EX-3 5 v094556_ex3.htm

Unassociated Document

Exhibit 3

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2007

(Unaudited)

(In thousands of U.S. dollars)

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED

FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2007

(Unaudited)

(In thousands of U.S. dollars)

CONTENTS

		Page
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets		2 - 3
Consolidated Statements of Income		4
Consolidated Statements of Changes in Shareholders’ Equity		5 -6
Consolidated Statements of Cash Flows		7 - 8
Notes to the Consolidated Financial Statements		9 - 15

# # # # # #

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars (in thousands)

		September 30,			December 31,
		2007			2006
		(Unaudited)			(Audited)
CURRENT ASSETS:
Cash and cash equivalents		$	306,923		$	84,564
Short-term bank deposits			14,464			836
Available for sale marketable securities			95,297			2,106
Trade receivables, (net of allowance for doubtful accounts in the amount of $3,956 and $3,390 as of September 30, 2007 and December 31, 2006, respectively)			411,022			384,487
Other receivables and prepaid expenses			112,906			78,836
Inventories, net of advances			435,548			371,962
Total current assets			1,376,160			922,791
INVESTMENTS AND LONG-TERM RECEIVABLES:
Investments in affiliated companies and a partnership			64,245			235,723
Compensation receivable in respect of fire damages, net			15,530			15,530
Long-term bank deposits and trade receivables			10,498			6,030
Deferred income taxes			18,720			8,783
Severance pay fund			223,590			160,620
			332,583			426,686
PROPERTY, PLANT AND EQUIPMENT, NET			336,283			294,628
INTANGIBLE ASSETS:
Goodwill			331,674			58,401
Other intangible assets, net			309,271			70,594
			640,945			128,995
		$	2,685,971		$	1,773,100

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

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars (in thousands, except share data)

		September 30,			December 31,
		2007			2006
		(Unaudited)			(Audited)
CURRENT LIABILITIES:
Short-term bank credit and loans		$	19,372		$	17,802
Current maturities of long-term loans			16,052			10,199
Trade payables			228,957			158,361
Other payables and accrued expenses			441,645			274,799
Customers advances and amounts in excess of costs incurred on contracts in progress			493,671			349,724
Total current liabilities			1,199,697			810,885
LONG-TERM LIABILITIES:
Long-term loans			431,311			125,266
Advances from customers			153,383			126,769
Deferred income taxes and tax reserve			95,078			20,658
Accrued termination liability			280,980			189,067
			960,752			461,760
MINORITY INTERESTS			11,912			6,871
SHAREHOLDERS’ EQUITY:
Share capital
Ordinary shares of New Israeli Shekels (NIS) 1 par value;
Authorized - 80,000,000 shares as of September 30, 2007 and December 31, 2006;
Issued - 42,462,273 and 42,425,595 shares as of September 30, 2007 and December 31, 2006, respectively;
Outstanding - 42,053,352 and 42,016,674 shares as of September 30, 2007 and December 31, 2006, respectively			11,885			11,876
Additional paid-in capital			293,443			289,026
Accumulated other comprehensive loss			(21,434	)		(16,746	)
Retained earnings			234,037			213,749
Treasury shares - 408,921 shares as of September 30, 2007 and December 31, 2006			(4,321	)		(4,321	)
			513,610			493,584
		$	2,685,971		$	1,773,100

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

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

U.S. dollars (in thousands, except share and per share data)

