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Elbit Systems Ltd – ‘6-K’ for 3/16/06

On: Thursday, 3/16/06, at 10:45am ET · For: 3/16/06 · Accession #: 910680-6-220 · File #: 0-28998

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/16/06  Elbit Systems Ltd                 6-K         3/16/06    1:217K                                   Troutman Sanders LLP

Report of a Foreign Private Issuer — Form 6-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 6-K         March 16, 2006                                        88    433K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Other Expenses (Net)
1	1st Page - Filing Submission
25	Other Expenses (Net)

6-K 1st Page of 88 TOC ↑Top Previous Next ↓Bottom Just 1st
 
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 March 2006
 -----------------------

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 if the  registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): |_|                                 

Note:  Regulation  S-T Rule  101(b)(1) only permits the submission in paper of a
Form 6-K if submitted  solely to provide an attached  annual  report to security
holders.                                                                        

Indicate by check mark if the  registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): |_|                                 

Note:  Regulation  S-T Rule  101(b)(7) only permits the submission in paper of a
Form 6-K  submitted to furnish a report or other  document  that the  registrant
foreign  private  issuer  must  furnish  and make  public  under the laws of the
jurisdiction  in which the  registrant  is  incorporated,  domiciled  or legally
organized  (the  registrant's  "home  country"),  or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press  release,  is not required to be and has
not been distributed to the registrant's  security holders, and, if discussing a
material  event,  has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.                                                     

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      

If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______________                               

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      Attached hereto as Exhibit 1 and incorporated herein by reference is
the Registrant's press release, dated March 15, 2006.                           

      Attached hereto as Exhibit 2 and incorporated herein by reference is
the Registrant's Management Report with respect to the results of operations of 
the Registrant for the year ended December 31, 2005.                            

      Attached hereto as Exhibit 3 and incorporated herein by reference is
the Registrant's consolidated audited financial statements for the year ended   
December 31, 2005.                                                              

 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/ Ilan Pacholder
                                               ---------------------------------
                            Name:   Ilan Pacholder
                                 Title:  Corporate Secretary

Dated:  March 15, 2006                                                          

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

Exhibit No.            Description                                      
-----------            -----------                                      

1.                     Press release dated March 15, 2006               

2.                     Management's Report.                             

3.                     Financial Statements                             

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 EXHIBIT 1

                                                              EARNINGS RELEASE

ELBIT SYSTEMS REPORTS FOURTH QUARTER
AND FULL YEAR RESULTS FOR 2005

RECORD REVENUES, ORDER BACKLOG AND OPERATING CASH FLOW

o 55% INCREASE IN BACKLOG OF ORDERS TO $3.35 BILLION
o 13.8% INCREASE IN ANNUAL CONSOLIDATED REVENUES TO $1.07 BILLION 
o $187.6 MILLION IN OPERATING CASH FLOW 

HAIFA,  ISRAEL,  MARCH 15, 2005 - ELBIT  SYSTEMS LTD. (THE  "COMPANY")  (NASDAQ:
ESLT),  the  international  defense  electronics  company,  today  reported  its
consolidated results for the fourth quarter and year-ended December 31, 2005.   

THE COMPANY'S  BACKLOG OF ORDERS AS OF DECEMBER 31, 2005 reached $3.35  billion,
as compared to $2.15 billion at the end of 2004.  72% of the backlog  relates to
orders  outside  of Israel.  Approximately  65% of the  Company's  backlog as of
December 31, 2005 is scheduled to be performed during 2006 and 2007.            

CONSOLIDATED REVENUES FOR THE YEAR ENDED DECEMBER 31, 2005 increased by 13.8% to
$1,070 million, as compared to $940 million in 2004.                            

CONSOLIDATED  REVENUES  FOR THE  FOURTH  QUARTER OF 2004  increased  by 18.8% to
$321.8 million,  as compared to $270.8 million in the  corresponding  quarter of
2004.                                                                           

IMPACT ON 2005 RESULTS.  As previously  reported,  the Company's  2005 financial
results were expected to be effected by the  acquisition of 40% of the shares of
Tadiran Communications Ltd. ("Tadiran"),  which were purchased in several stages
in the fourth quarter of 2004 and during 2005, and by the purchase of 70% of the
shares of Elisra  Electronic  Systems Ltd.  ("Elisra") in the fourth  quarter of
2005.  As a  result  of  the  above  purchases  the  Company  recorded  one-time
In-Process R&D ("IPR&D") and one-time  write-offs  related to the  acquisitions.
The effects of the Tadiran  transactions  are recorded as part of the  Company's
earnings from affiliated  companies in its income  statement.  In addition,  the
Company's  net  earnings  were  affected  by $5.4  million  of value  impairment
recorded with respect to its holdings in ImageSat  International  N.V.  ("ISI"),
which is included in the Company's other expenses.                              

REPORTED  CONSOLIDATED  NET EARNINGS  FOR THE YEAR ENDED  DECEMBER 31, 2005 were
$32.5 million,  as compared to $51.9 million in 2004.  Reported diluted earnings
per share ("EPS") in 2005 were $0.78, as compared to $1.26 in 2004.             

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Excluding  one-time IPR&D and other one-time expenses and write-offs  related to
the purchase of the Tadiran and Elisra shares,  the Company's net income in 2005
was $51.1 million,  and the diluted EPS was $1.23,  as compared to net income of
$52.9 million and diluted EPS of $1.29 in 2004.                                 

REPORTED  CONSOLIDATED NET LOSS FOR THE FOURTH QUARTER OF 2005 was $5.7 million,
as compared  to net income of $13  million in the same period of 2004.  Reported
diluted EPS for the fourth quarter of 2005 was $(0.14), as compared to $0.31 for
the fourth quarter of 2004.                                                     

Excluding  one-time IPR&D and other one-time expenses and write-offs  related to
the purchase of the Tadiran and Elisra  shares,  the Company's net income in the
fourth quarter of 2005 was $7.6 million, and the diluted EPS was $0.18.         

GROSS  PROFIT FOR THE YEAR  ENDED  DECEMBER  31,  2005 was  $279.8  million,  as
compared to gross profit of $250.3  million in 2004, and the gross profit margin
in 2005 was 26.1%, as compared to 26.6% in 2004.                                

Excluding one-time restructuring expenses related to the purchase of Elisra, the
Company's gross profit in 2005 was $283.3  million,  and the gross profit margin
was 26.5%.                                                                      

GROSS PROFIT FOR THE FOURTH  QUARTER OF 2005 was $78.5  million,  as compared to
gross  profit of $72.6  million  in the fourth  quarter  of 2004,  and the gross
profit margin in the fourth  quarter of 2005 was 24.4%,  as compared to 26.8% in
the fourth quarter of 2004.                                                     

Excluding one-time restructuring expenses related to the purchase of Elisra, the
Company's gross profit in the fourth quarter of 2005 was $81.9 million,  and the
gross profit margin was 25.5%.                                                  

OPERATING  CASH FLOW  produced  by the  Company in 2005 was $187.6  million,  as
compared to $81.5 in 2004.                                                      

The President and CEO of Elbit Systems, Joseph Ackerman,  commented: "2005 was a
very  significant  year for the Elbit  Systems  Group,  both  operationally  and
strategically.  Operationally  we  achieved  unprecedented  growth in  revenues,
backlog  of orders  and cash  flow.  On the  strategic  level we  completed  the
acquisitions of controlling interests in both Elisra and Tadiran Communications,
creating the largest  defense  group in Israel.  These  important  complementary
additions  to our Group  enable us to  expand  even  further  our  portfolio  of
advanced defense electronics systems and solutions for our customers  worldwide,
enhancing our competitive  position in the international  market. The process of
implementing the new synergies within the Group companies has already begun, and
we believe both acquisitions will be accretive.  We intend to continue to invest
in the development of new  technologies and markets and to execute our long-term
plan of profitable  organic growth,  while pursuing our acquisition  strategy in
Israel and globally."                                                           

The Board of Directors has declared a dividend of $0.14 per share for the fourth
quarter of 2005.  The dividend will be paid on April 10, 2006,  net of taxes and
levies, at the rate of 22.1%. The record date of the dividend is March 28, 2006.

6-K 6th Page of 88 TOC 1st Previous Next ↓Bottom Just 6th
CONFERENCE CALL                                                                 

The Company will be hosting a conference call on Wednesday, March 15, at 10.00am
EST.                                                                            

To  participate,  please  call one of the  following  teleconferencing  numbers.
Please begin placing your calls at least 5 minutes  before the  conference  call
commences.  If you are unable to connect using the toll-free numbers, please try
the international dial-in number.                                               

US DIAL-IN NUMBERS: 1 866 744 5399
 UK DIAL-IN NUMBER: 0 800 917 5108
ISRAEL DIAL-IN NUMBER: 03 918 0609
 INTERNATIONAL DIAL-IN NUMBER: +972 3 918 0609

 AT:
 10:00AM EASTERN STANDARD TIME
7:00AM PACIFIC STANDARD TIME

3:00PM GREENWICH MEAN TIME
5:00PM ISRAEL TIME

This   call   will  be   broadcast   live  on   Elbit   Systems'   web-site   at
HTTP://WWW.ELBITSYSTEMS.COM.  An online  replay will be available  from 24 hours
after the call ends, and will be available online for 30 days.                  

Alternatively,  for two days  following the end of the call,  investors  will be
able to dial a replay  number  to  listen to the  call.  The  dial-in  number is
either:  1 888 269 0005 (US) 0 800 917 4256 (UK) or +972 3 925 5945  (Israel and
International).                                                                 

ABOUT ELBIT SYSTEMS LTD.                                                        

Elbit Systems Ltd. is an international  defense electronics company engaged in a
wide range of defense-related  programs  throughout the world. The Elbit Systems
Group, which includes the company and its subsidiaries, operates in the areas of
aerospace, land and naval systems, command, control, communications,  computers,
intelligence,  surveillance and reconnaissance ("C4ISR"), advanced electro-optic
and space technologies, EW suites, airborne warning systems, ELINT systems, data
links and military communications systems and equipment.  The Group also focuses
on the upgrading of existing military  platforms and developing new technologies
for defense and homeland security applications.                                 

6-K 7th Page of 88 TOC 1st Previous Next ↓Bottom Just 7th
COMPANY CONTACT:                                     IR CONTACT:                

Ilan Pacholder                                       Ehud Helft / Kenny Green   
V.P. Finance & Capital Markets                                                  
Corporate Secretary                                                             
Elbit Systems Ltd.                                   Gelbart Kahana             
Tel:  +972-4 831-6632                                Tel: 1-866-704-6710        
Fax: +972-4 831-6659                                 Fax: + 972 - 3 - 607 - 4711
E-mail: pacholder@elbit.co.il                        E-mail: KENNY@GK-BIZ.COM   
                                                 E-mail: EHUD@GK-BIZ.COM

STATEMENTS   IN  THIS  PRESS  RELEASE   WHICH  ARE  NOT   HISTORICAL   DATA  ARE
FORWARD-LOOKING  STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
OR OTHER  FACTORS  NOT  UNDER THE  COMPANY'S  CONTROL,  WHICH  MAY CAUSE  ACTUAL
RESULTS,  PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY  DIFFERENT
FROM  THE  RESULTS,   PERFORMANCE  OR  OTHER   EXPECTATIONS   IMPLIED  BY  THESE
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DETAILED IN THE  COMPANY'S  PERIODIC  FILINGS WITH THE  SECURITIES  AND EXCHANGE
COMMISSION.                                                                     

(FINANCIAL TABLES TO FOLLOW)

6-K 8th Page of 88 TOC 1st Previous Next ↓Bottom Just 8th
ELBIT SYSTEMS LTD.
 CONSOLIDATED BALANCE SHEETS
 (In thousand of US Dollars)

                                                     December 31   December 31
                                                     2005          2004*
                                                     -----------   -----------
                                                     Audited       Audited

ASSETS                                                        
------                                                        

Current Assets:                                               

      Cash and short term deposits                    94,629        34,847
      Trade receivable and others                    416,067       266,610
      Inventories, net of advances                   328,428       248,041
                                                     -----------   -----------
      Total current assets                           839,124       549,498

      Affiliated Companies & other Investments       201,339        59,618
      Long-term receivables & others                 151,557        85,100
      Fixed Assets, net                              284,997       244,288
      Other assets, net                              142,728        95,987
                                                     -----------   -----------
                                                   1,619,745     1,034,491
                                                     ===========   ===========

LIABILITIES AND SHAREHOLDER'S EQUITY                          
------------------------------------                          

      Current liabilities                            612,168       376,157
      Long-term liabilities                          543,893       221,810
      Minority Interest                               12,907         4,340
      Shareholder's equity                           450,777       432,184
                                                     -----------   -----------
                                                   1,619,745     1,034,491
                                                     ===========   ===========

* Adjusted due to the Tadiran share purchase transaction            

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ELBIT SYSTEMS LTD.
 CONSOLIDATED STATEMENTS OF INCOME
 (In thousand of US Dollars, except for per share amounts)

                                                        [Enlarge/Download Table]

