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<SEC-DOCUMENT>0000910680-03-000600.txt : 20030715
<SEC-HEADER>0000910680-03-000600.hdr.sgml : 20030715
<ACCEPTANCE-DATETIME>20030715095441
ACCESSION NUMBER:		0000910680-03-000600
CONFORMED SUBMISSION TYPE:	6-K
PUBLIC DOCUMENT COUNT:		3
CONFORMED PERIOD OF REPORT:	20030715
FILED AS OF DATE:		20030715

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			ELBIT SYSTEMS LTD
		CENTRAL INDEX KEY:			0001027664
		STANDARD INDUSTRIAL CLASSIFICATION:	AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728]
		IRS NUMBER:				000000000
		STATE OF INCORPORATION:			L3
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		6-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-28998
		FILM NUMBER:		03786335

	BUSINESS ADDRESS:	
		STREET 1:		ADVANCED TECHNOLOGY CENTER
		STREET 2:		PO BOX 539
		CITY:			HAIFA, ISRAEL
		STATE:			L3
		ZIP:			31053
		BUSINESS PHONE:		01197248316626
</SEC-HEADER>
<DOCUMENT>
<TYPE>6-K
<SEQUENCE>1
<FILENAME>form6k-07112003.txt
<DESCRIPTION>JUNE 11, 2003
<TEXT>

                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549
                            --------------------

                                  FORM 6-K
                      Report of Foreign Private Issuer
                     Pursuant to Rule 13a-16 or 15d-16
                   of the Securities Exchange Act of 1934
                         For the Month of July 2003
                         --------------------------

                             ELBIT SYSTEMS LTD.
              (Translation of Registrant's Name into English)
        Advanced Technology Center, P.O.B. 539, Haifa 31053, Israel
                  (Address of Principal Corporate Offices)

Indicate by check mark whether the registrant  files or will file annual reports
under cover of Form 20-F or Form 40-F:

             |X|      Form 20-F          |_|    Form 40-F

Indicate by check mark whether the  registrant  by  furnishing  the  information
contained  in this  form is  also  thereby  furnishing  the  information  to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

             |_|      Yes                |X|    No



<PAGE>


         Attached hereto as Exhibit 1 and  incorporated  herein by reference are
proxy  materials  (the "Proxy  Materials")  distributed by the Registrant to its
shareholders  on or about the date hereof in connection  with the annual general
meeting of the Registrant's shareholders scheduled to be held on August 6, 2003.

         Attached hereto as Exhibit 2 and  incorporated  herein by reference are
the  Registrant's  financial  statements  for the year ended  December 31, 2002,
distributed to the Registrant's shareholders along with the Proxy Materials.



                                 SIGNATURE
                                 ---------

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                ELBIT SYSTEMS LTD.
                                (Registrant)


                                By: /s/ Arie Tal
                                    --------------------------------
                                Name: Arie Tal
                                Title:  Corporate Secretary

Dated:  July 15, 2003.









                                    -2-
<PAGE>


                               EXHIBIT INDEX
                               -------------


    EXHIBIT NO.         DESCRIPTION
    -----------         -----------

        1.              Proxy materials sent to the Registrant's shareholders on
                        or about July 15, 2003.

        2.              Financial statements of the Registrant for the year
                        ended December 31, 2002.









                                    -3-

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>3
<FILENAME>exhibit1.txt
<DESCRIPTION>EXHIBIT 1
<TEXT>


                                 EXHIBIT 1

[GRAPHIC OMITTED]


                                               July 15, 2003



Dear Fellow Shareholder,

         You are  cordially  invited to attend  the Elbit  Systems  Ltd.  Annual
General  Meeting of Shareholders to be held at 3:00 p.m. local time on August 6,
2003,  at our offices on the 31st floor of the Triangle  Building in the Azrieli
Center in Tel-Aviv, Israel.

         The  agenda  of the  meeting  and  the  proposals  to be  voted  on are
described in the accompanying proxy statement.  For the reasons described in the
proxy statement,  the Board of Directors  recommends that you vote "FOR" Items 1
and 2 as specified on the enclosed proxy card.

         At  the  meeting,  management  also  will  present  the  other  matters
described in the proxy  statement and provide a discussion  period for questions
and comments of general interest to shareholders.

         We look forward to greeting all the shareholders who are present at the
meeting.  However,  whether or not you are able to attend,  it is important that
your shares be represented. Therefore, at your earliest convenience please sign,
date and mail the  enclosed  proxy card in the  envelope  provided so that it is
received not later than 24 hours before the meeting.