		Nine months ended September 30,						Three months ended September 30,						Year ended December 31,
		2007			2006			2007			2006			2006
		(Unaudited)						(Unaudited)						(Audited)
Revenues		$	1,390,705		$	1,055,855		$	518,947		$	376,670		$	1,523,243
Cost of revenues			1,020,022			782,605			378,755			280,538			1,149,768
Restructuring expenses			10,482			-			-			-			-
Gross profit			360,201			273,250			140,192			96,132			373,475
Research and development costs, net			87,594			64,363			34,520			24,574			92,232
Marketing and selling expenses			113,134			81,027			41,558			27,397			111,880
General and administrative expenses			73,182			57,454			28,764			19,727			77,505
In-process research and development write-off			16,560			-			-			-			-
			290,470			202,844			104,842			71,698			281,617
Operating income			69,731			70,406			35,350			24,434			91,858
Financial expenses, net			(8,698	)		(15,363	)		(736	)		(4,445	)		(21,456	)
Other income (expenses), net			82			391			(13	)		231			1,814
Income before taxes on income			61,115			55,434			34,601			20,220			72,216
Taxes on income			21,311			16,645			9,189			7,279			20,694
			39,804			38,789			25,412			12,941			51,522
Equity in net earnings of affiliated companies and partnership			10,021			8,189			4,248			4,575			14,743
Minority interests in losses (earnings) of subsidiaries			(5,042	)		1,304			(3,285	)		1,227			5,977
Net income		$	44,783		$	48,282			26,375		$	18,743		$	72,242
Earnings per share
Basic net earnings per share		$	1.07		$	1.17		$	0.63		$	0.45		$	1.75
Diluted net earnings per share		$	1.06		$	1.15		$	0.62		$	0.45		$	1.72
Number of shares used in computation of basic net earnings per share			42,036			41,165			42,045			41,360			41,340
Number of shares used in computation of Diluted net earnings per share			42,372			41,819			42,307			41,913			41,880

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

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars (in thousands, except share data)

		Number of outstanding shares			Share capital			Additional paid-in capital			Accumulated other comprehensive loss			Retained earnings			Treasury shares			Total shareholders’ equity			Total comprehensive income
Balance as of January 1, 2006			40,966,624		$	11,636		$	278,679		$	(1,340	)	$	166,123		$	(4,321	)	$	450,777
Exercise of options			1,050,050			240			8,008			-			-			-			8,248
Tax benefit in respect of options exercised			-			-			2,144			-			-			-			2,144
Stock based compensation			-			-			195			-			-			-			195
Dividends declared			-			-			-			-			(24,616	)		-			(24,616	)
Other comprehensive income (loss), net of tax:
Unrealized loss on derivative instruments			-			-			-			(15,642	)		-			-			(15,642	)	$	(15,642	)
Foreign currency translation differences			-			-			-			2,034			-			-			2,034			2,034
Increase in additional minimum pension liability per FAS 87			-			-			-			2,603			-			-			2,603			2,603
Adjustment for adoption of FAS 158 for the pension plans as of December 31, 2006			-			-			-			(4,341	)		-			-			(4,341	)		-
Adjustment for adoption of FAS 158 for the post medical plan as of December 31, 2006			-			-			-			(252	)		-			-			(252	)		-
Unrealized gain on available for sale securities			-			-			-			192			-			-			192			192
Net income			-			-			-			-			72,242			-			72,242			72,242
Total comprehensive income																							$	61,429
Balance as of December 31, 2006			42,016,674		$	11,876		$	289,026		$	(16,746	)	$	213,749		$	(4,321	)	$	493,584
Exercise of options			36,678			9			634			-			-			-			643
Tax benefit in respect of options exercised			-			-			146			-			-						146
Stock based compensation			-			-			3,637			-			-						3,637
Dividends paid			-			-			-			-			(19,649	)		-			(19,649	)
Cumulative impact of change in accounting for uncertainties in income taxes (FIN 48)			-			-			-			-			(4,846	)		-			(4,846	)
Other comprehensive income (loss), net of tax:
Unrealized losses on derivative instruments			-			-			-			(7,216	)		-			-			(7,216	)		(7,216	)
Foreign currency translation differences			-			-			-			1,698			-			-			1,698			1,698
Unrealized gain on available for sale securities			-			-			-			830			-			-			830			830
Net income			-			-			-						44,783			-			44,783			44,783
Total comprehensive income																							$	40,095
Balance as of September 30, 2007 (Unaudited)			42,053,352		$	11,885		$	293,443		$	(21,434	)	$	234,037		$	(4,321	)	$	513,610