                                                     For the Year Ended        Three Months Ended   
                                                        December 31               December 31       
                                                -------------------------   ----------------------- 
                                                  2005             2004*      2005           2004*  
                                                ---------       ---------   ---------      -------- 
                                                           Audited                 Unaudited        
                                                                                                    
Revenues                                        1,069,876         939,925   321,760         270,775 
Cost of revenues                                  786,616         689,826   239,836         198,198 
Restructuirng expenses                              3,488               -     3,488               - 
                                                ---------       ---------   ---------      -------- 
  Gross Profit                                    279,772         250,299    78,446          72,577 

Research and development, net                      71,903          66,846    18,460          23,277 
Marketing and selling                              78,648          69,912    23,953          19,190 
General and administrative                         54,417          47,832    16,155          12,876 
IPR&D write-off                                     7,490               -     7,490               - 
                                                ---------       ---------   ---------      -------- 
Total operating expenses                          212,458         184,590    66,058          55,343 
                                                ---------       ---------   ---------      -------- 

Operating income                                   67,314          65,709    12,388          17,234 

Financial expenses, net                           (11,472)         (5,852)   (5,199)         (2,974)
Other income (expenses), net                       (5,326)            770    (5,134)            831 
                                                ---------       ---------   ---------      -------- 
  Income before income taxes                       50,516          60,627     2,055          15,091 
Provisions for income taxes                        16,335          15,219     4,046           3,507 
                                                ---------       ---------   ---------      -------- 
                                                   34,181          45,408    (1,991)         11,584 

Equity in net earnings (losses) of affiliated                                                       
   companies and partnership **                    (1,636)          6,645    (2,974)          2,059 

Minority rights                                       (58)           (180)     (710)           (639)
                                                ---------       ---------   ---------      -------- 
  Net income                                       32,487          51,873    (5,675)         13,005 
                                               ==========       ==========  =========      ======== 

Earnings per share                                                                                  
Basic net earnings per share                         0.80            1.30     (0.14)           0.32 
                                               ==========       ==========  =========      ======== 
Diluted net earnings per share                       0.78            1.26     (0.14)           0.31 
                                               ==========       ==========  =========      ======== 

*  Adjusted  due to the Tadiran  share  purchase  transaction                   
** Includes  IPR&D write-off of $8,500 in 2005                                  

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EXHIBIT 2 

ELBIT SYSTEMS LTD.
 MANAGEMENT'S REPORT
FOR THE YEAR ENDED DECEMBER 31, 2005

         THIS  REPORT  SHOULD BE READ  TOGETHER  WITH THE  AUDITED  CONSOLIDATED
         FINANCIAL  STATEMENTS  AND RELATED NOTES OF ELBIT SYSTEMS LTD.  ("ELBIT
         SYSTEMS"  AND  TOGETHER  WITH ITS  SUBSIDIARIES,  THE  "COMPANY" OR THE
         "GROUP") FOR THE YEAR ENDED  DECEMBER 31, 2005 AND THE  COMPANY'S  FORM
         20-F FOR THE YEAR ENDED  DECEMBER 31,  2004,  FILED BY THE COMPANY WITH
         THE  U.S.  SECURITIES  AND  EXCHANGE  COMMISSION  ("SEC")  AND WITH THE
ISRAELI SECURITIES AUTHORITY.                                 

         FORWARD  LOOKING  STATEMENTS  WITH RESPECT TO THE  COMPANY'S  BUSINESS,
         FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS  IN THIS  DOCUMENT ARE
         SUBJECT TO RISKS AND  UNCERTAINTIES  THAT COULD CAUSE ACTUAL RESULTS TO
         DIFFER  MATERIALLY  FROM THOSE  CONTEMPLATED  IN SUCH  FORWARD  LOOKING
         STATEMENTS,  INCLUDING,  BUT NOT LIMITED TO, PRODUCT  DEMAND,  PRICING,
         MARKET ACCEPTANCE,  CHANGING ECONOMIC CONDITIONS,  RISKS IN PRODUCT AND
         TECHNOLOGY DEVELOPMENT, THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES
         AS WELL AS CERTAIN  OTHER RISK FACTORS  WHICH ARE DETAILED FROM TIME TO
TIME IN THE COMPANY'S SEC FILINGS.                            

A.       EXECUTIVE OVERVIEW                                                     
------------------                                            

BUSINESS DESCRIPTION                                          
--------------------                                          

         Elbit Systems and its  subsidiaries  (the "Group") operate in the areas
         of aerospace, land and naval systems, command, control, communications,
         computers,  intelligence,  surveillance and reconnaissance ("C(4)ISR"),
         advanced  electro-optic  and space  technologies,  EW suites,  airborne
         warning systems, ELINT systems, data links and military  communications
         systems  and  equipment.  The Group also  focuses on the  upgrading  of
         existing military platforms and developing new technologies for defense
and homeland security applications.                           

         The Group  provides  support  services for the platforms it upgrades as
         well as the systems and  products it supplies.  In addition,  the Group
         provides a wide range of logistic support services, including operation
         of pilot  training  services  for the  Israeli  Air  Force on a private
         financing  initiative  basis.  Several of the  Group's  companies  also
         provide  advanced  engineering  and  manufacturing  services to various
         customers,  utilizing their significant manufacturing capabilities. The
         Group often  cooperates  with industries in Israel and in various other
countries.                                                    

         The Group  tailors  and adapts its  technologies,  integration  skills,
         market   knowledge  and   battle-proven   systems  to  each  customer's
         individual   requirements  in  both  existing  and  new  platforms.  By
         upgrading existing platforms with advanced electronic and electro-optic
         technologies,   the  Group  provides   customers  with   cost-effective
         solutions,  and its customers  are able to improve their  technological
and operational capabilities within limited defense budgets.  

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

1 

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FINANCIAL HIGHLIGHTS                                          
--------------------                                          

         The Company's revenues increased by 13.8% and reached $1,070 million in
2005, as compared to $940 million in 2004.                    

         Net  earnings in 2005 were $32.5  million and the diluted  earnings per
         share were $0.78, as compared to $51.9 million and $1.26,  respectively
in 2004.                                                      

         Excluding  a one-time In Process  Research  and  Development  ("IPR&D")
         write-off  of  $8.5  million  related  to the  acquisition  of  Tadiran
         Communications  Ltd.'s shares and a one-time IPR&D and other write-offs
         in the amount of $10.1  million  related to the  acquisition  of Elisra
         Electronic  Systems Ltd.'s ("Elisra") shares, net earnings in 2005 were
         $51.1  million,  and the  diluted  EPS was $1.23,  as compared to $52.9
million and an a diluted EPS of $1.29 in 2004.                

         The  Company's  results also reflect a write-off of $5.4 million in the
         fourth  quarter of 2005,  due to value  impairment  in its  holdings in
 ImageSat International N.V. (see "Other Expenses (Net)" below).

         The Company's backlog as of December 31, 2005 reached $3.35 billion, as
        compared to $2.15 billion as of December 31, 2004, an increase of 55%.

         The Company's  cash flow  generated  from  operations in the year ended
         December 31, 2005 was $187.6  million,  as compared to $81.5 million in
the year ended December 31, 2004.                             

         The Board of  Directors  declared a dividend of $0.14 per share for the
last quarter of 2005.                                         

B.       MARKET TRENDS                                                          
-------------                                                 

         Trends in the defense  electronics  and  homeland  security  markets in
         which the Company  operates  have been impacted by the nature of recent
         conflicts  and  terrorism  activities  throughout  the  world.  Lessons
         learned in Operation Iraqi Freedom,  Afghanistan and various  terrorist
         actions  worldwide  have  increased the focus of defense  forces on low
intensity conflicts and homeland security.                    

         In the defense  electronics  market,  there is an increasing demand for
         products  and systems in the areas of C(4)ISR.  Accordingly,  while the
         Company continues to perform platform upgrades,  more emphasis is being
         placed  on  C(4)ISR,   including   information  systems,   intelligence
         gathering,  situational awareness,  precision guidance, all weather and
         day/night operations,  border and perimeter security,  UAV's, space and
     satellite based defense capabilities and homeland security systems.

         The Company  believes that its core  technologies  and  abilities  will
         enable it to take advantage of many of these emerging  trends,  as well
         as to continue to participate in the "Current Force" legacy  operations
of its customers.                                             

         In recent years  consolidations  in the defense  industry have affected
         competition.  This has  decreased the number but increased the relative
         size and resources of the Company's competitors.  The Company adapts to
         evolving  market  conditions  by  adjusting  its  business  strategy to
         changing  defense  market  conditions.  It also  anticipates  continued
         competition in defense markets due to declining defense budgets in some
countries.                                                    

2 

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         The  Company  believes  in its  ability  to compete on the basis of its
         systems   development  and   technological   expertise,   combat-proven
         performance  and policy of  offering  customers  overall  solutions  to
         technological,  operational  and  financial  needs and in the same time
enhancing the industrial capabilities at these countries.     

C.       BACKLOG OF ORDERS                                                      
-----------------                                             

         The Company's  backlog of orders as of December 31, 2005 reached $3,347
         million  (including  $340 million in backlog related to Elisra that was
         acquired in the fourth  quarter of 2005),  of which 72% were for orders
         outside  Israel.  The  Company's  backlog as of  December  31, 2004 was
$2,154 million, of which 66% were for orders outside Israel.  

         Approximately  65% of the Company's  backlog as of December 31, 2005 is
         scheduled to be performed during 2006 and 2007. The majority of the 35%
balance is scheduled to be performed in 2008 and 2009.        

D.       OPERATING SUBSIDIARIES AND AFFILIATED ENTITIES                         
----------------------------------------------                

         o        Elbit Systems Electro-Optics Industries El-Op Ltd. ("El-Op") -
                  a wholly-owned  subsidiary based in Israel,  is engaged in the
                  area of  advanced  electro-optical  products  and  systems for
                  military and civilian  use.  El-Op's  business  areas  include
                  thermal imaging  products,  lasers,  IMINT solutions,  head-up
                  displays,  integrated  sights  for  ground  forces,  space and
                  airborne  reconnaissance systems and electro-optical  homeland
security and defense security systems.      

         o        Elbit Systems of America ("ESA") - is the headquarters for the
                  U.S.  operations  of the  Group  and  includes  the  following
companies:                                  

                  o        EFW Inc. ("EFW"), a wholly-owned  subsidiary based in
                           Fort Worth,  Texas,  provides  combat-proven  design,
                           development,  production  and  life-cycle  support of
                           mission critical systems for U.S. and allied military
tactical platforms.       

                  o        Kollsman,    Inc.   ("Kollsman"),    a   wholly-owned
                           subsidiary located in Merrimack,  New Hampshire, is a
                           supplier of avionic equipment,  electro-optic systems
                           and   subsystems,    vision   based   solutions   and
                           surveillance  systems  to  the  commercial  aviation,
            defense and homeland security markets.

                  o        International    Enterprises,    Inc.   ("IEI"),    a
                           wholly-owned subsidiary based in Talladega,  Alabama,
                           provides  depot  level  repair,   manufacturing   and
                           logistics support for military electronic systems and
components.               

                  o        Vision Systems International LLC ("VSI"), a 50% joint
                           venture with Rockwell  Collins,  located in San Jose,
                           California,  is a supplier of helmet  mounted  cueing
                        systems for fixed-wing, tactical fighter aircraft.

         o        Cyclone  Aviation  Products Ltd.  ("Cyclone") - a wholly-owned
                  subsidiary  based in Israel,  is engaged in the  production of
                  structural   components   and  parts  for  leading   aerospace

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                  companies.  Cyclone  also  performs  maintenance,  repair  and
            customized upgrading of light airplanes and helicopters.

         o        Silver Arrow LP - a wholly-owned  limited partnership based in
                  Israel, is engaged in UAV systems development,  production and
                  support and  produces a full range of UAV systems for tactical
use.                                        

         o        Ortek Ltd.  ("Ortek")  - a  wholly-owned  subsidiary  based in
                  Israel,  is  engaged  in the  development  and  production  of
                  optical  security systems and products and performs a range of
            projects for homeland security and defense applications.

         o        European  subsidiary  - a  wholly-owned  subsidiary  based  in
                  Belgium, is involved mainly in development,  manufacturing and
                  support of  electro-optical  products  for  defense  and space
markets.                                    

         o        Elisra  - in  which  Elbit  Systems  owns a 70%  interest,  is
                  comprised  of Elisra  Electronic  Systems Ltd.  ("Elisra"),  a
                  privately held Israeli company,  and Elisra's two wholly-owned
                  Israeli  subsidiaries  - Tadiran  Electronic  Systems Ltd. and
                  Tadiran  Spectralink  Ltd.  Elisra  specializes in the design,
                  manufacture,  integration  and  support  of  advanced  defense
                  solutions  and its main  business  areas  include  EW  suites,
                  airborne warning systems, ELINT systems, artillery C4I systems
 and data links for UAVs and guided munitions.

         o        Kinetics Ltd.  ("Kinetics") - a 51%-owned  subsidiary based in
                  Israel,  is involved  mainly in the development and production
  of systems and components for combat vehicles.

         o        Semi-Conductor   Devices  ("SCD")  -  an  Israeli   affiliated
                  partnership  held in  equal  part by each of the  Company  and
                  Rafael Armaments  Development  Authority Ltd.  ("Rafael"),  is
                  engaged  in  the   development   and  production  of  infrared
detectors and laser diodes.                 

         o        Opgal  Optronic   Industries  Ltd.   ("Opgal")  -  an  Israeli
                  affiliated  company,  owned  50.1% by the Company and 49.9% by
                  Galram Technologies Ltd., a wholly-owned subsidiary of Rafael,
                  is engaged mainly in the area of thermal  imaging  systems for
commercial applications.                    

         o        Tadiran  Communications  Ltd.  ("Tadiran") - a publicly-traded
                  Israeli company in which Elbit Systems holds an  approximately
                  40% interest,  is engaged in the worldwide market for military
                  communications systems and equipment and is also active in the
civilian communications market.             

