063
             Depreciation and amortization                                3,540           2,730           3,947
             Other                                                        6,172           6,313           6,167
                                                                        -------         -------         -------
                                                                        $41,651         $43,216         $26,251
                                                                        =======         =======         =======

NOTE 23  -        FINANCIAL INCOME (EXPENSES), NET
                                                                                YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------
                                                                         2002            2001            2000
                                                                        -------         -------         -------
             Income:
               Interest on cash equivalents and bank
                 deposits                                                $1,547          $2,179          $2,574
              Other                                                       2,073           2,841           3,949
                                                                        -------         -------         -------
                                                                          3,620           5,020           6,523
                                                                        -------         -------         -------
             Expenses:
               On long-term bank debt and debentures                      2,026           3,033           1,442
               On short-term bank credit and loans                        3,415           3,806           3,626
               Other                                                      1,214             798           1,340
                                                                        -------         -------         -------
                                                                          6,655           7,637           6,408
                                                                        -------         -------         -------
                                                                        $(3,035)        $(2,617)           $115
                                                                        =======         =======         =======

NOTE 24 -         OTHER INCOME (EXPENSES), NET

                                                                                YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------
                                                                         2002            2001            2000
                                                                        -------         -------         -------
             Gain (loss) on disposal of property, plant
               and equipment                                              $(743)           $327            $597
             Other, net                                                     281             447            (594)
                                                                        -------         -------         -------
                                                                          $(462)           $774              $3
                                                                        =======         =======         =======
</TABLE>

                                      F-55
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
                         (In thousands of U.S. dollars)
NOTE 25  -         RELATED PARTIES TRANSACTIONS AND BALANCES

                                                    YEAR ENDED DECEMBER 31,
                                               ------------------------------
                                                2002        2001        2000
                                               -------     -------    -------
               Income -
                 Sales (*)                     $37,924     $28,675    $11,168
                 Expenses charged                 $902        $633       $626

               Cost and expenses -
                 Supplies and services         $10,457     $11,125     $7,392
                 Participation in expenses (*)  $1,498      $1,632     $1,464
                 Financial expenses               $110        $193          -


                                                 DECEMBER 31,
                                               -------------------
                                                2002         2001
                                               ------      -------
               Trade receivables (*)           $9,647      $14,257
               Trade payables                  $4,006       $2,016

               (*) The amounts relate mainly to transactions with VSI.

               The  Company's  President  and CEO is entitled  for a  three-year
               period,  starting  in July 2000,  to an annual  bonus of not less
               than 1% of the Company's net income after tax (excluding  unusual
               expenses such as amortization of goodwill),  and is also entitled
               to up to 10% of the  number of  options  or shares  issued by the
               Company to its  employees and under the same terms (see Note 17).
               A former  director of the Company  received an annual bonus of 1%
               of the Company's net income after tax (excluding unusual expenses
               such as amortization of goodwill) from July 2000 to December 2001
               and an additional  bonus equal to the  compensation  derived from
               400,000 options of the Company.


NOTE 26 -         RECONCILIATION TO ISRAELI GAAP

           As described in Note 1, the Company prepares its financial statements
           in accordance with U.S. GAAP. The effects of the differences  between
           US GAAP and Israeli GAAP on the Company's  financial  statements  are
           detailed below.

           Differences between US GAAP and Israeli GAAP:

                                      F-56
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

           A building purchased from Elbit Ltd.
           ------------------------------------

           According to generally accepted accounting  principles in Israel, the
           Company  charged to capital  reserves  the excess of the amount  paid
           over net book value of a building acquired from Elbit Ltd in 1999.

           According to US GAAP,  the entire  amount paid is  considered  as the
           cost of the building acquired.

           Proportional consolidation method
           ---------------------------------

           According to Israeli  GAAP, a jointly  controlled  company  should be
           included   according  to  the  proportional   consolidation   method.
           According to US GAAP,  the  investment  in such a company is recorded
           according to the equity method.

           Tax benefit in respect of options exercised
           -------------------------------------------

           According  to  Israeli  GAAP,  tax  benefits  from  employee  options
           exercised are recorded as a reduction of tax expense. According to US
           GAAP, the difference between the above mentioned tax benefits and the
           benefits recorded in respect of compensation expense in the financial
           statements is credited to capital reserves.