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

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars (in thousands, except share data) 

		Number of outstanding shares			Share capital			Additional paid-in capital			Accumulated other comprehensive income (loss)			Retained earnings			Treasury shares			Total shareholders’ equity			Total comprehensive income
Balance as of July 1, 2006 (Unaudited)			41,216,786		$	11,670		$	280,682		$	(8,916	)	$	183,861		$	(4,321	)	$	462,976
Exercise of options			403,316			114			3,111			-			-			-			3,225
Tax benefit in respect of options exercised			-			-			902			-			-			-			902
Dividends paid			-			-			-			-			(6,240	)		-			(6,240	)
Other comprehensive income (loss):
Unrealized gains on derivative instruments			-			-			-			(2,064	)		-			-			(2,064	)	$	(2,064	)
Foreign currency translation differences			-			-			-			744			-			-			744			744
Unrealized gain from securities			-			-			-			123			-			-			123			123
Net income			-			-			-			-			18,743			-			18,743			18,743
Total comprehensive income																							$	17,546
Balance as of September 30, 2006 (Unaudited)			41,620,102		$	11,784		$	284,695		$	(10,113	)	$	196,364		$	(4,321	)	$	478,409
Balance as of July 1, 2007 (Unaudited)			42,042,089		$	11,882		$	291,532		$	(16,162	)	$	214,259		$	(4,321	)	$	497,190
Exercise of options			11,263			3			353			-			-			-			356
Tax benefit in respect of options exercised			-			-			82			-			-			-			82
Stock based compensation			-			-			1,476			-			-			-			1,476
Dividends paid			-			-			-			-			(6,597	)		-			(6,597	)
Other comprehensive income (loss):
Unrealized gains on derivative instruments			-			-			-			(5,135	)		-			-			(5,135	)	$	(5,135	)
Foreign currency translation differences			-			-			-			673			-			-			673			673
Adjustment for adoption of FAS 158 for the post medical plan as of December 31, 2006			-			-			-			(1,163	)		-			-			(1,163	)		(1,163	)
Unrealized gain from securities			-			-			-			353			-			-			353			353
Net income			-			-			-			-			26,375			-			26,375			26,375
Total comprehensive income																							$	21,103
Balance as of September 30, 2007 (Unaudited)			42,053,352		$	11,885		$	293,443		$	(21,434	)	$	234,037		$	(4,321	)	$	513,610

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

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars (in thousands)

		Nine months ended September 30,						Year ended December 31,
		2007			2006			2006
		(Unaudited)						(Audited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	44,783		$	48,282		$	72,242
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			65,980			43,831			58,500
Purchased in process R&D			16,560			-			-
Stock based compensation			3,637			-			195
Deferred income taxes			(21,162	)		(1,630	)		(4,659	)
Accrued severance pay, net			(3,583	)		(8,809	)		(5,197	)
Gain on sale of property and equipment			(918	)		(1,242	)		(2,351	)
Minority interests in earnings (losses) of subsidiaries			5,042			(1,304	)		(5,977	)
Equity in net earnings of affiliated companies and partnership, net of dividend received (*)			(407	)		(1,042	)		(1,696	)
Changes in operating assets and liabilities:
Increase in short-term and long-term receivables and prepaid expenses			(13,101	)		(6,318	)		(58,793	)
Increase in inventories			(52,039	)		(59,779	)		(69,974	)
Increase in trade payables, other payables and accrued expenses			76,714			43,665			75,869
Increase in advances received from customers			92,723			94,311			142,844
Other adjustments			5			(75	)		(35	)
Net cash provided by operating activities			214,234			149,890			200,968
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment			(65,903	)		(44,277	)		(64,809	)
Acquisition of subsidiaries and businesses (Schedule A)			(353,175	)		-			-
Investments in affiliated companies			(556	)		(31,232	)		(31,930	)
Proceeds from sale of property, plant and equipment			3,922			4,057			5,705
Proceeds from sale of investment			-			-			5,000
Investment in long-term bank deposits			(3,130	)		(710	)		(880	)
Proceeds from sale of long-term bank deposits			16,473			695			780
Short-term bank deposits, net			115,904			(1,781	)		(862	)
Net cash used in investing activities			(286,465	)		(73,248	)		(86,996	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options			643			5,122			8,248
Repayment of long-term bank loans			(119,234	)		(286,961	)		(188,723	)
Receipt of long-term bank and other loans			429,567			203,853			85,053
Dividends paid			(19,647	)		(18,041	)		(24,322	)
Tax benefit in respect of options exercised			146			1,042			2,144
Change in short-term bank credit and loans, net			3,115			(7,706	)		(5,695	)
Net cash provided by (used in) financing activities			294,590			(102,691	)		(123,295	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			222,359			(26,049	)		(9,323	)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD			84,564			93,887			93,887
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD		$	306,923		$	67,838		$	84,564
(*) Dividend received		$	9,614		$	7,147		$	13,047