         The  Company  has  holdings,   directly  and  indirectly,   in  several
         relatively  small companies in various  countries.  These companies are
         engaged mainly in the manufacturing, marketing and servicing of defense
avionics and electronics as well as defense related software. 

         The Company  also has  holdings,  directly and  indirectly,  in several
         non-defense   technologies  spin-off  companies  whose  activities  are
         usually based on  technologies  that were  developed by the Group.  The
         spin-off  companies  are  involved  primarily  in the areas of  medical
equipment and space satellites.                               

         The Company evaluates investments in affiliates, partnerships and other
         companies,  and when relevant  factors  indicate  other than  temporary
decline  in the fair  value of the  investments  below        

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         their  carrying  value,  the  Company  adjusts  the  investment  to the
         estimated  fair  value.  The value of these  companies  is  subject  to
ongoing changes resulting from their business conditions.     

E.       RECENT EVENTS                                                          
-------------                                                 

         o        On December 4, 2005,  the Company  announced that it signed an
                  approximately  (euro)57  million  contract  for  a  helicopter
                  upgrade program with the Bulgarian  Ministry of Defense.  This
                  program  was the  subject  of  previous  announcements  by the
    Company on December 21, 2004 and March 10, 2005.

         o        On  December  12,  2005,  the Company  reported  that its U.S.
                  subsidiary Kollsman,  was awarded initial orders in the amount
                  of $33.6 million to provide high performance Thermal Binocular
                  System Long Range Thermal  Imagers (LRTI) for the U.S.  Marine
                  Corps.  Under the  indefinite  delivery / indefinite  quantity
                  (IDIQ)  contract the U.S.  Government may purchase up to 5,000
                  LRTI's  as well as spare  parts,  contractor  maintenance  and
                  training items over a five-year  period.  Therefore,  there is
                  the potential  for up to $250 million in additional  orders to
Kollsman.                                   

         o        On  December  18,  2005,   the  Company   announced  that  its
                  subsidiary  El-Op  was  selected  by the  Korean  Air Force to
                  supply Real Time EO/IR Long Range Oblique  Imagery Systems for
                  the  ROKAF's   F-16   Aircraft.   The   contract,   valued  at
                  approximately $50 million, will be performed over a multi-year
period.                                     

         o        On January 2, 2006,  the Company  reported  that its 70%-owned
                  subsidiary,  Elisra  completed the  finalization  process of a
                  contract  valued at  approximately  $80 million to supply full
                  electronic  warfare  (EW)  suites for  fighter  aircraft to an
                  international  customer. The contract will be performed over a
three-year period.                          

         o        On January 4, 2006,  the Company  reported  that its 40%-owned
                  subsidiary,  Tadiran  announced that it expected to post a $10
                  million  to $15  million  net loss for the  fourth  quarter of
                  2005,  resulted  mainly  from  the loss of  approximately  $20
                  million in planned  revenues due to a  seven-week  strike that
                  ended on December 28, 2005,  and to a one-time  write-off that
                  is  expected  to  be  recognized   in   connection   with  the
                  anticipated early retirement of approximately 50 employees, as
                  part  of  Tadiran's  recently  signed  collective   bargaining
agreement.                                  

         o        On February 2, 2006, the Company reported that it was selected
                  to supply  Unmanned  Turrets  systems for the Belgian  Armored
                  Infantry  Vehicle Program in co-operation  between the Company
                  and the Swiss company  Mowag,  a part of the General  Dynamics
                  European Land Combat Systems Group.  The anticipated  contract
                  value  for the  Company's  portion  of the  Program  amount is
                  expected  to  be  material  to  the  Company.  Deliveries  are
expected to take place between 2007 - 2012. 

         o        On February 13, 2006, the Company announced that it expects to
                  record in the fourth  quarter of 2005 an estimated $20 million
                  to $25 million in costs,  which is related to its  acquisition
                  of a 70% interest in Elisra, the purchase of an additional 13%
                  interest in Tadiran,  the impact of certain  developments that
                  occurred  in Tadiran  during  the  fourth  quarter of 2005 and
                  value  impairment  in connection  with  companies in which the
Company holds a minority interest.          

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F.       CRITICAL ACCOUNTING POLICIES AND ESTIMATES                             
------------------------------------------                    

         The Company's  significant  accounting policies are described in Note 2
         to the audited  consolidated  financial  statements  for the year ended
December 31, 2005.                                            

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

         The most critical  accounting  policy applicable to the Company relates
to revenue recognition as described below.                    

         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 Statement of
         Position 81-1  "Accounting  for  Performance of  Construction-Type  and
         Certain  Production-Type  Contracts"  ("SOP  81-1")  according to which
revenues are recognized on the percentage-of-completion basis.

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

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

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

         The  percentage-of-completion  method of accounting requires management
         to  estimate  the cost and  gross  profit  margin  for each  individual
         contract.  Estimated gross profit or loss from long-term  contracts may
         change due to changes in estimates  resulting from differences  between
         actual  performance and original estimated  forecasts.  Such changes in
estimated  gross profit are                                   

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         recorded in results of operations when they are reasonably determinable
         by management,  on a cumulative  catch-up basis.  Anticipated losses on
   contracts are charged to earnings when determined to be probable.

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

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

         The Group believes that the use of the percentage-of-completion  method
         is  appropriate  as the  Group  has  the  ability  to  make  reasonably
         dependable  estimates  of the extent of  progress  towards  completion,
         contract revenues and contract costs. In addition,  contracts  executed
         include   provisions  that  clearly  specify  the  enforceable   rights
         regarding  services to be provided  and  received by the parties to the
         contracts,  the  consideration to be exchanged and the manner and terms
         of  settlement.   In  all  cases  the  Group  expects  to  perform  its
         contractual obligations and its customers are expected to satisfy their
obligations under the contract.                               

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

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

         As for research and  development  costs accounted for as contract costs
         refer to Note  2(T) to the  Company's  audited  consolidated  financial
statements for the year ended December 31, 2005.              

G.       IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS                     
--------------------------------------------------            

         Consistent with Statement of Financial  Accounting  Standards  ("SFAS")
         No.  142,  "Goodwill  and Other  Intangible  Assets,"  goodwill  is not
         amortized and is tested at least annually for impairment.  According to
         SFAS 142, an impairment loss will be recognized when the carrying value
of the goodwill is not recoverable and exceeds its fair value.

         The  methods  commonly  used to value a closely  held  company  are the
         Income,  Market and Cost approaches.  The Company's reported units fair
         market  value was  estimated  using two  valuation  methodologies:  the
Income Approach and the Market Approach.                      

         As of  December  31,  2005,  the  Company's  goodwill  amounted  to $64
         million.  The Company  tested its  goodwill as of December 31, 2005 and
concluded that no assessment of impairment loss was necessary.

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         Consistent  with  SFAS  No.  144,  "Accounting  for the  Impairment  or
         Disposal of Long-Lived Assets," the Company evaluates long-lived assets
         for impairment and assesses their recoverability based upon anticipated
         future cash flows.  As of December 31, 2005,  the Company's  long-lived
         assets  amounted  to  $363.8   million,   including  $78.8  million  in
         intangible  assets,  and the Company  concluded that no impairment loss
was necessary.                                                

         Should  future  impairment  tests made by the  Company  determine  that
         impairment  has  occurred  in the value of the  Company's  goodwill  or
         long-lived  assets,  such  impairment may have a material effect on the
         financial  results of the Company in the period in which the impairment
is determined. See also "Other Expenses (Net)" below.         

H.       SARBANES-OXLEY ACT                                                     
------------------                                            

         According to Section 404 of the U.S.  Sarbanes-Oxley  Act of 2002,  the
         Company is required to include in its annual report for the fiscal year
         ending  December  31, 2006 an  assessment,  as of the end of the fiscal
         year, of the  effectiveness  of its internal  controls  over  financial
reporting.                                                    

         During 2004 and 2005,  the Company took steps to assure  compliance  of
         its documentation  and internal controls over financial  reporting with
         the guidelines  stipulated in the Sarbanes-Oxley Act. The Company plans
to continue with these steps during 2006.                     

I.       NEW ACCOUNTING STANDARDS                                               
------------------------                                      

         The significant accounting policies applied in the preparation of these
         statements  are identical to those applied in preparation of the latest
annual financial statements except as indicated below:        

         o        On  December  2004,  the FASB  issued the revised FAS No. 123,
                  "Share-Based  Payment"  ("FAS  123(R)"),  which  addresses the
                  accounting for share-based  payment  transactions in which the
                  Company obtains employee  services in exchange for: (a) equity
                  instruments of the Company;  or (b) liabilities that are based
                  on the fair value of the Company's equity  instruments or that
                  may be settled by the  issuance  of such  equity  instruments.
                  This Statement  eliminates the ability to account for employee
                  share-based payment transactions using APB 25, "Accounting for
                  Stock Issued to  Employees",  and  requires  instead that such
                  transactions  be accounted for using the grant-date fair value
                  based method.  This Statement was to have been effective as of
                  the beginning of the first interim or annual  reporting period
                  that  commences  after  June 15,  2005  (July 1,  2005 for the
                  Company);   however,  on  April  14,  2005,  the  SEC  delayed
                  effectiveness  for companies with fiscal years ending December
                  31, (such as the Company) to January 1, 2006.  This  Statement
                  applies  to  all  awards   granted  or   modified   after  the
                  Statement's effective date. In addition, compensation cost for
                  the unvested portion of previously  granted awards that remain
                  outstanding  on  the  Statement's   effective  date  shall  be
                  recognized  on or after the  effective  date,  as the  related
                  services are rendered,  based on the awards'  grant-date  fair
                  value as previously  calculated  for the pro-forma  disclosure
                  under SFAS 123.  In March  2005,  the SEC  released  SEC Staff
                  Accounting  Bulletin No.107 (SAB 107),  "Share-Based  Payment"
                  (SAB  107").   SAB  107  provides  the  SEC  staff's  position
                  regarding   the   application   of  FAS  123(R)  and  contains
interpretive                                

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                  guidance  related to the  interaction  between  FAS 123(R) and
                  certain SEC rules and  regulations  and also  provides the SEC
                  staff's views  regarding the valuation of share-based  payment
arrangements for public companies.          

         o        In May 2005, the FASB issued Statement of Financial Accounting
                  Standard  No. 154 ("FAS 154"),  "Accounting  Changes and Error
                  Corrections"  -  a  replacement  of  APB  No.  20,  Accounting
                  Changes"  and FAS No.  3,  "Reporting  Accounting  Changes  in
                  Interim  Financial  Statements".  FAS 154 provides guidance on
                  the  accounting  for and reporting of  accounting  changes and
                  error  corrections.  APB Opinion 20  previously  required that
                  most voluntary changes in accounting  principles be recognized
                  by  including  in net  income of the  period of the change the
                  cumulative effect of changing to the new accounting principle.
                  FAS 154 requires  retrospective  application to prior periods'
                  financial  statements  of a  voluntary  change  in  accounting
                  principles  unless it is  impracticable  to do so.  FAS 154 is
                  effective for  accounting  changes and  corrections  of errors
                  made in fiscal years  beginning  after  December 15, 2005. The
                  Company estimates that the adoption of FAS 154 will not have a
                  significant  impact on its  results of  operations,  financial
condition and cash flows.                   

         o        In June 2005, the Emerging Issues Task Force ("EITF") released
                  Issue No. 04-5 "Determining  Whether a General Partner, or the
                  General Partner as a Group,  Controls a Limited Partnership or
                  Similar Entity When the Limited  Partners Have Certain Rights"
                  ("EITF  04-5").  EITF 04-5  provides  guidance in  determining
                  whether a general partner  controls a limited  partnership and
                  therefore  should  consolidate the limited  partnership.  EITF
                  04-5 states that the general partner in a limited  partnership
                  is presumed to control that limited  partnership  and that the
                  presumption  may be  overcome  if the  limited  partners  have
                  either (1) the  substantive  ability to dissolve or  liquidate
                  the  limited  partnership  or  otherwise  remove  the  general
                  partner without cause or (2) substantive participating rights.
                  The effective  date for applying the guidance in EITF 04-5 was
                  (1)  June  29,  2005  for all  new  limited  partnerships  and
                  existing  limited   partnerships  for  which  the  partnership
                  agreement  was modified  after that date and (2) no later than
                  the  beginning of the first  reporting  period in fiscal years
                  beginning  after  December  15,  2005,  for all other  limited
                  partnerships.  Implementation  of EITF  04-5  did  not  have a
                  material impact on the Company's  financial position in fiscal
2005.                                       

         o        In  November  2005,  the FASB  issued FSP FAS  115-1.  The FSP
                  addresses  the  determination  as to  when  an  investment  is
                  considered  impaired,  whether that  impairment  is other than
                  temporary,  and the measurement of an impairment loss. The FSP
                  also  includes  accounting  considerations  subsequent  to the
                  recognition  of  other-than-temporary  impairment and requires
                  certain disclosures about unrealized losses that have not been
                  recognized as other-than-temporary  impairments.  The guidance
                  in this  FSP  amends  SFAS No.  115,  Accounting  for  Certain
                  Investments   in  Debt  and  Equity.   The  FSP  replaces  the
                  impairment  evaluation  guidance of EITF Issue No. 03-1,  "The
                  Meaning of Other-Than-Temporary Impairment and Its Application
                  to  Certain  Investments,"  with  references  to the  existing
                  other-than-temporary  impairment  guidance.  The FSP clarifies
                  that an investor should  recognize an impairment loss no later
                  than when the impairment is deemed other-than-temporary,  even
                  if a decision to sell an impaired  security has not been made.
                  The guidance in this FSP is to be applied to reporting periods
                  beginning  after  December 15, 2005.  As of December 31, 2005,
                  adoption of FSP FAS 115-1 has not had a material impact on the
          Company's financial position or results of operations.