         Thank you for your cooperation.

                                Very truly yours,


                                MICHAEL FEDERMANN
                                Chairman of the Board of Directors


                                JOSEPH ACKERMAN
                                President and Chief Executive Officer


<PAGE>


                               ELBIT SYSTEMS LTD.

                NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS

                                                         Haifa, Israel
                                                         July 15, 2003

     This is notice that the Annual  General  Meeting of  Shareholders  of Elbit
Systems Ltd. (the "Company")  will be held at the Company's  offices on the 31st
floor of the Triangle  Building of the Azrieli  Center in Tel-Aviv,  Israel,  on
August 6, 2003, at 3:00 p.m. local time, for the following purposes:

1.   To elect ten nominees to the Company's  Board of  Directors,  including one
     External Director; and

2.   To appoint the  Company's  independent  auditors for the fiscal year ending
     December 31, 2003.

     In addition, at the meeting the Company will present the Management Report,
the Auditors' Report and the Consolidated  Financial  Statements of the Company,
each for the fiscal year ended  December 31, 2002.  The Company also will report
on  the  2002  dividend,   directors'  compensation  and  independent  auditors'
compensation arrangement.

     Shareholders  of record  at the close of  business  on July 10,  2003,  are
entitled to receive notice of, and to vote at, the meeting. All shareholders are
cordially invited to attend the meeting in person.

     Shareholders  who are unable to attend the meeting in person are  requested
to complete, date and sign the enclosed proxy card and return it promptly in the
pre-addressed  envelope  provided so that it is received by the Company at least
24 hours  before the  meeting.  No postage is  required  if mailed in the United
States.  Shareholders  who attend the meeting may revoke their  proxies and vote
their shares in person.


                                       By Order of the Board of Directors,


                                       MICHAEL FEDERMANN
                                       Chairman of the Board of Directors


                                       JOSEPH ACKERMAN
                                       President and Chief Executive Officer


THE COMPANY'S FINANCIAL  STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002,
ARE ENCLOSED BUT ARE NOT A PART OF THIS PROXY. THE FINANCIAL  STATEMENTS  SHOULD
NOT BE CONSIDERED AS PROXY SOLICITATION MATERIAL.


<PAGE>



                     QUESTIONS AND ANSWERS ABOUT THE ANNUAL
                                 GENERAL MEETING

THE FOLLOWING  QUESTIONS AND ANSWERS  SUMMARIZE THE MAJOR ISSUES TO BE DISCUSSED
AT THE ANNUAL  GENERAL  MEETING.  FOR A MORE COMPLETE  DESCRIPTION OF THE ISSUES
PLEASE SEE THE ACCOMPANYING PROXY STATEMENT.

Q: WHEN AND WHERE IS THE MEETING?
A: The Meeting will take place at 3 p.m.  local time,  on  Wednesday,  August 6,
2003, at the Company's offices on the 31st floor of the Triangle Building in the
Azrieli Center in Tel-Aviv, Israel.

Q: WHAT IS THE RECORD DATE FOR THE MEETING?
A: The record date is July 10, 2003, and all shareholders  holding shares at the
close of business on July 10, 2003 will be entitled to receive  notice of and to
vote at the Meeting.

Q: WHAT ARE THE ITEMS TO BE VOTED ON AT THE MEETING?
A: The items to be voted on include:
o Election of ten  nominees to the Board of  Directors,  including  one External
Director; and o Appointment of the Company's independent auditors for 2003.

Q: DOES THE COMPANY AND ITS BOARD OF DIRECTORS SUPPORT THE PROPOSALS TO BE VOTED
ON AT THE MEETING?
A: Yes.


<PAGE>



Q: WHAT VOTING MAJORITY IS REQUIRED?
A: The required majority is more than 50% of the shares voted at the Meeting for
(a) election of a director who is not an External  Director (under Item 1 in the
Proxy Statement) as well as (b) to approve Item 2 in the Proxy Statement.
     Election of the  External  Director  (under Item 1 in the Proxy  Statement)
requires a majority of the votes cast  regarding  such  election at the Meeting,
whether in person or by proxy, provided that (i) that majority includes at least
one third (1/3) of the total  votes of  non-controlling  shareholders  or anyone
voting on their behalf present at the Meeting in person or by proxy (abstentions
will  not be  taken  into  account)  or (ii) the  total  number  of votes of the
shareholders  mentioned in (i) above that are voted  against such  election does
not exceed one percent (1%) of the Company's voting rights.

Q: WHAT OTHER MATTERS WILL BE PRESENTED AT THE MEETING?