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

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars (in thousands)

		Nine months ended September 30,						Year ended December 31,
		2007			2006			2006
		(Unaudited)						(Audited)
SUPPLEMENTARY CASH FLOWS ACTIVITIES:
Cash paid during the period for:
Income taxes		$	22,610		$	14,709		$	15,955
Interest		$	12,767		$	14,199		$	14,311
SCHEDULE A:
Subsidiaries acquired (Tadiran and FTL- see Notes 1B and C)
Estimated net fair value of assets acquired and liabilities assumed at the date of acquisition:
Working capital, net (excluding cash and cash equivalents)		$	40,540		$	-		$	-
Property, plant and equipment			25,175			-			-
Other long-term assets			63,063			-			-
Goodwill and other intangible assets			530,536			-			-
In-process R&D			16,560			-			-
Deferred income taxes			(71,919	)		-			-
Long-term liabilities			(76,910	)		-			-
Equity investment in Tadiran			(173,870	)		-			-
		$	353,175		$	-		$	-

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

- -

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

U. S. dollars (In thousands)

Note 1 - GENERAL

A. The accompanying financial statements have been prepared in a condensed format as of September 30, 2007, and for the three and nine months then ended in accordance with generally accepted accounting principles in the United States ")U.S. GAAP”( relating to the preparation of financial statements for interim periods. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP, but which are not required for interim reporting purposes, have been condensed or omitted.

These statements should be read in conjunction with the Company’s annual financial statements and accompanying notes as of December 31, 2006.

The interim financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation. All such adjustments were of a normal recurring nature. Reclassifications have been made to comparative data in the balance sheet as of December 31, 2006 in order to conform to the current year’s presentation.

Operating results for the nine and three months ended September 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

B. On April 26, 2007, the Company completed its Cash Tender Offer (“the Offer”) for the balance of the ordinary shares of Tadiran Communications Ltd. (“Tadiran”), which prior to the completion of the Offer was a publicly traded company in Israel, held 42% by the Company and recorded the investment as an equity investee. As a result, Tadiran became a private, wholly-owned subsidiary of the Company. The total amount paid by the Company for the Tadiran shares relating to the Offer was approximately $383 million. The results of Tadiran are consolidated in the Company’s financial statements commencing the beginning of the month after the date of completion of the Offer.

The table below summarizes the Preliminary Purchase Price Allocation (“PPA”), for the aggregate assets acquired, and liabilities assumed, in connection with the acquisition of the Tadiran shares as follows:

		Acquired share of book value in Tadiran			Excess cost			Total			Expected useful lives of excess cost
			(in thousands of U.S. dollars)
Working capital		$	67,600			(17,400	)	$	50,200			Up to a quarter
Long-term assets and investments			44,100			1,100			45,200			20 years
Long-term liabilities			(53,000	)		800			(52,200	)		3 years
Brand name			5,700			18,200			23,900			15 years
Customer relationships and backlog			-			96,800			96,800			2-10 years
Technology			2,700			40,800			43,500			10 years
IPR&D			-			16,600			16,600			Immediate write-off
Deferred taxes			-			(35,100	)		(35,100	)
Goodwill			32,800			161,300			194,100			Indefinite - subject to annual impairment test
		$	99,900		$	283,100		$	383,000

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

U. S. dollars (In thousands)

Note 1 - GENERAL (Cont.)