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

         o        The Company and certain Israeli subsidiaries partially finance
                  their  research and  development  expenditures  under programs
                  sponsored by the Government of Israel Chief  Scientist  Office
                  ("OCS") for the support of research and development activities
                  conducted  in  Israel.  At the  time the  participations  were
                  received,  successful  development of the related projects was
not assured.                                

                  In exchange for  participation in the programs by the OCS, the
                  Company  and the  subsidiaries  agreed to pay 2% - 5% of total
                  sales of  products  developed  within the  framework  of these
                  programs.  The obligation to pay these royalties is contingent
on actual sales of the products.            

                  The Company and some of its subsidiaries may also be obligated
                  to pay  certain  amounts to the  Israeli  Ministry  of Defense
                  ("IMOD") and others on certain sales including sales resulting
                  from the  development  of some of the  technologies  developed
with their participation.                   

         o        In connection  with long-term  projects in certain  countries,
                  the Company and certain  subsidiaries  undertook  to use their
                  respective  best  efforts to make or  facilitate  purchases or
                  investments  in  those  countries  at  specified   percentages
                  (typically up to 100%) of the amount of the specific contract.
                  The companies'  obligation to make or facilitate third parties
                  making such investments and purchases is subject to commercial
                  conditions in the local market,  typically  without a specific
                  financial  penalty.  The maximum  aggregate  undertaking as of
                  December  31, 2005  amounted to $666  million to be  performed
                  over  a  period  of up to 10  years.  In  the  opinion  of the
                  Company's Management, the actual amount of the investments and
                  purchases is anticipated to be less than that mentioned above,
                  since certain investments and purchases can result in reducing
            the overall undertaking on more than a one-to-one basis.

         o        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, 2005 as follows:  $13.1  million for 2006,  $10.2
                  million for 2007, $8.6 million for 2008, $8.0 million for 2009
and 17.6 million for 2010 and thereafter.   

         O        In   connection   with  bank  credits  and  loans,   including
                  performance  guarantees issued by banks and bank guarantees in
                  order to secure certain  advances from customers,  the Company
                  and  certain   subsidiaries  are  obligated  to  meet  certain
                  financial  covenants.  Such covenants include requirements for
                  shareholders' equity,  current ratio, operating profit margin,
                  tangible net worth, EBITDA,  interest coverage ratio and total
                  leverage.  As of  December  31,  2005,  the  Company  and  its
                  subsidiaries,  except  Elisra,  were in  compliance  with  all
covenants.                                  

                  As at December  31,  2005,  Elisra did not comply with some of
                  its  financial  covenants.  Nonetheless,   subsequent  to  the
                  balance  sheet  date,  a letter was  received  from one of the
                  banks,  waving  its  demand  for  repayment  of the loan for a
                  period of 15 months from the balance  sheet date. In addition,
                  a  letter  was  also   received   from  the  other  bank  that

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                  retroactively  updates the financial  covenants as at December
                  31,  2005  (based on the actual  ratios at that time) and also
                  provides updated financial covenants for the coming years. The
                  bank  will  examine  these  updated  financial   covenants  on
                  December 31, 2006, and in Management's  estimation Elisra will
                  comply with those covenants at that date. Accordingly,  loans,
                  in the amount of $10  million,  are  classified  as  long-term
loans.                                      

         o        As  of  December  31,  2005,   guarantees  in  the  amount  of
                  approximately $667,000 were issued by banks on behalf of Group
                  companies in order to secure  certain  advances from customers
and performance bonds.                      

K.       ACQUISITIONS DURING 2005                                               
------------------------                                      

         o        During the last quarter of 2004 and during  2005,  the Company
                  purchased from Koor Industries Ltd. ("Koor") and in the market
                  approximately  40% of the shares of Tadiran for  approximately
                  $172  million in cash,  and the Company  has become  Tadiran's
controlling shareholder.                    

                  The excess of the amount paid for  Tadiran's  shares  acquired
                  during  2004 and 2005 over their  book value is  approximately
                  $120 million.  Based on a purchase price  allocation  analysis
                  ("PPA") performed by an independent advisor,  this excess, net
of taxes, was attributed as follows:        

                                                        [Enlarge/Download Table]

                                    $M   Expected useful lives                         
                                    --   ---------------------                         

                                                                                       
In Process R&D ("IPR&D")           9.5   immediate write-off                           
Inventory                          2.8   up to 2 quarters                              
Other assets or liabilities        0.7   5 years                                       
Brand name                         7.5   15 years                                      
Customer base and backlog         37.7   2-12 years                                    
Technology                        22.3   10 years                                      
Goodwill                          39.6   indefinite - subject to annual impairment test
                             ----------                                                
                                 120.1                                                 
                             ==========                                                

              The effect of the above transaction on the Company's 2005 results,
              which  were  reflected  as part  of the  Company's  equity  in net
earnings of affiliated companies, was as follows:   

                                                                  $M

           IPR&D write-off                                           (8.5)
           Inventory amortization                                    (2.0)
           Other tangible and intangible assets amortization         (4.4)
                                                                ------------
                                                                    (14.9)
                                                                ============

Company's portion in Tadiran's results              
             (according to U.S. GAAP)                                3.8
                                                                ------------
           Net effect                                               (11.1)
                                                                ============

         o        On November 30, 2005, the Company  announced the completion of
                  the purchase of the shares of Koor in Elisra for approximately
                  $68.8  million  in  cash.  Following  the  completion  of  the
                  transaction,  the Company  owns 70% of Elisra and Elisra's two
                  major  subsidiaries  - Tadiran  Electronic  Systems  Ltd.  and
Tadiran Spectralink Ltd.                    

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

                  The excess of the amount paid for the Elisra's shares acquired
                  over their book value is approximately $60.2 million. Based on
                  a PPA  performed by an  independent  advisor,  this excess was
attributed as follows:                      

                                                        [Enlarge/Download Table]

                                  $M    Expected useful lives                         
                                  --    ---------------------                         
                                                                                      
IPR&D                            7.5    immediate write-off                           
Inventory                        1.2    up to 2 quarters                              
Land and buildings               5.7    20 years                                      
Customer base and backlog       11.8    10 years                                      
Technology                       9.5    10 years                                      
Deferred taxes                   (5.4)  According to the relevant item above          
Goodwill                        29.9    indefinite - subject to annual impairment test
                           ----------                                                 
                                60.2                                                  
                           ==========                                                 

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

              Following the acquisition of Elisra's shares in the fourth quarter
              of  2005,  the  Company   identified   and  wrote-off   duplicated
              inventories  and  equipment in the amount of $3.5  million,  which
              were recorded as restructuring  expenses in the cost of goods sold
(net effect of $2.6 million).                       

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L.       SUMMARY OF FINANCIAL RESULTS                                           
----------------------------                                  

         The  following  table  sets  forth  the   consolidated   statements  of
         operations  of the Company  and its  subsidiaries  for the  three-month
  periods and years ended December 31, 2005 and December 31, 2004.

                                                        [Enlarge/Download Table]

                                                                  For the year                     For the three months            
                                                              ended on December 31                 ended on December 31            
                                               ----------------------------------------- ----------------------------------------- 
                                                        2005                 2004                 2005                 2004        
                                               -------------------  -------------------- --------------------  ------------------- 
                                                    $        %           $         %         $           %         $         %     
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 
                                                                  (In thousands of U.S. dollars except per share data)             
                                                                                                                                   
Total revenues                                  1,069,876    100.0     939,925     100.0    321,760     100.0     270,775    100.0 
Cost of revenues                                  786,616     73.5     689,626      73.4    239,826      74.5     198,198     73.2 
Restructuring expenses (pre-contract and                                                                                           
equipment write-off)                                3,488      0.4          --       0.0      3,488       0.4          --      0.0 
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 
Gross profit                                      279,772     26.1     250,299      26.6     78,446      24.4      72,577     26.8 
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 

Research and development (R&D) expenses            92,375      8.6      86,368       9.2     25,482       7.9      32,370     12.0 
Less - participation                              (20,472)    (1.9)    (19,522)     (2.1)    (7,022)     (2.2)     (9,094)    (3.4)
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 
R&D expenses, net                                  71,903      6.7      66,846       7.1     18,460       5.7      23,277      8.6 
Marketing and selling expenses                     78,648      7.4      69,912       7.4     23,953       7.4      19,190      7.0 
General and administrative expenses                54,417      5.1      47,832       5.1     16,155       5.0      12,876      4.8 
IPR&D write-off                                     7,490      0.7          --       0.0      7,490       0.7          --      0.0 
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 
                                                  212,458     19.9     184,590      19.6     66,058      20.5      55,343     20.4 
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 

Operating  income                                  67,314      6.3      65,709       7.0     12,388       3.9      17,234      6.5 
Finance expenses, net                             (11,472)    (1.1)     (5,852)     (0.6)    (5,199)     (1.6)     (2,974)    (1.1)
Other expenses, net                                (5,326)    (0.5)        770       0.1     (5,134)     (1.6)        831      0.3 
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 
Income before taxes on income                      50,516      4.7      60,627       6.4      2,055       0.6      15,091      5.6 

Taxes on income                                    16,335      1.5      15,219       1.6      4,046       1.2       3,507      1.3 
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 
                                                   34,181      3.2      45,408       4.8     (1,991)     (0.6)     11,584      4.3 

Minority interest in loses (gains) of                                                                                              
Subsidiaries                                          (58)    (0.0)       (180)      0.0       (710)     (0.2)       (639)    (0.2)

Equity in net earnings (losses) of affiliated                                                                                      
companies and partnership                          (1,636)    (0.2)      6,645       0.7     (2,974)     (0.9)      2,059      1.2 
                                               ---------- --------  ----------  -------- ----------  --------  ---------- -------- 

Net earnings                                       32,487      3.0      51,873       5.5     (5,675)     (1.7)     13,005      5.2 
                                               ========== ========  ==========  ======== ==========  ========  ========== ======== 

Diluted earnings per share                           0.78                 1.26                (0.14)                 0.31          
                                               ==========               ======           ==========            ==========          

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REVENUES                                                      
--------                                                      

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

         The Company's  consolidated  revenues  increased by 13.8%,  from $939.9
million in 2004 to $1,069.9 million in 2005.                  

         Following   the   acquisition   of  Elisra's   shares,   the  Company's
         consolidated  revenues  in 2005  includes  $15.7  million  of  Elisra's
revenues.                                                     

         The following  table sets forth the Company's  revenue  distribution by
areas of operation:                                           

                                                        [Enlarge/Download Table]

                                                              Year ended                 
                                             ------------------------------------------- 
                                                December 31, 2005      December 31, 2004 
                                             ---------------------  -------------------- 
                                             $ millions      %      $ millions          %
                                                                                         
 Airborne systems                                 420.8       39.3      367.9       39.1 
 Land systems                                     117.4       11.0      199.2       21.2 
 C(4)ISR systems                                  217.3       20.3      108.9       11.6 
 Electro-optics                                   242.3       22.7      200.3       21.3 
 Other  (mainly non-defense engineering and                                              
      production services)                         72.1        6.7       63.6        6.8 
                                                -------      -----      -----      ----- 
Total                                           1,069.9      100.0      939.9      100.0 
                                                =======      =====      =====      ===== 

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

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

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

         The following  table sets forth the Company's  distribution of revenues
by geographical regions:                                      

                                                                [Download Table]

                                        Year ended                       
                    -----------------------------------------------------
                    December 31, 2005                 December 31, 2004  
                    ---------------------            --------------------
                 $ millions             %       $ millions              %
                                                                         
Israel                315.4          29.5            241.6           25.7
United States         397.5          37.2            348.5           37.1
Europe                104.2           9.7            124.1           13.2
Other countries       252.8          23.6            225.7           24.0
                    -------          ----            -----           ----
Total               1,069.9         100.0            939.9          100.0
                    =======         =====            =====          =====

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

GROSS PROFIT                                                  
------------                                                  

         The Company's  gross profit  represents  the  aggregate  results of the
         Company's  activities  and projects and is based on the mix of programs
in which the Company is engaged during the reported period.   