A: The Company also will present at the Meeting the following  matters  relating
to the fiscal year ended December 31, 2002:
   o  its  Independent  Auditors'  Report,  Management  Report and  Consolidated
      Financial Statements;
   o  the dividend paid to shareholders;
   o  the compensation paid to the Company's directors; and
   o  the compensation arrangement with the Company's independent auditors.

Q: WHAT DO I NEED TO DO NOW?
A: Just  indicate on your proxy card how you want to vote,  and sign and mail it
in the enclosed return envelope as soon as possible, so that your shares will be
represented at the Meeting.  The signed proxy must be received by the Company at
least 24 hours before the Meeting. If you sign and send in your proxy but do not
indicate  how you want to vote,  your proxy will be counted as a vote for all of
the proposals.


<PAGE>



Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just mail a later-dated,  signed proxy card or other  document  revoking your
proxy in time for it to be received by the Company at least 24 hours  before the
Meeting or attend the Meeting in person and vote.

Q: IF MY  SHARES  ARE  HELD IN  "STREET  NAME"  BY MY  BROKER,  A BANK OR  OTHER
REPRESENTATIVE,  WILL MY  REPRESENTATIVE  VOTE MY SHARES  FOR ME? A: If you hold
your shares through a broker, bank or other representative, generally the broker
or other  representative may only vote the shares it holds for you in accordance
with your instructions.  However, if the broker or other representative does not
receive your  instructions  in time, it may vote on certain types of matters for
which it has  discretionary  authority,  including each matter that is presently
scheduled to be voted on at the Meeting.

Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: For additional  information  about the Meeting,  please contact during normal
office  hours,  Sunday  through  Thursday,  Arie Tal,  the  Company's  Corporate
Secretary   at   the   Company's   offices   in   Haifa,    Israel,    telephone
011-972-4-8316632.

<PAGE>



                               ELBIT SYSTEMS LTD.
                           ADVANCED TECHNOLOGY CENTER
                                  P.O. BOX 539
                               HAIFA 31053, ISRAEL


                                 PROXY STATEMENT
                                 ---------------

This Proxy  Statement is provided to the  shareholders of ordinary  shares,  NIS
1.00 nominal  value,  of Elbit Systems Ltd. (the Company or Elbit  Systems),  in
connection  with the Board of Directors'  solicitation of proxies for use at the
Shareholders' Annual General Meeting to be held on August 6, 2003 (the Meeting),
or at any adjournment of the Meeting, as specified in the accompanying Notice of
Annual General Meeting of Shareholders.

It is proposed that the shareholders adopt resolutions  concerning the following
matters at the Meeting:

(1)  election of ten nominees to the Board of Directors,  including one External
     Director; and

(2)  appointment  of the  Company's  independent  auditors  for the fiscal  year
     ending December 31, 2003.

In addition,  at the Meeting the Company will present or report on the following
matters relating to fiscal year 2002:

     o    its Independent  Auditors' Report,  Management Report and Consolidated
          Financial Statements;

     o    the dividend paid to shareholders;

     o    the compensation paid to the Company's directors; and

     o    the compensation arrangement with the Company's independent auditors.

Shares represented by properly signed and unrevoked proxies will be voted in the
manner directed by the persons designated as proxies.



<PAGE>



                         QUORUM AND VOTING REQUIREMENTS

Only  shareholders of record at the close of business on July 10, 2003, have the
right to receive notice and to vote at the Meeting.

The Company had outstanding on July 1, 2003,  39,175,069  ordinary shares,  each
giving  a right  of one vote for  each of the  matters  to be  presented  at the
Meeting.  No less than two  shareholders,  present  in  person or by proxy,  and
holding or  representing  between  them  one-third of the  outstanding  ordinary
shares, will constitute a quorum at the Meeting.

If a quorum  is not  present  within  one-half  hour  after the time set for the
Meeting,  the Meeting will be adjourned and will be reconvened one week later at
the same time and place unless other notice is given by the Board of  Directors.
If there is not a quorum  within  one-half  hour of the time for the  reconvened
meeting,  a  quorum  will  be  considered  present  as  long  as  at  least  two
shareholders participate in person or by proxy.

Joint holders of shares should note that according to the Company's  Articles of
Association the vote, whether in person or by proxy, of the more senior of joint
holders of any voted  share will be  accepted  over  vote(s) of the other  joint
holders of that share.  For this purpose  seniority  will be  determined  by the
order the joint holders' names appear in the Company's Register of Shareholders.