The assets and liabilities recorded in connection with the PPA for the Tadiran acquisition are based upon preliminary estimates of fair values for contracts in process, inventories, estimated costs in excess of estimated contract value to complete contracts in process in a loss position, contingent assets and liabilities, identifiable intangibles, goodwill, property, plant and equipment and deferred income taxes. Actual adjustment will be based on the final appraisals and other analysis of fair values, which are in process. The Company expects to complete the PPA by the end of 2007. The Company does not expect the difference between the preliminary and final PPA for this business acquisition to have a material impact on its results of operations or financial position.

Following the acquisition of the Tadiran shares in the second quarter of 2007, the Company identified and wrote-off duplicated inventories and equipment and accrued termination costs in a total amount of $10,482, which was recorded as restructuring costs in the cost of revenues.

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

The proforma information reflects the results of the Company's operations assuming that Tadiran’s results were included in the Company’s consolidated results prior to each of the reported periods and under the following assumptions:

(1) Intangible assets (customer relationships, backlog, brand name and technology) arising from the acquisition of the Tadiran shares of approximately $228,000, net of related deferred taxes of approximately $57,000, is amortized over a period of 2-15 years.

(2) Excess of cost over equity purchased allocated to real estate assets of approximately $1,800, net of related deferred taxes of approximately $450, is amortized over a period of 20 years.

(3) The cost attributed to purchase IPR&D projects, in the amount of approximately $16,560, has been charged to operations immediately as a non-recurring item and is not included in the proforma consolidated results.

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

		Three months ended September 30,						Nine months ended September 30,
		2007			2006			2007			2006
Proforma sales		$	518,947		$	438,402		$	1,476,749		$	1,249,578
Proforma income		$	26,375		$	26,136		$	63,840		$	58,959
Proforma earnings per share
Basic		$	0.63		$	0.63		$	1.52		$	1.43
Diluted		$	0.62		$	0.62		$	1.51		$	1.41

C. On July 27, 2007, the Company reported that it acquired the entire share capital of the UK company Ferranti Technologies (Group) Limited (“FTL”) for £15 million (approximately $31,000).

The table below summarizes the preliminary PPA for the aggregate assets acquired, and liabilities assumed, in connection with the acquisition of FTL’s shares as follows:

		Acquired share of book value in FTL			Excess cost			Total			Expected useful lives of excess cost
			(in thousands of U.S. dollars)
Working capital		$	3,873		$	582		$	4,455			2 years
Long-term assets and investments			3,845			3,376			7,221			20 years
Non-competition			-			436			436			2 years
Brand name			-			1,119			1,119			15 years
Customer relationships and backlog			-			8,933			8,933			13-15 years
Technology			-			750			750			15 years
Deferred taxes			-			(4,559	)		(4,559	)
Goodwill			-			12,055			12,055			Indefinite - subject to annual impairment test
		$	7,718		$	22,692		$	30,410

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

U. S. dollars (In thousands)

Note 1 - GENERAL (Cont.)

The assets and liabilities recorded in connection with the PPA for the FTL acquisition are based upon preliminary estimates of fair values for contracts in process, inventories, estimated costs in excess of estimated contract value to complete contracts in process in a loss position, contingent assets and liabilities, identifiable intangibles, goodwill, property, plant and equipment and deferred income taxes. Actual adjustment will be based on the final appraisals and other analysis of fair values, which are in process. The Company expects to complete the PPA by the end of 2007. The Company does not expect the difference between the preliminary and final PPA for this business acquisition to have a material impact on its results of operations or financial position.