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

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

         Excluding  the write-off as mentioned  above,  gross profit in 2005 was
$283.3 million (gross profit margin of 26.5%).                

RESEARCH AND DEVELOPMENT ("R&D")                              
--------------------------------                              

         The Company continually invests in R&D in order to maintain and further
         advance its technologies, in accordance with a long-term plan, based on
its estimate of future market needs.                          

         The Company's R&D  activities  in the reported  period are  coordinated
         with, and partially  funded by, third  parties,  including the IMOD and
         the OCS. These  programs were mainly in the areas of advanced  airborne
         systems,  cutting  edge  electro-optics  technology  and  products  for
      surveillance, aerial reconnaissance, lasers and space based sensors.

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

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

MARKETING AND SELLING EXPENSES                                
------------------------------                                

         The Company  maintains its  activities  in  developing  new markets and
         pursues  various  business  opportunities  according  to the  Company's
plans.                                                        

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

GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES                   
-------------------------------------------                   

         G&A expenses in 2005 were $54.4 million (5.1% of revenues), as compared
to $47.8 million                                              

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(5.1% of revenues) in 2004.                                   

         The  increase in G&A  expenses in 2005  compared to 2004 was related to
         the cost of various  exploratory  merger and acquisition,  legal, audit
         and control  activities,  including expenses related to compliance with
the Sarbanes-Oxley Act.                                       

FINANCING EXPENSES (NET)                                      
------------------------                                      

         Net financing expenses in 2005 were $11.5 million,  as compared to $5.9
million in 2004.                                              

         The increase in the net finance expenses  resulted mainly from a higher
         level of long-term  loans,  currency  exchange rate  differences and an
increase in market interest rates.                            

OTHER EXPENSES (NET)                                          
--------------------                                          

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

         During  the  fourth  quarter  of  2005,  the  fair  value  of  ImageSat
         International  N.V.  ("ISI"),  an  approximately  14%  affiliate of the
         Company,  decreased  as a result of a  decrease  in ISI's  backlog  and
         estimated  future cash  flows.  Based on a  valuation  performed  by an
         independent advisor,  the Company wrote-off  approximately $5.4 million
of its investment in ISI.                                     

TAXES ON INCOME                                               
---------------                                               

         The Company's tax rate  represents a weighted  average of the tax rates
         to which the various companies in the Group are subject.  The change in
         the  effective  tax rate is  attributable  mainly to the mix of the tax
         rates in the various tax  jurisdictions in which the Group's  companies
         generating the taxable income operate and the continued decrease in the
tax rate in Israel.                                           

         Provision for taxes in 2005 was $16.3  million (tax rate of 32.3%),  as
         compared to a provision  for taxes of $15.2 million (tax rate of 25.1%)
in 2004.                                                      

         Excluding the IPR&D related to Elisra and the write-off related to ISI,
         which are not deductible for tax purposes,  the Company's effective tax
rate was 25.8%.                                               

COMPANY'S SHARE IN EARNINGS OF AFFILIATED ENTITIES            
--------------------------------------------------            

         In 2005,  the Company had net expense of $1.6 million from its share in
         earnings  of  affiliated  entities,  as  compared  to an income of $6.6
million in 2004.                                              

         The Company's  share in 2005 includes the write-off of IPR&D related to
      the acquisition of Tadiran's shares, which amounted to $8.5 million.

         Excluding  the IPR&D  write-offs,  the  Company's  share in earnings of
affiliated entities in 2005 was a net income of $6.9 million. 

         The companies and partnerships,  in which the Company holds 50% or less
         in shares or voting rights and are therefore  not  consolidated  in its
         financial  statements,  operate in complementary areas to the Company's
         core business activities,  including  electro-optics,  airborne systems
and                                                           

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         communications.  This includes the  Company's  share in the earnings of
         Tadiran and reflects  the impact of the  corresponding  purchase  price
allocation adjustments described above.                       

NET EARNINGS AND EARNINGS PER SHARE ("EPS")                   
-------------------------------------------                   

         Reported net earnings in 2005 were $32.5 million (3.0% of revenues), as
         compared to reported net earnings of $51.9  million  (5.5% of revenues)
         in 2004.  Reported  fully diluted EPS was $0.78 in 2005, as compared to
$1.29 in 2004.                                                

         Excluding the IPR&D and write-offs related to Tadiran and Elisra, which
         amounted in 2005 to approximately  $18.6 million,  net earnings in 2005
         were  $51.1  million  (4.8%  of  revenues)  and the EPS was  $1.23,  as
         compared to $52.9  million  (5.6% of  revenues)  and an EPS of $1.29 in
year ended December 31, 2004.                                 

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

M.       LIQUIDITY AND CAPITAL RESOURCES                                        
-------------------------------                               

         The Company's net cash flow generated from operating activities in 2005
         was $187.6  million,  resulting  mainly  from net  income and  advances
         received from customers. The cash inflows were partially offset, mainly
  by an increase in inventories and by payments of trade payables.

         Net  cash  flows  used for  investment  activities  in the  year  ended
         December  31,  2005 were  $241.7  million,  which was used  mainly  for
         acquisition  of Tadiran's and Elisra's  shares and for  procurement  of
various assets and equipment.                                 

         Net cash flow  derived  from  financing  activities  in 2005 was $113.9
million, which was mainly from receipt of long-term loans.    

         On December 31, 2005, the Company had total borrowings in the amount of
         $262.6  million,  including  $225 million in  long-term  loans and $667
         million in guarantees issued on its behalf by banks,  mainly in respect
         of advance payment and performance  guarantees  provided in the regular
         course of  business.  On  December  31,  2005,  the  Company had a cash
balance amounting to $93.9 million.                           

         The Company and some of its  subsidiaries  operate with loan and credit
         agreements  that contain  certain  covenants.  Such  covenants  include
         requirements for shareholders' equity,  current ratio, operating profit
         margin,  tangible net worth, EBITDA,  interest coverage ratio and total
         leverage. As of December 31, 2005, the Company and its subsidiaries are
in compliance with all such covenants.                        

         As of December  31,  2005,  the  Company  had  working  capital of $227
         million and its current ratio was 1.37.  The Company's  ratio of equity
to total assets was 27.8%.                                    

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N.       DERIVATIVES AND HEDGES                                                 
----------------------                                        

         Market risks relating to the Company's operations result primarily from
         changes in interest  rates and exchange  rates.  The Company  typically
         uses financial  instruments to limit its exposure to those changes. The
         Company also typically enters into forward contracts in connection with
         transactions that are denominated in currencies other than U.S. dollars
         and New  Israeli  Shekels  ("NIS").  The Company may enter from time to
         time into forward contracts related to NIS, based on market conditions.

         On December 31, 2005,  the Company's  liquid  assets were  comprised of
         bank deposits,  and it had no  investments in liquid equity  securities
         that were subject to market fluctuations, except for the Tadiran shares
         acquired as mentioned above. The Company's deposits and loans are based
         on variable  interest  rates.  Should interest rates either increase or
         decrease,  such change may affect the  Company's  results of operations
         due to  changes  in the cost of the  liabilities  and the return on the
assets that are based on variable rates.                      

         The Company's  functional  currency is the U.S. dollar. On December 31,
         2005, the Company had exposure due to liabilities denominated in NIS of
         $37 million in excess of its NIS denominated assets.  These liabilities
         represent mostly wages and trade payables.  The amount of the Company's
         exposure to the changes in the  NIS-U.S.  dollar  exchange  rate varies
from time to time.                                            

         Most of the Company's  assets and liabilities  which are denominated in
         currencies  other than the NIS and the U.S.  dollar were  covered as of
         December 31, 2005 by forward  contracts  and  options.  On December 31,
         2005,  the Company had forward  contracts  for the sale and purchase of
         such  foreign  currencies  totaling  $220 million ($22 million in Euro,
         $194 million in GBP and $4 million in other currencies).  The financial
         derivative  activities  in the fourth  quarter of 2005  resulted  in an
         unrealized net gain of approximately  $6.3 million,  which was recorded
as other comprehensive income.                                

O.       DIVIDENDS                                                              
---------                                                     

         The Board of  Directors  declared on March 13, 2006 a dividend of $0.14
         per share for the last quarter of 2005. The total dividend declared for
2005 was $0.54 per share.                                     

 * * * * * * * * * * * * * *

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EXHIBIT 3 

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

 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF DECEMBER 31, 2005
 (IN U.S. DOLLARS)

6-K 29th Page of 88 TOC 1st Previous Next ↓Bottom Just 29th
--------------------------------------------------------------------------------
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES 
--------------------------------------------------------------------------------

 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF DECEMBER 31, 2005
 IN U.S. DOLLARS

 C O N T E N T S

                                                              PAGE
                                                              ------------
EPORT OF INDEPENDENT REGISTRED PUBLIC ACCOUNTING FIRM                 2         

ONSOLIDATED FINANCIAL STATEMENTS:                                               

Consolidated Balance Sheets                                         3 - 4       

Consolidated Statements of Income                                     5         

Statements of Changes in Shareholders' Equity                       6 - 7       

Consolidated Statements of Cash Flows                               8 - 9       

Notes to the Consolidated Financial Statements                     10 - 60      

 # # # # # # #

1 

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[LOGO OF ERNST & YOUNG]  KOST FORER GABBAY & KASIERER       Phone: 972-4-8654000
                         2 Pal-Yam St.                      Fax:   972-4-8654022
Haifa-33095, Israel           

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS OF                                                          
ELBIT SYSTEMS LTD.                                                              

We have audited the  accompanying  consolidated  balance sheets of Elbit Systems
Ltd. ("the  Company") and its  subsidiaries as of December 31, 2005 and 2004 (as
adjusted - see Note 1(G)),  and the related  consolidated  statements of income,
changes  in the  shareholders'  equity  and cash flows for the each of the three
years in the period  ended  December  31,  2005.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.                                                 

We did not audit the financial statements of a majority-owned subsidiary,  which
statements  reflect total assets  constituting  16.3% in 2005 and total revenues
constituting 1.5% in 2005,  respectively,  of the related  consolidated  totals.
Those financial  statements were audited by other auditors whose report has been
furnished to us, and our opinion,  insofar as it relates to the amounts included
for this subsidiary, is based solely on the report of the other auditors.       

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

In our  opinion,  based on our  audits  and the  report of other  auditors,  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, 2005 and 2004, and the  consolidated  results of
their operations, and their cash flows for each of the three years in the period
ended December 31, 2005, in conformity  with U.S generally  accepted  accounting
principles.                                                                     

As discussed in Note 2(X) to the consolidated  financial statements,  on January
1,  2004  the  Company   adopted  SFAS  No.  123   "Accounting  for  Stock-Based
Compensation."                                                                  

                                          KOST FORER GABBAY & KASIERER
                                          A MEMBER OF ERNST & YOUNG GLOBAL

Haifa, Israel                                                                   
March 13, 2006                                                                  

2 

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

                                                        [Enlarge/Download Table]

                                                                                      December 31,           
                                                                             --------------------------------
                                                                   NOTE          2005            2004 (*)    
                                                                -----------  --------------    --------------

                                                                                                             
CURRENT ASSETS:                                                                                              
Cash and cash equivalents                                                     $     93,887      $     34,109 
Short-term bank deposits                                                               742               738 
Trading securities                                                                   2,282                 - 
Trade receivables, (net of allowance for doubtful                                                            
    accounts in the amount of $3,221 and $3,064 as of December                                               
    31, 2005 and 2004, respectively)                               (3)             346,689           214,816 
Other receivables and prepaid expenses                             (4)              67,096            51,794 
Inventories, net of advances                                       (5)             328,428           248,041 
                                                                             --------------    --------------
Total current assets                                                               839,124           549,498 
                                                                             --------------    --------------

INVESTMENTS AND LONG-TERM RECEIVABLES:                                                                       
Investments in affiliated companies and a partnership              (6A)            194,994            47,873 
Investments in other companies                                     (6B)              6,345            11,745 
Compensation receivable in respect of fire damages, net            (7)              15,530                -- 
Long-term bank deposits and trade receivables                      (8)               2,457             2,102 
Severance pay fund                                                 (2P)            133,570            82,998 
                                                                             --------------    --------------
                                                                                   352,896           144,718 
                                                                             --------------    --------------

PROPERTY, PLANT AND EQUIPMENT,  NET                                (9)             284,997           244,288 
                                                                             --------------    --------------

INTANGIBLE ASSETS:                                                 (10)                                      
Goodwill                                                                            63,957            33,706 
Other intangible assets, net                                                        78,771            62,281 
                                                                             --------------    --------------
                                                                                   142,728            95,987 
                                                                             --------------    --------------

                                                                               $ 1,619,745       $ 1,034,491 
                                                                             ==============    ==============

*   Adjusted (See Note 1G)                                                      

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

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

                                                        [Enlarge/Download Table]


                                                                                 DECEMBER 31,           
                                                                        --------------------------------
                                                              NOTE          2005            2004 (*)    
                                                           -----------  --------------    --------------