A  majority  of the votes  cast at the  Meeting  either in person or by proxy is
required  (a) to  elect,  under  Item 1 of  this  Proxy  Statement,  each of the
individuals  nominated to be a director,  other than the External Director,  and
(b) to approve Item 2 of this Proxy Statement.

Election  of the  External  Director,  under  Item 1 of  this  Proxy  Statement,
requires a majority of the votes cast  regarding  such  election at the Meeting,
whether in person or by proxy, provided that (i) that majority includes at least
one-third  (1/3) of the total votes of  non-controlling  shareholders  or anyone
voting on their behalf present at the Meeting in person or by proxy (abstentions
will  not be  taken  into  account)  or (ii) the  total  number  of votes of the
shareholders  mentioned in (i) above that are voted  against such  election does
not exceed one percent (1%) of the Company's voting rights.

                                 VOTING BY PROXY

A proxy form for use at the Meeting and a return envelope for the proxy form are
enclosed. Shareholders may revoke any properly signed and filed proxy form prior
to its exercise by filing with the Company a written  notice of  revocation or a
properly  signed  proxy  form of a later  date,  or by  voting  in person at the
Meeting.  In order to be  counted  for  purposes  of  voting at the  Meeting,  a
properly  signed  proxy form must be  received  by the Company at least 24 hours
before the Meeting.


<PAGE>



Unless otherwise  indicated on the proxy form, shares  represented by a properly
signed and received proxy in the enclosed form will be voted in favor of all the
above  described  matters  to be  presented  for voting at the  Meeting.  On all
matters considered at the Meeting,  abstentions and broker non-votes will not be
treated as either a vote "for" or "against"  the matter,  although  they will be
counted to determine if a quorum is present.

Proxy forms are being mailed to shareholders on or about July 15, 2003, and will
be solicited mostly by mail.  However, in some cases proxies may be solicited by
telephone, telegram or other personal contact. The Company will pay for the cost
of the solicitation of proxies, including the cost of preparing,  assembling and
mailing  the proxy  material,  and will  reimburse  the  reasonable  expenses of
brokerage firms and others for forwarding material to shareholders.


                      BENEFICIAL OWNERSHIP OF SECURITIES BY
                    CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table shows,  as of July 1, 2003,  the number of ordinary  shares
owned  by (i) all  shareholders  known by the  Company  to own 5% or more of the
Company's  ordinary shares and (ii) all directors and officers of the Company as
a group.


NAME AND ADDRESS                               NUMBER OF SHARES        PERCENT
- ----------------                               ----------------        -------

The Federmann Group                               12,100,000           30.88%
99 Hayarkon Street
Tel-Aviv, Israel(1)(3)

Elron Electronic Industries Ltd.                   7,815,448           19.95%
3 Azrieli Center, 42nd Floor
Tel-Aviv, Israel(2)(3)

Bank Hapoalim Group                                2,664,690            6.80%
Tel-Aviv, Israel(4)

Bank Leumi Group
Tel-Aviv, Israel(4)                                2,326,413            5.93%

All officers and directors
as a group (23 persons)                            291,240(5)          0.74%
- ----------------------------


<PAGE>

(1)      The Federmann  Group includes  Federmann  Enterprises  Ltd.  (Federmann
         Enterprises),  an Israeli  company that holds 21.09% of Elbit  Systems'
         shares, and Heris  Aktiengesellschaft  (Heris), a Liechtenstein company
         that holds 9.79% 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  Electronic  Industries  Ltd.  (Elron) is a  multinational,  high
         technology  operational  holding  company  whose  business is conducted
         through a group of high technology operating  companies.  The principal
         shareholders of Elron are Discount  Investment  Corporation Ltd. (DIC),
         the Bank Leumi Group and the Clal Insurance Group,  which as of July 1,
         2003 held approximately 38.49%, 8.24%, and 2.25%, respectively,  of the
         voting power of Elron.

         IDB Holding  Corporation  Ltd.  (IDBH) is the parent of IDB Development
         Corporation  Ltd.  (IDBD),  which, in turn, is the parent of DIC. 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.


<PAGE>

         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  Federmann  Group and Elron may be deemed to be joint owners of the
         aggregate  ordinary shares of Elbit Systems  beneficially owned by them
         by virtue of a shareholders  agreement  dated December 19, 1999 between
         the Federmann Group and Elron,  which agreement  provides,  among other
         things,  for their  coordinated  voting at Elbit  Systems'  shareholder
         meetings and for their equal  representation on Elbit Systems' Board of
         Directors.  The  Federmann  Group and Elron  disclaim  such  beneficial
         ownership.