Proforma information in accordance with SFAS No. 141 has not been provided, since the net income of FTL was not material in relation to total revenues and net income of the Company.

Note 2 - SIGNIFICANT ACCOUNTING POLICIES

A. The significant accounting policies followed in the preparation of these statements are identical to those applied in preparation of the latest annual financial statements, except for the adoption of FASB Statement No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”).

The Company adopted the provisions of FIN 48 on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a minimum recognition threshold for a tax position taken or expected to be taken in a tax return that is required to be met before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of January 1, 2007, our unrecognized tax benefit (“tax contingencies”) totaled $18,750. As a result of the implementation of FIN 48, our tax contingencies increased by $4,846, which were recorded as a reduction to retained earnings. We do not expect a significant increase or decrease in unrecognized tax benefits over the next 12 months.

We record interest related to our tax contingencies as income tax expense. Our January 1, 2007 tax contingencies include $ 2,450 of interest.

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

U. S. dollars (In thousands)

Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

A. (Cont.)

The Company and its subsidiaries are subject to examination by various tax authorities in jurisdictions such as Israel, the United States and Europe. With respect to the Company and its major subsidiaries, we have completed the examinations by the tax authorities for tax years through 2000. The Company and certain subsidiaries are under examination of the tax authorities for the years 2001-2005. The Company does not expect any adverse affect will result from their examination.

B. Other new pronouncements issued but not effective as of September 30, 2007 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations, with the possible exception of the following, which are currently being evaluated by management:

(1) In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure eligible items at fair value at specific election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company beginning January 1, 2008. Management is currently evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations when it becomes effective in 2008.

(2) In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”, which defines fair value, establishes a framework for consistently measuring fair value under GAAP, and expands disclosures about fair value measurement. SFAS No. 157 is effective for the Company beginning January 1, 2008, and the provisions of SFAS No. 157 will be applied prospectively as of that date. Management is currently evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations when it becomes effective in 2008.

(3) On June 27, 2007 EITF 07-3 “Accounting for Nonrefundable Advance Payments for Good or Services Received for Use in Future Research and Development Activities (“EITF 07-3”) was issued. EITF 07-3 provides that nonrefundable advance payments made for goods or services to be used in future research and development activities should be deferred and capitalized until such time as the related goods or services are delivered or are performed, at which point the amounts would be recognized as an expense. This standard is effective for new contracts entered into after January 1, 2008. The Company is currently evaluating the impact of adopting EITF 07-3.

C. The accompanying financial statements have been prepared in U.S. dollars since the functional currency of the primary economic environment in which the operations of the Group (which includes Elbit Systems Ltd. and its subsidiaries) are conducted is the U.S. dollar.

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

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

Note 3 - INVENTORIES, NET OF ADVANCES

		September			December 31,
		2007			2006
		(Unaudited)			(Audited)
Cost of long-term contracts in progress		$	459,382		$	373,045
Raw materials			112,713			90,075
Advances to suppliers and subcontractors			49,148			41,037
			621,243			504,157
Less - Cost incurred on contracts in progress
deducted from customer advances			73,296			49,455
Advances received from customers			99,793			77,246
Provision for losses			12,606			5,494
		$	435,548		$	371,962

Note 4 - STOCK OPTION PLAN

In January 2007, the Company’s shareholders approved the Company’s 2007 Option Plan (the “Plan”) to employees of the Company and certain subsidiaries. The options include: (i) Regular Options - up to 1,250,000 options exercisable into 1,250,000 shares of the Company in consideration for the exercise price, all or any portion of which may be granted as Incentive Stock Options (“Regular Options”) and (ii) Cashless Options - up to 1,250,000 options, which entitle the participant to exercise options for an amount reflecting only the benefit factor (“Cashless Options”). Each of the participants is granted an equal amount of Regular Options and Cashless Options. The exercise price for Israeli participants is the average closing price of the Company’s share during 30 trading days preceding the options grant date. The exercise price of options granted to a non-Israeli participant residing in the United States is the fair market value of the share on the date the options are granted.