CURRENT LIABILITIES:                                                                                    
                                                                                                        
Short-term bank credit and loans                              (11)      $      30,296     $       8,592 

Current maturities of long-term loans                         (14)              7,355             1,656 
Trade payables                                                                120,260           113,691 
Other payables and accrued expenses                           (12)            216,539           172,109 
Customers advances in excess of                                                                         
    costs incurred on contracts in progress                   (13)            237,718            80,109 
                                                                        --------------    --------------
Total current liabilities                                                     612,168           376,157 
                                                                        --------------    --------------

LONG-TERM LIABILITIES:                                                                                  
Long-term loans                                               (14)            224,982            86,234 
Advances from customers                                       (13)            122,263            10,320 
Deferred income taxes                                         (16)             31,424            24,516 
Accrued termination liability                               (15, 2P)          165,224           100,740 
                                                                        --------------    --------------
                                                                              543,893           221,810 
                                                                        --------------    --------------

COMMITMENTS  AND CONTINGENT  LIABILITIES                      (17)                                      

MINORITY INTERESTS                                                             12,907             4,340 
                                                                        --------------    --------------

SHAREHOLDERS' EQUITY:                                         (18)                                      
Share capital                                                                                           
Ordinary shares of New Israeli Shekels (NIS) 1 par value;                                               
    Authorized -  80,000,000 shares as of                                                               
    December 31, 2005 and 2004;                                                                         
    Issued - 41,375,545 and 40,969,947 shares as                                                        
    of December 31, 2005 and 2004, respectively;                                                        
    Outstanding - 40,966,624 and 40,561,026 shares                                                      
    as of December 31, 2005 and 2004,  respectively                            11,636            11,548 
Additional paid-in capital                                                    278,679           274,432 
Accumulated other comprehensive loss                                           (1,340)           (4,742)
Retained earnings                                                             166,123           155,267 
Treasury shares - 408,921 shares as of                                                                  
   December 31, 2005 and 2004                                                  (4,321)           (4,321)
                                                                        --------------    --------------
                                                                              450,777           432,184 
                                                                        --------------    --------------
                                                                        $   1,619,745     $   1,034,491 
                                                                        ==============    ==============

*    Adjusted (See Note 1G)                                                     

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

4 

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

                                                        [Enlarge/Download Table]

                                                                                     YEAR ENDED DECEMBER 31,           
                                                                           ------------------------------------------- 
                                                                     NOTE      2005          2004 (*)         2003     
                                                                     ---   -----------     -----------     ----------- 
                                                                                                                       
Revenues                                                             (19)  $ 1,069,876     $   939,925     $   897,980 
Cost of revenues                                                               786,616         689,626         672,711 
Restructuring expenses (pre-contract costs and equipment write-off)                                                    
                                                                     (1H)        3,488               -               - 
                                                                           -----------     -----------     ----------- 
           Gross profit                                                        279,772         250,299         225,269 
                                                                           -----------     -----------     ----------- 

Research and development expenses, net                               (20)       71,903          66,846          54,919 
Marketing and selling expenses                                                  78,648          69,912          69,943 
General and administrative expenses                                             54,417          47,832          46,077 
In process research and development write-off                        (1H)         7,490              -               - 
                                                                           -----------     -----------     ----------- 
                                                                               212,458         184,590         170,939 
                                                                           -----------     -----------     ----------- 

      Operating income                                                          67,314          65,709          54,330 

Financial expenses, net                                              (21)      (11,472)         (5,852)         (4,870)
Other income (expenses), net                                         (6B)       (5,326)            770              53 
                                                                           -----------     -----------     ----------- 
      Income before taxes on income                                             50,516          60,627          49,513 
Taxes on income                                                      (16)       16,335          15,219          11,334 
                                                                           -----------     -----------     ----------- 
                                                                                34,181          45,408          38,179 
Equity in net earnings (losses) of affiliated companies and                                                            
   partnership **                                                    (1G)       (1,636)          6,645           7,209 
Minority interests in losses (earnings) of subsidiaries                            (58)           (180)            557 
                                                                           -----------     -----------     ----------- 
      Net income                                                           $    32,487     $    51,873     $    45,945 
                                                                           ===========     ===========     =========== 
Earnings per share                                                                                                     
   Basic net earnings per share                                            $      0.80     $      1.30     $      1.18 
                                                                           ===========     ===========     =========== 

   Diluted net earnings per share                                          $      0.78     $      1.26     $      1.14 
                                                                           ===========     ===========     =========== 

   Number of shares used in computation of basic net earnings per                                                      
   share                                                                        40,750          39,952          39,061 
                                                                           ===========     ===========     =========== 

   Number of shares used in computation of diluted net earnings per                                                    
   share                                                                        41,623          41,041          40,230 
                                                                           ===========     ===========     =========== 

*    Adjusted (See Notes 1G)                                                    

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

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

5 

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                                   
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except share data)                                  

                                                        [Enlarge/Download Table]

                                                                                             ACCUMULATED  
                                               NUMBER OF                    ADDITIONAL          OTHER     
                                              OUTSTANDING      SHARE        PAID-IN        COMPREHENSIVE  
                                                SHARES        CAPITAL        CAPITAL        INCOME (LOSS) 
                                              ------------  -------------  -------------  ----------------

                                                                                                          
BALANCE AS OF  JANUARY 1, 2003                  38,803,507      $ 11,154    $   248,387   $       (2,882) 

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

                                              ------------  -------------  -------------  ----------------
 Total comprehensive income                                                                               

BALANCE AS OF DECEMBER 31, 2003                 39,337,304      $ 11,273    $   259,033   $       (3,992) 

  Exercise of options                            1,223,722           275         10,985                   
  Cumulative effect of first time adoption of                                                             
   the fair value based method for stock                                                                  
   based compensation expenses                          -             -           (152)                -  
  Tax benefit in respect of options exercised           -             -          1,179                 -  
  Stock based compensation                              -             -          3,387                 -  
  Dividends paid                                        -             -              -                 -  
  Other comprehensive income (loss)                                                                       
   net of tax:                                          -             -              -                 -  
  Unrealized loss on derivative instruments             -             -              -              (299) 

  Foreign currency translation differences              -             -              -               450  
  Minimum pension liability adjustment                  -             -              -              (901) 
  Net income                                            -             -              -                 -  
                                              ------------  -------------  -------------  ----------------
  Total comprehensive income                                                                              

BALANCE AS OF DECEMBER 31, 2004*               40,561,026   $     11,548   $   274,432    $       (4,742) 
                                              ============  =============  =============  ================

* Adjusted (see Note 1G)                                                        

                                                        [Enlarge/Download Table]

                                                                                    TOTAL            TOTAL        
                                                 RETAINED        TREASURY       SHAREHOLDERS'    COMPREHENSIVE    
                                                  EARNINGS         SHARES          EQUITY            INCOME       
                                               -------------   -------------   -------------    ----------------  
                                                                                                                  
BALANCE AS OF  JANUARY 1, 2003                   $  159,023      $ (4,321)      $   411,361                       

Exercise of options                                       -             -             5,266                       
Tax benefit in respect of options exercised               -             -               758                       
Stock based compensation                                  -             -             4,741                       
Dividends paid                                      (14,882)            -           (14,882)                      
Other comprehensive income (loss)                                                                                 
   net of tax:                                            -             -                 -                       
Unrealized loss on derivative instruments                 -             -              (578)     $         (578)  
Foreign currency translation differences                  -             -               340                 340   
Minimum pension liability adjustment                      -             -              (872)               (872)  
Net income                                           45,945             -            45,945              45,945   
                                                 ------------    ------------  ---------------   ---------------  
 Total comprehensive income                                                                      $       44,835   
                                                                                                 ===============  
BALANCE AS OF DECEMBER 31, 2003                  $  190,086      $ (4,321)      $   452,079                       

  Exercise of options                                                                11,260                       
  Cumulative effect of first time adoption of                                                                     
   the fair value based method for stock                                                                          
   based compensation expenses                            -             -              (152)                      
  Tax benefit in respect of options exercised             -             -             1,179                       
  Stock based compensation                                -             -             3,387                       
  Dividends paid                                    (86,692)            -           (86,692)                      
  Other comprehensive income (loss)                                                                               
   net of tax:                                            -             -                                         
  Unrealized loss on derivative instruments               -             -              (299)      $        (299)  
  Foreign currency translation differences                -             -               450                 450   
  Minimum pension liability adjustment                    -             -              (901)               (901)  
  Net income                                         51,873             -            51,873              51,873   
                                                 ------------    ------------  ---------------   -----------------
  Total comprehensive income                                                                     $       51,123   
                                                                                                 =================
BALANCE AS OF DECEMBER 31, 2004*                 $  155,267      $ (4,321)      $   432,184                       
                                                 ============    ============  ===============                    
* Adjusted (see Note 1G)                                                                                          

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

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

                                                        [Enlarge/Download Table]

                                                                                             ACCUMULATED  
                                               NUMBER OF                    ADDITIONAL          OTHER     
                                              OUTSTANDING      SHARE         PAID-IN        COMPREHENSIVE 
                                                SHARES        CAPITAL        CAPITAL            LOSS      
                                              ------------  -------------  -------------  ----------------
                                                                                                          
BALANCE AS OF JANUARY 1, 2005                  40,561,026     $   11,548     $  274,432       $   (4,742) 
  Exercise of options                             405,598             88          3,423                -  
  Tax benefit in respect of options exercised           -              -            652                -  
  Stock based compensation                              -              -            172                -  
  Dividends paid                                        -              -              -                -  
  Other comprehensive income (loss)                                                                       
   net of tax:                                                                                            
  Unrealized gain on derivative instruments             -              -              -            6,412  
  Foreign currency translation differences              -              -              -             (924) 
  Minimum pension liability adjustment                  -              -              -           (2,086) 
  Net income                                            -              -              -                -  
                                              ------------  -------------  -------------  ----------------
  Total comprehensive income                                                                              

BALANCE AS OF DECEMBER 31, 2005                40,966,624    $    11,636     $  278,679       $   (1,340) 
                                              ============  =============  =============  ================

                                                        [Enlarge/Download Table]


                                                                                TOTAL             TOTAL      
                                                RETAINED      TREASURY      SHAREHOLDERS'     COMPREHENSIVE  
                                                EARNINGS       SHARES           EQUITY            INCOME     
                                               ------------  ------------  ---------------  -----------------
                                                                                                             
BALANCE AS OF JANUARY 1, 2005                     $155,267     $  (4,321)  $     432,184                     
  Exercise of options                                    -             -           3,511                     
  Tax benefit in respect of options exercised            -             -             652                     
  Stock based compensation                               -             -             172                     
  Dividends paid                                   (21,631)            -         (21,631)                    
  Other comprehensive income (loss)                                                                          
   net of tax:                                                                                               
  Unrealized gain on derivative instruments              -             -           6,412          6,412      
  Foreign currency translation differences               -             -            (924)          (924)     
  Minimum pension liability adjustment                   -             -          (2,086)        (2,086)     
  Net income                                        32,487             -          32,487         32,487      
                                               ------------  ------------  ---------------  -----------------
  Total comprehensive income                                                                 $   35,889      
                                                                                            =================
BALANCE AS OF DECEMBER 31, 2005                 $  166,123   $    (4,321)  $     450,777                     
                                               ============  ============  ===============                   

                                                        [Enlarge/Download Table]

ACCUMULATED OTHER COMPREHENSIVE LOSS (NET OF TAXES)                                  
---------------------------------------------------                                  

                                                               DECEMBER 31,          
                                                           2005             2004     
                                                      ---------------    ------------
                                                                                     
Accumulated gains (losses) on derivative instruments  $        5,535     $     (877) 
Accumulated foreign currency translation differences          (134)             790  
Accumulated minimum pension liability adjustment            (6,741)          (4,655) 
                                                      ---------------    ------------
Accumulated other comprehensive loss                  $      (1,340)     $   (4,742) 
                                                      ===============    ============

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

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

                                                        [Enlarge/Download Table]

                                                                                            YEAR ENDED DECEMBER 31,       
                                                                                    ------------------------------------- 
                                                                                       2005         2004**         2003   
                                                                                    ---------     ---------     --------- 
CASH FLOWS FROM OPERATING ACTIVITIES                                                                                      
                                                                                                                          
Net income                                                                          $  32,487     $  51,873     $  45,945 
Adjustments to reconcile net income to net cash provided by operating activities:                                         
Depreciation and amortization                                                          57,718        42,261        37,890 
Purchased in process R&D                                                                7,490             -             - 
Stock based compensation                                                                  172         3,387         4,741 
Deferred income taxes                                                                   6,551           153            35 
Accrued severance pay, net                                                             (6,707)       (2,304)       (1,240)
Loss (gain) on sale of property, plant and equipment                                     (731)          143          (915)
Tax benefit in respect of options exercised                                               652         1,179           758 
Minority interests in earnings (losses) of subsidiaries                                    58           180          (557)
Equity in net losses (earnings) of affiliated companies and partnership, net of                                           
      dividend received (*)                                                            13,805         1,505        (4,995)
Changes in operating assets and liabilities:                                                                              
Decrease (increase) in short and long-term trade receivables, and prepaid expenses    (43,420)      (16,871)       45,297 
Decrease (increase) in inventories                                                    (43,679)        2,932       (38,651)
Increase (decrease) in trade payables, other payables and accrued expenses            (37,859)       20,522        32,147 
Increase (decrease) in advances received from customers                               202,450       (18,535)      (27,855)
Settlement of royalties with the Office of the Chief Scientist                         (1,371)       (3,714)       (1,581)
Other adjustments                                                                           -        (1,228)          337 
                                                                                    ---------     ---------     --------- 
Net cash provided by operating activities                                             187,616        81,483        91,356 
                                                                                    ---------     ---------     --------- 