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

(5)      This  includes  261,322  shares  underlying  options that are currently
         exercisable or that will become  exercisable within 60 days of the date
         of this  Proxy  Statement.  A portion  of the  underlying  options  are
         "phantom options" that have been calculated based on the Company's July
         1, 2003 share price of $19.40.

                    INFORMATION REGARDING EXTERNAL DIRECTORS

The Company is required under the Israeli  Companies Law - 1999 (the  "Companies
Law") to have at least two External  Directors on its Board of Directors.  Among
other  requirements  of the Companies Law, a person may not serve as an External
Director if such person or such person's relative,  partner or employer,  or any
entity  controlled  by such person,  has, at any time during the two years up to
the date of appointment,  any affiliation with the Company, entities controlling
the Company or entities  controlled by the Company.  The term  "affiliation"  is
broadly  defined in the  Companies  Law. In addition,  no person may serve as an
External  Director  if such  person's  position  or other  business  creates any
conflict of interest with or impairs his or her  responsibilities as an External
Director.

Each  committee  of the  Company's  Board of Directors is required to include at
least one External  Director,  and all External Directors must be members of the
Board of  Directors'  Audit  Committee.  An  External  Director  is  entitled to
compensation and to  reimbursement of expenses as provided in regulations  under
the  Companies  Law  and  is  otherwise  prohibited  from  receiving  any  other
compensation, directly or indirectly, in connection with services provided as an
External  Director.  External  Directors  are elected at a general  shareholders
meeting  and  serve  for a  three-year  term.  The term may be  extended  for an
additional   three-year   term  if  the  extension  is  approved  by  a  general
shareholders meeting.

Nathan Sharony currently serves as an External  Director.  His term of office as
an External Director ends in March 2005. In May 2003, Joel Feldschuh resigned as
an External  Director due to his anticipated  nomination for an officer position
with a company  affiliated  with IDBH, a controlling  shareholder of Elron.  Mr.
Yaacov  Lifshitz  has  been  nominated  to fill  the  vacant  External  Director
position.


<PAGE>
                         ITEM 1 - ELECTION OF DIRECTORS

At the Meeting nine  directors  who are not External  Directors and one External
Director  (see list of nominees  below) are to be elected.  Also,  if elected to
another term as a director, Michael Federmann will continue to serve as Chairman
of the Board of Directors.

The persons  named in the form of proxy  intend to vote for the  election of the
ten nominees  named  below,  eight of whom  currently  serve as directors of the
Company.  Mr.  Lifshitz  has been  nominated  to serve as an External  Director,
replacing Mr.  Feldschuh  who resigned in May 2003 as noted above.  In addition,
Lenny Recanati resigned from the Board of Directors in May 2003, and Avi Fischer
has been nominated to replace him on the Board of Directors.

The Company  expresses its appreciation to Mr. Feldschuh and to Mr. Recanati for
their  contributions  to the  Company  during  their  service  on the  Board  of
Directors.

The  Companies  Law provides  that a general  shareholders  meeting at which the
appointment of an External  Director is to be considered will not be held unless
the  nominee  has  declared  to the  Company  that he or she  complies  with the
qualifications for appointment as an External Director.  The proposed nominee to
be an External  Director  of the  Company,  Mr.  Lifshitz,  has  declared to the
Company that he complies with the  qualifications for appointment as an External
Director.

Each nominee,  other than the External  Director,  so elected as a director will
hold office until the next shareholders' Annual General Meeting and until his or
her successor is elected and qualified,  unless any director's office is vacated
earlier in accordance  with the provisions of the Companies Law or the Company's
Articles of Association.  Mr. Lifshitz, if elected as an External Director, will
hold  office for a  three-year  term  unless  his  office is vacated  earlier in
accordance with the provisions of the Companies Law or the Company's Articles of
Association.

The  Company  is not aware of any reason why any of the  nominees,  if  elected,
should be unable to serve as a director.  Nevertheless,  if any of the nominees,
other than the External Director, should be unable to serve, the proxies will be
voted for the  election  of such other  person or persons as  determined  by the
person named in the form of proxy in accordance with his or her judgment. If the
nominee to the position of External Director should be unable to serve,  another
person will be elected in accordance with applicable law.