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

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

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

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

The options expire five years from the grant date.

The Company grants options to Israeli participants in accordance with the provisions of Section 102 of the Israel Tax Ordinance related to the Capital Gains Tax Track.

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

U. S. dollars (In thousands)

Note 4 - STOCK OPTION PLAN (Cont.)

A summary of the Company’s share option activity under the Plan and its previous stock option plan from 2000 is as follows: 

		Nine months ended						Year ended December 31,
		September 30, 2007						2006						2005
		Number of options			Weighted average exercise price			Number of options			Weighted average exercise price			Number of options			Weighted average exercise price
Outstanding - beginning of the year			167,460		$	15.70			1,602,752		$	12.83			2,130,257		$	12.60
Granted			2,381,300			33.27			-			-			22,000			19.36
Exercised			(46,124	)		15.95			(1,366,809	)		12.40			(549,505	)		12.38
Forfeited			(58,300	)		33.10			(68,483	)		12.55			-			-
Outstanding - end of the period			2,444,336		$	32.40			167,460		$	16.45			1,602,752		$	12.83
Options exercisable at the end of the period			57,211		$	15.57			75,085		$	15.70			1,470,752		$	12.47

Aggregate intrinsic value of outstanding options as of September 30, 2007, related to the above mentioned option plans amounted to $36,640. The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing stock price on the last trading day of the third quarter of 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2007. This amount changes based on the fair market value of the Company's stock.

Compensation expenses, related to the above mentioned option plans, net amounting to $3,637 were recorded in the nine months ended September 30, 2007. The expenses were recorded based on SFAS No. 123(R) and SAB 107. As of September 30, 2007, there was approximately $16,500 of total unrecognized compensation cost related to share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of four years.

Note 5 - COMMITMENTS AND CONTINGENT LIABILITIES

A. On July 4, 2007, the Company announced it was advised that a claim was filed by certain minority shareholders of ImageSat International N.V. (“ImageSat”). The claim was filled in the United States District Court for the Southern District of New York against ImageSat, Israel Aerospace Industries Ltd. (“IAI”), the Company and certain current and former officers and directors of ImageSat. ImageSat’s largest shareholder is IAI, holding approximately 46% of ImageSat’s issued share capital. Elbit Systems Electro-Optics Elop Ltd. (“Elop”) holds approximately 14% (7% on a fully diluted basis) of ImageSat’s issued share capital and is entitled to nominate one director to ImageSat’s board. ImageSat is engaged in the operation of satellites and in providing satellite imagery. IAI has manufactured and supplied ImageSat two satellites. Elop has manufactured the cameras for those satellites, as IAI's sub-contractor. The claim contains various allegations that the defendants allegedly breached their fiduciary and/or contractual obligations to the detriment of the plaintiffs, who are certain of ImageSat’s minority shareholders. The claim alleges various causes of action and damages aggregating hundreds of millions of dollars, not all of which are alleged against Elbit Systems and/or each of the former or current ImageSat directors. Based on a preliminary analysis, the Company believes it has good defenses to the claim.

ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

U. S. dollars (In thousands)

Note 5 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

B. On November 7, 2007, the Company announced that on November 6, 2007, a jury verdict was rendered in a trial in the U.S. against several defendants, including Kollsman, Inc. (“Kollsman”), a wholly-owned U.S. subsidiary of the Company. The trial involved primarily misappropriation of trade secrets relating to two models of a commercial air data computer. The jury’s verdict awarded damages against all of the defendants, including an award against Kollsman. The verdict also allows for the possibility of the court’s imposition of exemplary damages and other costs against any or all of the defendants based on willful conduct. Kollsman is evaluating the options available to it in light of the jury verdict and believes it has bases to appeal the verdict and to object to the imposition of any exemplary damages or other costs. The impact of the verdict is reflected in the third quarter results.

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