CASH FLOWS FROM INVESTING ACTIVITIES                                                                                      
Purchase of property, plant and equipment                                             (58,735)      (53,008)      (61,287)
Acquisition of subsidiaries and businesses  (Schedule A)                              (28,331)       (2,315)       (2,458)
Investments in affiliated companies                                                  (160,861)      (18,391)       (1,049)
Proceeds from sale of property, plant and equipment                                     2,712         2,560         5,815 
Proceed from sale of investment                                                         3,100             -             - 
Investment in long-term bank deposits                                                  (1,089)       (1,203)       (1,750)
Proceeds from sale of long-term bank deposits                                           1,501         1,507         3,568 
Collection of long-term loan                                                                -             -         2,400 
Short-term bank deposits, net                                                              (4)          (48)          960 
                                                                                    ---------     ---------     --------- 
Net cash used in investing activities                                                (241,707)      (70,898)      (53,801)
                                                                                    ---------     ---------     --------- 

CASH FLOWS FROM FINANCING ACTIVITIES                                                                                      
Proceeds from exercise of options                                                       3,511        11,260         5,266 
Repayment of long-term bank loans                                                     (85,035)      (35,826)      (27,066)
Receipt of long-term bank loans                                                       216,500        58,410        10,000 
Dividends paid                                                                        (21,631)      (86,692)      (14,882)
Change in short-term bank credit and  loans, net                                          524           216       (10,997)
                                                                                    ---------     ---------     --------- 
Net cash provided by (used in) financing activities                                   113,869       (52,632)      (37,679)
                                                                                    ---------     ---------     --------- 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   59,778       (42,047)         (124)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR                                 34,109        76,156        76,280 
                                                                                    ---------     ---------     --------- 
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                    $  93,887     $  34,109     $  76,156 
                                                                                    =========     =========     ========= 
(*) Dividend received                                                               $  12,169     $   8,150     $   2,214 
                                                                                    =========     =========     ========= 
(**) Adjusted (See Notes 1G)                                                                                              

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

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

                                                        [Enlarge/Download Table]

                                                                                        YEAR ENDED DECEMBER 31,      
                                                                                  ---------------------------------- 
                                                                                    2005         2004         2003   
                                                                                  --------     --------     -------- 
SUPPLEMENTAL CASH FLOW ACTIVITIES:                                                                                   

Cash paid during the year for:                                                                                       
                                                                                                                     
Income taxes                                                                      $ 21,475     $ 13,305     $ 14,666 
                                                                                  ========     ========     ======== 
Interest                                                                          $ 13,151     $  3,122     $  4,034 
                                                                                  ========     ========     ======== 

SCHEDULE A:                                                                                                          
Subsidiaries and businesses acquired (*)                                                                             

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

Working capital, net (excluding cash and cash equivalents)                        $ 39,273     $   (707)    $    657 
Property, plant and equipment                                                      (28,875)         (10)        (249)
Other long term assets                                                             (74,363)           -            - 
Goodwill and other intangible assets                                               (53,291)      (1,598)      (1,334)
In process R&D                                                                      (7,490)           -            - 
Deferred income taxes                                                                5,404            -       (1,765)
Long-term liabilities                                                               82,730            -          198 
Minority interest                                                                    8,281            -           35 
                                                                                  --------     --------     -------- 
                                                                                  $(28,331)    $ (2,315)    $ (2,458)
                                                                                  ========     ========     ======== 

(*)      In 2003 a European subsidiary (see Note 1(C)) and AD&D (see Note 1(D)).
         In 2004 the assets of Computer  Instruments  Corporation Inc. (see Note
1(E))                                                         
         In 2005 the assets of IMI (see Note 1(F)) and the shares of Elisra (see
Note 1(H))                                                    

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

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1 - GENERAL                                                                

         A.       Elbit Systems Ltd. (the "Company") is an Israeli  corporation,
                  40.6%  owned by the  Federmann  Group,  and 7.6% owned by Koor
                  Industries Ltd.  (Koor").  The Company's  shares are traded on
                  the Tel Aviv Stock Exchange and on the Nasdaq  National Market
                  in the United States.  The Company and its  subsidiaries  (the
                  "Group")   are   engaged   mainly  in  the  field  of  defense
                  electronics. The Company's principal wholly-owned subsidiaries
                  are the Elbit Systems of America  ("ESA")  companies and Elbit
           Systems Electro-Optics Industries El-Op Ltd. ("El-Op").

         B.       A majority of the Group's  revenues are derived from direct or
                  indirect sales to governments or to governmental  agencies. As
                  a  result,  a  substantial  portion  of the  Group's  sales is
                  subject  to  the  special  risks   associated  with  sales  to
                  governments or to governmental agencies.  These risks include,
                  among others,  the  dependency  on the resources  allocated by
                  governments  to  defense  programs,  changes  in  governmental
                  priorities  and changes in  governmental  approvals  regarding
                  export  licenses  required for the Group  products and for its
           suppliers. As for major customers, refer to Note 19(C).

         C.       In June 2003, the Company  (through El-Op) acquired all of the
                  outstanding  ordinary shares of a European  entity,  a company
                  registered in Belgium,  in  consideration  for $1,846 in cash,
                  which were  allocated to the fair value of net tangible  asset
                  acquired.  The  acquisition  was accounted for by the purchase
method of accounting.                       

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

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

                  Pro forma  information in accordance with SFAS No. 141 has not
                  been  provided,  since  the  revenues  and net  income of this
                  subsidiary were not material in relation to total consolidated
revenues and net income for the year 2003.  

         D.       In July 2003, the Company  acquired  approximately  54% of the
                  outstanding shares of Aero Design Development Ltd. ("AD&D") an
                  Israeli  company  in  consideration  for  $1,406 in cash.  The
                  acquisition  was  accounted  for by  the  purchase  method  of
accounting.                                 

                  AD&D develops,  manufactures  and builds  airborne  models and
other engineered products.                  

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

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

10

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

NOTE 1 - GENERAL (CONT.)                                                        

                  On July  2005,  the  Company  completed  the  purchase  of the
                  remaining shares of AD&D in consideration  for $1,025 in cash.
                  The  excess of the  purchase  price over the fair value of net
                  tangible assets acquired in the amount of approximately $1,214
                  was  allocated  to  technology  ($900) to be  amortized by the
                  straight-line  method  over a  period  of eight  years  and to
goodwill ($341).                            

                  Pro forma  information in accordance with SFAS No. 141 has not
                  been provided,  since the revenues and net income of AD&D were
                  not  material in relation to total  consolidated  revenues and
 net income for the years 2003, 2004 and 2005.

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

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

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

                  Pro forma  information in accordance with SFAS No. 141 has not
                  been  provided,  since the revenues and net income of CIC were
                  not  material in relation to total  consolidated  revenues and
net income for the years 2003 and 2004.     

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

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

                  The financial results of the business acquired are included in
                  the Company's  consolidated financial statements from the date
of acquisition.                             

                  Pro forma  information in accordance with SFAS No. 141 has not
                  been  provided,  since  the  revenues  and net  income  of the
                  Aircraft  Division  are not  material in relation to the total
                  consolidated  revenues  and net  income for the years 2004 and
2005.                                       

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U.S. dollars (In thousands)                                                     

NOTE 1 - GENERAL (CONT.)                                                        

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

                  During   2004,   the  Company   acquired   4.3%  of  Tadiran's
                  outstanding   shares  on  the  Tel  Aviv  Stock   Exchange  in
                  consideration for $15,900. In 2004 the investment in Tadiran's
              shares was accounted for as available-for-sale securities.

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

                  As a result of the  acquisition in the second quarter of 2005,
                  the  Company  was able to exercise  significant  influence  on
                  Tadiran.  In  accordance  with APB 18, "The  Equity  Method of
                  Accounting for  Investments  in Common  Stock",  the Company's
                  interest in Tadiran,  which was  previously  accounted  for as
                  available-for-sale  securities,  was  accounted  retroactively
                  under  the   equity   method  of   accounting   ("step-by-step
                  acquisition").   Implementing  the  step-by-step   acquisition
                  method  resulted in a adjustments  of the Company's  financial
                  statements  for 2004,  in which the  Company's  investment  in
               Tadiran was accounted for as available-for-sale securities.

     The following are the effects of the adjustments:

(1)    Consolidated balance sheet           

                                                        [Enlarge/Download Table]

                                                               December 31, 2004            
                                                    --------------------------------------- 
                                                        As          Effect of          As   
                                                    reported       adjustments     adjusted 
                                                    ---------      ---------      --------- 
                                                                                            
Other receivables and prepaid expenses              $  51,042      $     752      $  51,794 
Investment in affiliated companies and                                                      
partnership                                            33,124         14,749         47,873 
Available for sale securities                          18,017        (18,017)             - 
Accumulated other comprehensive loss, net of tax       (3,346)        (1,396)        (4,742)
Retained earnings                                     156,387         (1,120)       155,267 
Total  shareholders' equity                         $ 434,700      $  (2,516)     $ 432,184 



  (2) Consolidated statement of income                                                      

                                                          Year ended December 31, 2004      
                                                    --------------------------------------- 
                                                        As         Effect of         As     
                                                    reported     adjustments      adjusted  
                                                    ---------    -----------      --------- 
                                                                                            
Equity in net earnings of affiliated companies                                              
and partnership                                   $    7,765     $  (1,120)     $    6,645  
Net income                                            52,993        (1,120)         51,873  
Basic net earnings per share                            1.33         (0.03)           1.30  
Diluted net earnings per share                    $     1.29     $   (0.03)     $     1.26  

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U.S. dollars (In thousands)                                                     

NOTE 1 - GENERAL (CONT.)                                                        

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

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

                  The excess of the amounts paid for the Tadiran shares acquired
                  during 2004 and 2005 over their book value is detailed  below.
                  Based  on  a  purchase  price   allocation   analysis  ("PPA")
                  performed  by  an   independent   advisor,   this  excess  was
attributed as follows:                      

                                                        [Enlarge/Download Table]

                                                        In the      In the      In the                                         
                                           Until the     first       third      fourth                                         
                                             end of     half of     quarter     quarter                                        
                                              2004       2005       of 2005      of 2005       Total     Expected useful lives 
                                           ---------    --------     -------      -------       -----     ---------------------
                                                                                                                               
In Process R&D ("IPR&D")                      $ 1,000    $ 4,000      $ 1,200      $ 3,300    $ 9,500    immediate write-off   
Inventory                                         300      1,200          400          900      2,800    up to a quarter       
Other tangible assets and liabilities             100        300          100          200        700    5 years               
Brand name                                        800      3,200        1,000        2,500      7,500    15 years              
Customer base and backlog                       4,100     16,000        4,900       12,700     37,700    2-12 years            
Technology                                      2,400      9,500        2,900        7,500     22,300    10 years              
Goodwill                                        1,600     17,600        5,800       14,600     39,600    indefinite-subject to 
                                                                                                         annual impairment test
                                           ----------- ---------- ------------- ----------- ------------                       
Total excess of  consideration  over book                                                                                      
value                                         $10,300    $51,800      $16,300      $41,700   $120,100                          
                                           =========== ========== ============= =========== ============                       
Percentage of interest acquired in                                                                                             
Tadiran                                       4.3%        17%         5.2%        13.5%         40%                            
                                           =========== ========== ============= =========== ============                       

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

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

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

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

NOTE 1 - GENERAL (CONT.)                                                        

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

                  Elisra has significant complementary technologies and customer
                  installment  base to  those of the  Group  in areas  including
                  ELINT systems,  EW suites,  airborne  warning systems and data
                  links.   The   Company's   management   believes   that   such
                  technologies  and  customer  installment  base will enable the
                  Group to offer more  comprehensive  turnkey  solutions  to its
      customers and strengthen its competitive position.

                  The excess of the amount paid for the Elisra  shares  acquired
                  over their book value is approximately $60.2 million. Based on
                  a PPA  performed by an  independent  advisor,  this excess was
attributed as follows:                      

                                                        [Enlarge/Download Table]

                                              Expected useful lives                         
                                              ---------------------                         
                                                                                            
IPR&D                                $7,500   immediate write-off                           
Inventory                             1,200   up to 2 quarters                              
Land and  buildings                   5,700   20 years                                      
Customer base and backlog            11,800   10 years                                      
Technology                            9,500   10 years                                      
Deferred taxes                       (5,400)  According to the relevant item above          
Goodwill                             29,900   indefinite - subject to annual impairment test
                           -----------------                                                
                                    $60,200                                                 
                           =================                                                

                  The results of Elisra's  operations  have been included in the
                  consolidated   financial   statements   from   the   date   of
                  acquisition.  Regarding performance  information in accordance
with SFAS 141, see below.                   