           Goodwill
           --------

           Effective January 1, 2002 the Company adopted SFAS 142, "Goodwill and
           Other Intangible  Assets"  according to which goodwill and intangible
           assets with indefinite lives are no longer amortized periodically but
           are  reviewed   annually  for  impairment  (or  more   frequently  if
           impairment   indicators  arise).   According  to  Israeli  GAAP,  all
           intangibles, including goodwill should be amortized.

NOTE 26 -         RECONCILIATION TO ISRAELI GAAP

           1. EFFECT ON NET INCOME AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
                                                                                   YEAR ENDED
                                                                                   DECEMBER 31
                                                                       -----------------------------------------
                                                                           2002            2001          2000
                                                                       ---------          ------       -------
<S>                                                                       <C>             <C>          <C>

           A) Net earnings (loss) as reported
                 according to U.S. GAAP                                   45,113          40,796       (20,531)
                Adjustments to Israeli GAAP                               (4,227)          1,767         1,822
                                                                       ---------          ------       -------
                Net earnings (loss) according to Israeli
                  GAAP                                                    40,886          42,563       (18,709)
                                                                       =========          ======       =======
           B) Earnings per share
                Basic net earnings (loss) per share
                   As reported according to U.S. GAAP                       1.17             1.07        (0.65)

                   As per Israeli GAAP                                      1.03             1.11        (0.59)
</TABLE>

                                      F-57
<PAGE>

                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

<TABLE>

<S>                                                                         <C>              <C>         <C>
                Diluted net earnings (loss) per share
                   As reported according to U.S. GAAP                       1.13             1.04        (0.65)

                   As per Israeli GAAP                                      0.96             1.11        (0.59)

</TABLE>

           2. EFFECT ON SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                                          AS PER
                                                                      AS REPORTED        ADJUSTMENTS   ISRAELI GAAP
                                                                      -----------        -----------   ------------
           <S>                                                           <C>              <C>          <C>
           AS OF DECEMBER 31, 2002
             Shareholders' equity                                        411,361          (11,076)     400,285
                                                                         =======          =======      =======
           AS OF DECEMBER 31, 2001
             Shareholders' equity                                        377,985          (12,149)     365,836
                                                                         =======          =======      =======

</TABLE>


                                                            # # # # # # # #


                                      F-58
<PAGE>

ITEM 19.    EXHIBITS.


     (a)  Index to Financial Statements

                                                                    Page
                                                                    ----
     Independent Auditors' Reports                                  F-2 - F-2(a)
     Consolidated Balance Sheets at December 31, 2001 and 2002      F-3 - F-4
     Consolidated Statements of Operations                          F-5
     Consolidated Statements of Changes in Shareholders' Equity     F-6 - F-7
     Consolidated Statements of Cash Flows                          F-8 - F-9
     Notes to Consolidated Financial Statements                     F-10 - F-58

         (b)      Exhibits

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

----------
*       Filed as an exhibit to Elbit Systems' Annual Report on Form 20-F (File
        No. 0-28998) for the year ended December 31, 2000, which was filed with
        the Securities and Exchange Commission on April 5, 2001, and
        incorporated herein by reference.
**      Filed as an exhibit to Elbit Systems' Registration Statement on Form
        20-F (File No. 0-28998), which was filed with the Securities and
        Exchange Commission on November 22, 1996, and incorporated herein by
        reference.
***     Filed as an exhibit to Elbit Systems' Report on Form 6-K for February
        2000, which was filed by Elbit Systems with the Securities and Exchange
        Commission on March 6, 2000, and incorporated herein by reference.
****    This document is being furnished in accordance with SEC Release Nos.
        33-8212 and 34-47551.


                                       92
<PAGE>


                                   SIGNATURES
                                   ----------

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

Dated:  June 17, 2003

                                   ELBIT SYSTEMS LTD.