The nominees and the current External Director, their respective ages on July 1,
2003, and the year in which they became directors of the Company are as follows:


<PAGE>



BOARD OF DIRECTORS

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

Michael Federmann (Chairman)                  59                   2000
Joseph Ackerman                               54                   1996
Avraham Asheri                                65                   2000
Rina Baum                                     58                   2001
Aharon Beth-Halachmi                          66                   2000
Doron Birger                                  52                   2002
Ami Erel                                      56                   1999
Yaacov Lifshitz (External Director)           59                   - -
Avi Fischer                                   46                   - -
Dov Ninveh                                    56                   2000
Nathan Sharony (External Director)            68                   2002


         MICHAEL  FEDERMANN.  Michael  Federmann  has served as  Chairman of the
Board of  Directors  of Elbit  Systems  since the merger (the  Merger) with Elop
Electro-Optics  Industries  Ltd.  (El-Op) in 2000.  He served as Chairman of the
Board of Directors of El-Op from 1988 until the Merger.  He has held  managerial
positions  in the  Federmann  Group since 1969,  and since  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 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  of Elbit  Systems 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  Inc.,  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,  Discount  Mortgage Bank Ltd.,  Kardan  Nadlan Ltd.,  Scitex
Corporation   Ltd.   (Scitex),   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.


<PAGE>

         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  Israeli  Ministry  of  Defense.  Prior to that he served in the
Israeli  Defense  Forces  (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
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 was recently nominated to be Chairman of the Board of
Directors of Scitex and 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  bachelor  of  science  degree  in
electrical engineering from the Technion.

         AVI FISCHER. Avi Fischer was appointed as the Co-CEO of Clal Industries
&  Investments  Ltd.  (Clal) in June 2003.  Mr.Fischer  is a co-founder of the
Ganden Group and has served as the  Co-Chairman  of Ganden  Tourism and Aviation
Ltd.  and as the Vice  Chairman  of Ganden  Holdings  Ltd.  since  1999.  He has
practiced  law  since  1983  and is a  Co-Managing  Partner  in the law  firm of
Fischer,  Behar,  Chen & Co. He  currently  serves on the boards of directors of
IDBH, DIC, Clal, Scitex,  Vyyo Inc., Natour Ltd. and Nichsei Azorim Ltd. as well
as several  privately held  companies.  Mr. Fischer holds an L.L.B.  degree from
Tel-Aviv University.


<PAGE>

         YAACOV LIFSHITZ (EXTERNAL DIRECTOR).  Mr. Lifshitz serves as a director
of several companies and as a lecturer in the fields of economics, public policy
and  management.  He currently is a lecturer at the  Department of Economics and
the Department of Public Policy and  Management of Ben-Gurion  University and at
the  Department  of Economics and  Management  of the Tel-Aviv - Jaffa  Academic
College.  He also  currently  serves on the boards of  directors of DorGas Ltd.,
Kali - Insurance  Agencies Ltd.,  Spring - Pension Fund Management Ltd.,  Carmel
Investments Ltd. and Tesnet Software Testing Ltd. During the period from 1994 to
2002,  Mr.  Lifshitz  served at various  times as the  chairman of the boards of
directors of Hamashbir  Lazarchan Israel Ltd., Israel Military  Industries Ltd.,
Spectronix  Ltd.,  Dor  Chemicals  Ltd,  Dor Energy Ltd.,  DorGas Ltd.,  and the
Israeli Foreign Trade Risk Insurance Corp. Ltd. He also served from 1995 to 2002
as the Chairman of the Executive Board of the Israel Management Center. Prior to
that he held various  senior  positions  in  government,  banking and  industry,
including  Director  General of the Israel  Ministry of Finance,  Chief Economic
Advisor to the Israel  Ministry of  Defense,  Senior  Vice  President  and Chief
Credit Officer of Israel Discount Bank and President and CEO of Electra (Israel)
Ltd. Mr. Lifshitz holds a bachelor's  degree in economics and political  science
and a master's degree in economics from the Hebrew University.

         DOV NINVEH.  Dov Ninveh has served since 1994 as 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.,
Akershtain  Industries Ltd., Ormat Industries Ltd., Genoa  Technologies Ltd. and
International  Technologies  (Lasers)  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.


THE BOARD OF  DIRECTORS  RECOMMENDS  A VOTE FOR ALL THE NOMINEES TO THE BOARD OF
DIRECTORS.




<PAGE>



                             ITEM 2 - APPOINTMENT OF
                       THE COMPANY'S INDEPENDENT AUDITORS
                              FOR FISCAL YEAR 2003

At the  Meeting,  Luboshitz  Kasierer,  an  affiliate  member  of  Ernst & Young
International  Certified Public Accountants,  will be nominated by the Company's
Board of Directors for reappointment as independent  auditors of the Company for
the fiscal year ending  December 31, 2003. A  representative  of the independent
auditors  will be present at the  Meeting  and will be  available  to respond to
appropriate questions from the shareholders.

At the  Meeting,  the  Board  of  Directors  will  propose  that  the  following
resolution be adopted:

         "RESOLVED,  that the  Company's  independent  auditors,  Luboshitz
         Kasierer, an affiliate member of Ernst & Young International,  are
         reappointed as independent  auditors of the Company for the fiscal
         year ending December 31, 2003."

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THIS RESOLUTION.



                  COMPENSATION PAID TO THE COMPANY'S DIRECTORS
                              FOR FISCAL YEAR 2002

 The Companies Law requires shareholder approval of the compensation paid to the
Company's  directors,  including  compensation as an officer of the Company. The
compensation  paid to directors for the fiscal year ended  December 31, 2002 was
previously approved by the Company's shareholders.


                                   By Order of the Board of Directors



                                   MICHAEL FEDERMANN
                                   Chairman of the Board of Directors



                                   JOSEPH ACKERMAN
                                   President and Chief Executive Officer


Date:  July 15, 2003
<PAGE>

                               ELBIT SYSTEMS LTD.

                THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
                 FOR THE ANNUAL GENERAL MEETING OF SHAREHOLDERS
                          TO BE HELD ON AUGUST 6, 2003




KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned hereby appoints MICHAEL
FEDERMANN, JOSEPH ACKERMAN and ARIE TAL, and each of them, the true and lawful
proxies of the undersigned, with full power of substitution, to vote with
respect to all of the undersigned's ordinary shares of ELBIT SYSTEMS LTD. (the
"Company"), at the Annual General Meeting of Shareholders of the Company to be
held at the Company's offices at the Azrieli Center in Tel-Aviv, Israel on
August 6, 2003, at 3 p.m. local time, and at any adjournments, with all power
that the undersigned would have if personally present and especially (but
without limitation) to vote as follows:

The shares represented by this Proxy will be voted in the manner directed, and
if no instructions to the contrary are indicated, will be voted "FOR" all
Proposals listed on the reverse side.




                   CONTINUED AND TO BE SIGNED ON REVERSE SIDE




<PAGE>





A     |--------|
      |        |
      |    X   |        Please mark your votes as in this example
      |        |
      |--------|
<TABLE>
<CAPTION>
1. ELECTION OF DIRECTORS

      FOR all listed nominees (except as marked        WITHHOLD AUTHORITY                          Nominees:
      to the contrary)                                 To vote for all nominees listed at right    Joseph Ackerman, Avraham Asheri,
                                                                                                   Rina Baum, Aharon
                                                                                                   Beth-Halachmi, Doron Birger,
                                                                                                   Ami Erel, Michael Federmann
                                                                                                   (Chairman), Avi Fischer, Yaacov
                                                                                                   Lifshitz (External Director) and
                                                                                                   Dov Ninveh
<S>                                                    <C>
                     |--------|                         |--------|
                     |        |                         |        |
                     |        |                         |        |
                     |        |                         |        |
                     |--------|                         |--------|


         (Instructions:    to   withhold
         authority   to  vote   for  any
         individual  nominee,  strike  a
         line through the nominee's name
         in the list at right)
</TABLE>



2. APPOINTMENT OF THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING
   DECEMBER 31, 2003:

<PAGE>


         |--------| FOR         |--------| AGAINST         |--------|ABSTAIN
         |        |             |        |                 |        |
         |        |             |        |                 |        |
         |        |             |        |                 |        |
         |--------|             |--------|                 |--------|

                                    * * * * *

Any proxies previously given are hereby revoked.




                                              Dated: ___________________, 2003

[Name, address, number of shares]             ________________________________

                                              ______________________
                                              Signature

                                              ______________________
                                              Signature

                                              IMPORTANT:  Please sign  exactly
                                              as   name(s)    appears   Above.
                                              Executors,       administrators,
                                              trustees,  etc.  should indicate
                                              the capacity in which they sign.




The above-signed hereby acknowledge(s) receipt of the Notice of Annual General
Meeting of Shareholders and the accompanying Proxy Statement.






</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<FILENAME>exhibit2.txt
<DESCRIPTION>EXHIBIT 2
<TEXT>
                                 EXHIBIT 2












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



                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2002
                             -----------------------
                         (IN THOUSANDS OF U.S. DOLLARS)

<PAGE>







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




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




                                                                         PAGE


REPORT OF INDEPENDENT AUDITORS                                          2 - 2(a)

CONSOLIDATED FINANCIAL STATEMENTS

  Consolidated Balance Sheets                                           3 - 4

  Consolidated Statements of Operations                                   5

  Consolidated Statements of Changes in Shareholders' Equity            6 - 7

  Consolidated Statements of Cash Flows                                 8 - 9

  Notes to the Consolidated Financial Statements                       10 - 58





                                  # # # # # # #



<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


                                      -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




                                     -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.