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



                                       93
<PAGE>

                                 CERTIFICATIONS

         I, Joseph Ackerman, certify that:

         1. I have reviewed this annual report on Form 20-F of Elbit Systems
Ltd.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

               a.   designed such disclosure controls and procedures to ensure
                    that material information relating to the registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others within those entities, particularly during the
                    period in which this annual report is being prepared;

               b.   evaluated the effectiveness of the registrant's disclosure
                    controls and procedures as of a date within 90 days prior to
                    the filing date of this annual report (the "Evaluation
                    Date"); and

               c.   presented in this annual report our conclusions about the
                    effectiveness of the disclosure controls and procedures
                    based on our evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

               a.   all significant deficiencies in the design or operation of
                    internal controls which could adversely affect the
                    registrant's ability to record, process, summarize and
                    report financial data and have identified for the
                    registrant's auditors any material weaknesses in internal
                    controls; and

               b.   any fraud, whether or not material, that involves management
                    or other employees who have a significant role in the
                    registrant's internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: June 17, 2003

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



                                      C-1
<PAGE>


                                 CERTIFICATIONS

         I, Joseph Gaspar, certify that:

         1. I have reviewed this annual report on Form 20-F of Elbit Systems
Ltd.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

               a.   designed such disclosure controls and procedures to ensure
                    that material information relating to the registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others within those entities, particularly during the
                    period in which this annual report is being prepared;

               b.   evaluated the effectiveness of the registrant's disclosure
                    controls and procedures as of a date within 90 days prior to
                    the filing date of this annual report (the "Evaluation
                    Date"); and

               c.   presented in this annual report our conclusions about the
                    effectiveness of the disclosure controls and procedures
                    based on our evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

               a.   all significant deficiencies in the design or operation of
                    internal controls which could adversely affect the
                    registrant's ability to record, process, summarize and
                    report financial data and have identified for the
                    registrant's auditors any material weaknesses in internal
                    controls; and

               b.   any fraud, whether or not material, that involves management
                    or other employees who have a significant role in the
                    registrant's internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: June 17, 2003

                                   /s/ Joseph Gaspar
                                   ---------------------------
                                   Joseph Gaspar
                                   Corporate Vice President
                                   and Chief Financial Officer


                                      C-2

<PAGE>


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

<TABLE>
<CAPTION>

                                                COLUMN A       COLUMN B       COLUMN C       COLUMN D        COLUMN E
                                                               Additions      Charged to
                                                Balance at     Charged to     Other
              DESCRIPTION                       Beginning      Costs and      Accounts       Deductions      Balance at
              -----------                       of Period      Expenses       (Describe)     (Describe)      End of Period
                                                ---------     -----------    -----------     ----------      -------------
<S>                                              <C>             <C>            <C>            <C>             <C>
YEAR ENDED DECEMBER 31, 2002:

Deducted from Assets Accounts:

  Allowance for Doubtful Accounts......           3,200             459                           248           3,411

  Provisions for Additional Work on
  Systems and Products Delivered,
  Warranties and Expected Losses.......          51,132          29,841                        28,278          52,695

YEAR ENDED DECEMBER 31, 2001:

Deducted from Assets Accounts:

  Allowance for Doubtful Accounts......           2,957             270             --             27           3,200

  Provisions for Additional Work on
  Systems and Products Delivered,
  Warranties and Expected Losses.......          44,019          31,345         345(1)         24,577          51,132

YEAR ENDED DECEMBER 31, 2000:

Deducted from Assets Accounts:

  Allowance for Doubtful Accounts......           2,560              --         425(1)             28           2,957

  Provisions for Additional Work on
  Systems and Products Delivered,
  Warranties and Expected Losses.......          28,707          13,213      15,857(1)         13,758          44,019
</TABLE>

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(1)      Acquisition of subsidiaries


                                      S-1
<PAGE>


                                  EXHIBIT INDEX

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

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*       Filed as an exhibit to Elbit Systems' Annual Report on Form 20-F (File
        No. 0-28998) for the year ended December 31, 2000, which was filed with
        the Securities and Exchange Commission on April 5, 2001, and
        incorporated herein by reference.
**      Filed as an exhibit to Elbit Systems' Registration Statement on Form
        20-F (File No. 0-28998), which was filed with the Securities and
        Exchange Commission on November 22, 1996, and incorporated herein by
        reference.
***     Filed as an exhibit to Elbit Systems' Report on Form 6-K for February
        2000, which was filed by Elbit Systems with the Securities and Exchange
        Commission on March 6, 2000, and incorporated herein by reference.
****    This document is being furnished in accordance with SEC Release Nos.
        33-8212 and 34-47551.