                                      -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.

                                      -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.

                                      -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.

                                      -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.


                                      -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.


                                      -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.


                                      -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.


                                      -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.



                                      -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.


                                      -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.



                                      -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.


                                      -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.



                                      -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.

                                      -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.


                                      -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.



                                      -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.


                                      -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.


                                      -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.


                                      -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.


                                      -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.


                                      -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.


                                      -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


                                      -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>


                                      -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).


                                      -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.


                                      -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 interest rates of Libor + 1.5%.

NOTE 4   -        OTHER RECEIVABLES AND PREPAID EXPENSES

                                                            DECEMBER 31,
                                                     --------------------------
                                                        2002             2001
                                                     ---------         --------
              Prepaid expenses                        $12,244          $ 13,445
              Government departments                    5,915             4,937
              Employees                                 1,029               710
              Deferred income taxes                    11,675            11,631
              Other                                     3,513             5,486
                                                     --------          --------
                                                     $ 34,376          $ 36,209
                                                     ========          ========


                                      -29-
<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.


                                      -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.

                                      -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).


                                      -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).


                                      -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.


                                      -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>


                                      -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
              (1)      Provision for vacation pay         20,492         18,380
              Government departments                      22,443         28,750
              (2)       Provision for warranty            26,641         22,723
              Cost provisions and other                   45,038         39,797
                                                        ---------      ---------
                                                        $142,526       $135,386
                                                        =========      =========


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

                                                              DECEMBER 31,
                                                        ------------------------
                                                           2002          2001
                                                        ---------      ---------

               Advances received                        $227,111       $184,112
               Less -
                 Advances presented under long-term
                    liabilities                           40,411         29,840
                 Advances deducted from inventories       67,624         49,969
                                                        ---------      ---------
                                                         119,076        104,303
               Less -
                 Costs of contracts in progress           10,658         10,961
                                                        ---------      ---------
                                                        $108,418        $93,342
                                                        =========      =========



                                      -36-
<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.


                                      -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%




                                      -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.


                                      -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  deduct  for tax  purposes  public
                            issuance expenses.

                     (3)    TAX   BENEFITS    UNDER   ISRAEL'S   LAW   FOR   THE
                            ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959:

                            Four  expansion  programs of the  Company  have been
                            granted "Approved  Enterprise" status under Israel's
                            Law for the  Encouragement  of Capital  Investments,
                            1959. For these expansion programs,  the Company has
                            elected to receive grant.  Accordingly the income of
                            the Company  derived from the "Approved  Enterprise"
                            expansion programs is tax exempt for two-year period
                            and   subject  to  reduced  tax  rates  of  25%  for
                            five-year period commencing in the year in which the
                            Company first  generates  taxable income (limited to
                            twelve  years from  commencement  of


                                      -40-
<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.


                                      -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.


                                      -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.


                                      -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>


                                      -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
                        liability.


                    (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>


                                      -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.

                                      -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.

                                      -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  minimum  lease  commitments  of the Group under
                     various   non-cancelable   operating  lease  agreements  in
                     respect of premises,  motor  vehicles and office  equipment
                     are as of December 31, 2002:

                             2003                                     $8,197
                             2004                                      8,985
                             2005                                      4,834
                             2006                                      4,156
                             2007 and there after                      3,877
                                                                     -------
                                                                     $30,049
                                                                     =======

                     Rent expenses for the years ended  December 31, 2000,  2001
                     and  2002   amounted   to  $7,411,   $7,978,   and  $9,215,
                     respectively.

              E.     The Company has provided,  on a  proportional  basis to its
                     ownership interest,  guarantees for two of its investees in
                     respect of credit  lines from  banks  amounting  to $10,600
                     (2001-  $10,700),  of which $10,200 (2001 - $9,700) relates
                     to a foreign  investee  owned 50% by El-Op.  The guarantees
                     will exist as long as the credit  lines are in effect.  The
                     Company  would be liable to perform under the guarantee for
                     any debt the investee  would be in default  under the terms
                     of the credit line.


                                      -48-
<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


                                      -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>


                                      -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


                                      -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.


                                      -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>

                                      -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>


                                      -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>


                                      -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:


                                      -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>

                                      -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>


                                                            # # # # # # # #


                                      -58-

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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