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

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

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U.S. dollars (In thousands)                                                     

NOTE 1 - GENERAL (CONT.)                                                        

         (1)      Intangible  assets  (customer  base,  backlog and  technology)
                  arising   from  the   acquisition   of   Elisra's   shares  of
                  approximately  $21,300,  net  of  related  deferred  taxes  of
                 approximately $4,300, is amortized over a period of 10 years.

         (2)      Excess of cost over equity purchased  allocated to real estate
                  assets of approximately  $5,700, net of related deferred taxes
                  of  approximately  $1,100,  is  amortized  over a period of 20
years.                                      

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

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

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

                                                                [Download Table]

                                                        FOR THE YEAR ENDED     
                                                   ----------------------------
                                                           DECEMBER 31         
                                                   ----------------------------
                                                       2005             2004   
                                                   -----------      -----------
                                                                               
Revenues                                            $1,264,375       $1,181,110
                                                   ===========      ===========
Net income as reported                                 $32,487          $51,873
Adjustments:                                                                   
Elimination of the charge to operations for IPR&D        7,490                -
Other adjustments, net                                 (21,337)             126
                                                   -----------      -----------
Net income - proforma (*)                              $18,640          $51,999
                                                   ===========      ===========
Basic earnings per share - proforma                      $0.46            $1.33
                                                   ===========      ===========
Diluted earnings per share - proforma                    $0.45            $1.29
                                                   ===========      ===========

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

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

         I.       In  October  2005,  the  Company  invested  an  amount of $2.5
                  million in Chip PC Ltd. ("Chip PC"), an Israeli company, for a
20% interest in Chip PC.                    

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

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U.S. dollars (In thousands)                                                     

NOTE 1 - GENERAL (CONT.)                                                        

                  The excess of the amount paid for the Chip PC shares  acquired
                  over their book value is approximately $2.4 million.  Based on
                  a PPA  performed by an  independent  advisor,  this excess was
                  allocated  mainly to technology ($1.6 million) to be amortized
                  by a straight-line  method over a period of 5 - 8 years and to
goodwill ($1.1 million).                    

         J.       The financial results of the business acquired are included in
                  the Company's  consolidated financial statements from the date
                  of  acquisition.  In October 2005,  the Company  established a
                  U.K.  subsidiary - UAV Tactical  Systems Ltd.  ("U-Tacs"),  in
                  which the  Company  holds 51% and the rest of the  shares  are
                  held by Thales  U.K..  U-Tacs  will be the  manufacturing  and
                  support  center of the  Watchkeeper  program - an Unmanned Air
Vehicle (UAV) program for the U.K. MOD.     

                  U-Tacs will establish the capabilities to design, manufacture,
                  integrate  and fly  tactical UAV  systems,  consisting  of air
                  vehicles,  ground control stations,  data links,  payloads and
launch and recovery subsystems.             

NOTE 2   -  SIGNIFICANT ACCOUNTING POLICIES                                 

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

A.       USE OF ESTIMATES                                     

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

B.       FINANCIAL STATEMENTS IN U.S. DOLLARS                 

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

                  Transactions  and  balances  originally  denominated  in  U.S.
                  dollars are presented at their original  amounts.  Transaction
                  and balances in other  currencies  have been  remeasured  into
                  U.S.  dollars in accordance  with principles set forth in SFAS
                  No. 52 "Foreign Currency Translation".  All exchange gains and
                  losses from the remeasurement mentioned above are reflected in
            the statement of income in financial income or expenses.

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U.S. dollars (In thousands)                                                     

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

B.       FINANCIAL STATEMENTS IN U.S. DOLLARS (Cont.)         

                  For those foreign  subsidiaries whose functional  currency has
                  been determined to be other than the U.S.  dollar,  assets and
                  liabilities  are  translated  at year-end  exchange  rates and
                  statement of income items are  translated at average  exchange
                  rates  prevailing  during  the  year.  Resulting   translation
                  adjustments   are   recorded  as  a  separate   component   of
                  accumulated  other   comprehensive   income  in  shareholders'
equity.                                     

C.       PRINCIPLES OF CONSOLIDATION                          

                  The consolidated  financial statements include the accounts of
               the Company and its wholly and majority-owned subsidiaries.

                  The  consolidated  subsidiaries  include El-Op,  ESA 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 EQUIVALENTS                                     

                  Cash  equivalents,  are short-term  highly liquid  investments
                  that are readily  convertible to cash with maturities of three
months or less at the date of acquisition.  

E.       SHORT-TERM BANK DEPOSITS                             

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

F.       MARKETABLE SECURITIES                                

                  Investments  in a  marketable  securities  are  classified  as
                  trading   securities   according  to  Statement  of  Financial
                  Accounting   Standard   No.  115   "Accounting   for   Certain
                  Investments in Debt and Equity Securities",  ("SFAS No. 115").
                  Accordingly, these securities are stated at fair market value,
                  with  gains and  losses,  net of taxes,  reported  as  finance
income (loss).                              

G.       INVENTORIES                                          

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

Cost is  determined  as  follows:           

         o        Raw materials using the average cost method.

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

G.       INVENTORIES (Cont.)                                  

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

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

         Advances  from  customers  are  allocated  to the  applicable  contract
         inventories  and are  presented as net  amounts.  Advances in excess of
related inventories are classified as liabilities.            

         H.       INVESTMENT  IN  AFFILIATED  COMPANIES,  PARTNERSHIP  AND OTHER
COMPANIES                                   

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

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

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

                  Management  evaluates  investments  in  affiliates  and  other
                  companies  for  evidence of other than  temporary  declines in
                  value.  When relevant factors indicate a decline in value that
                  is other than  temporary  the Company  records a provision for
                  the decline in value.  A judgmental  aspect of accounting  for
                  investments      involves      determining      whether     an
                  other-than-temporary  decline in value of the  investment  has
                  been  sustained.  Such evaluation is dependent on the specific
                  facts and  circumstances.  Accordingly,  management  evaluates
                  financial information (e.g. budgets, business plans, financial
                  statements,     etc.)    in     determining     whether     an
                  other-than-temporary   decline   in  value   exists.   Factors
                  indicative   of  an   other-than-temporary   decline   include
                  recurring  operating  losses,  credit  defaults and subsequent
                  rounds of  financings at an amount below the cost basis of the
                  investment.  This  list is not all  inclusive  and  management
                  weighs all quantitative and qualitative factors in determining
                  if an  other-than-temporary  decline in value of an investment
                  has  occurred.  The results of 2005  include  impairment  loss
       related to its investment in ISI (see Note 6(B)2)).

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

I.       LONG-TERM TRADE RECEIVABLES                          

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

J.       LONG-TERM BANK DEPOSITS                              

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

K.       PROPERTY, PLANT AND EQUIPMENT                        

                  Property,  plant and  equipment  are  stated  at cost,  net of
                  accumulated  depreciation and investment grants. For equipment
                  produced  for the Group's own use,  cost  includes  materials,
                  labor and overhead, but not in excess of the fair value of the
equipment.                                  

                  Depreciation  is calculated by the  straight-line  method over
                  the  estimated  useful  life of the  assets  at the  following
annual rates:                               

                                               %
                                              ------
      Buildings                                2-4
      Instruments, machinery and equipment    6-33
      Office furniture and other              6-33
                     Motor vehicles                         12-33   (mainly 15%)

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

L.       INVESTMENT GRANTS                                    

                  As  a  governmental  incentive  for  industrial  companies  in
                  Israel,  the  "Investment  Center",  which is a branch  of the
                  Israel  Ministry of  Industry  and Trade,  permits  industrial
                  companies  to  submit a request  to  qualify  as an  "Approved
                  Enterprise".  An  Approved  Enterprise  is entitled to certain
                  benefits in respect of capital  investments.  The benefits may
                  be in the form of  reduced  tax  rates and of  capital  grants
                  received as a percentage  of the  investments  of the Approved
                  Enterprise.  The amount of a capital  grant is determined as a
                  percentage of the Approved Enterprise  investment in property,
                  plant and  equipment.  As a condition to the granting of these
                  benefits,  the Approved Enterprise is obligated to perform the
                  applicable  industrial  plan as detailed in the request to the
                  Investment Center (see Note 16(A)(3) and 17(J)). These capital
                  grants are non-royalty  bearing and are not conditioned on the
                  results  of  operations.  As the  capital  grants are a direct
                  participation  in the  cost of the  acquisition  of  property,
                  plant and equipment  they are offset against  property,  plant
and equipment.                              

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

M.       IMPAIRMENT OF LONG-LIVED ASSETS                      

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

N.       INTANGIBLE ASSETS                                    

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

O.       GOODWILL                                             

                  Goodwill  represents  the  excess  of  the  cost  of  acquired
                  businesses over the net fair values of the assets acquired and
                  liabilities  assumed.  Under  SFAS No.  142,  effective  as of
                  January  1,  2002,  goodwill  is no longer  amortized,  but is
                  instead  tested  for  impairment  at least  annually  (or more
frequently if impairments indicators arise).

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

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

                  Fair  value  of a  reporting  unit  is  determined  using  the
                  discounted  future cash flows  method.  Significant  estimates
                  used in the  methodology  include  estimates  of  future  cash
                  flows,  future  short-term  and  long-term  growth  rates  and
                  weighted  average  cost of capital  for each of the  reporting
units.                                      

                  As of  December  31,  2005,  no  impairment  losses  have been
identified.                                 

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

P.       SEVERANCE PAY                                        

                  Under  Israeli  law and  employment  agreements,  the  Group's
                  companies  in Israel are required to make  severance  payments
                  and,  in  certain  situations,   pay  pensions  to  terminated
                  employees.  The calculation is based on the employee's  latest
salary and the period of his/her employment.

                  The Group's  companies in Israel  records a liability  for the
                  amount  that  would  have  to be  paid  to  the  employees  as
             severance payment in the event of the companies shut down

                  The  companies'  obligation  for  severance pay and pension is
                  provided by monthly deposits with insurance companies, pension
                  funds and by an accrual.  The value of severance  pay funds is
                  presented   in  the  balance   sheet  and   includes   profits
                  accumulated to balance sheet date.  The amounts  deposited may
                  be  withdrawn  only  after   fulfillment  of  the  obligations
                  pursuant to Israeli severance pay law or labor agreements. The
                  values  of  the   deposited   funds  are  based  on  the  cash
                  surrendered  value  of  these  funds  and  include  immaterial
profits.                                    

                  Severance pay expenses for the years ended  December 31, 2005,
                  2004 and 2003, amounted to approximately $17,500,  $15,574 and
$11,491, respectively.                      

Q.       REVENUE RECOGNITION                                  

                  The  Group   generates   revenues  from  long-term   contracts
                  involving the design, development, manufacture and integration
                  of defense  systems and  products  and  providing  support and
services for such systems and products.     

                  Revenues  from  long-term  contracts are  recognized  based on
                  Statement of Position  81-1  "Accounting  for  Performance  of
                  Construction-Type and Certain Production-Type Contracts" ("SOP
                  81-1")  according  to which  revenues  are  recognized  on the
percentage-of-completion basis.             

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

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

                  Sales  and  anticipated  profit  under  long-term  fixed-price
                  contracts  that involve both  development  and  production are
                  recorded  on  a  percentage-of-completion   basis,  using  the
                  cost-to-cost   method   and   units-of-delivery    method   as
applicable. In certain circumstances, when  

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Q. REVENUE RECOGNITION (Cont.)                                                  

                  measuring  progress  toward  completion  under the development
                  portion of the contract,  the Company considers other factors,
  such as achievement of performance milestones.

                  The  percentage-of-completion  method of  accounting  requires
                  management  to estimate the cost and gross  profit  margin for
                  each individual contract.  Estimated gross profit or loss from
                  long-term  contracts  may change  due to changes in  estimates
                  resulting  from  differences  between actual  performance  and
                  original estimated forecasts.  Such changes in estimated gross
                  profit are  recorded  in results of  operations  when they are
                  reasonably   determinable  by  management,   on  a  cumulative
                  catch-up basis. Anticipated losses on contracts are charged to
earnings when determined to be probable.    

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

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

                  The     Group     believes     that    the    use    of    the
                  percentage-of-completion  method is  appropriate  as the Group
                  has the ability to make reasonably dependable estimates of the
                  extent of progress towards  completion,  contract revenues and
                  contract  costs.  In  addition,   contracts  executed  include
                  provisions  that  clearly   specify  the  enforceable   rights
                  regarding  services to be provided and received by the parties
                  to the contracts,  the  consideration  to be exchanged and the
                  manner and terms of settlement. In all cases the Group expects
                  to perform its contractual obligations,  and its customers are
            expected to satisfy their obligations under the contract

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

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

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

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

R.       PRE-CONTRACT COSTS                                   

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

S.       WARRANTY                                             

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

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

                                                                [Download Table]

                                                         2005            2004    
                                                   ---------------  -------------
                                                                                 
Balance, at January 1                              $    34,230      $    36,653  
Warranties issued during the year                       19,223           17,907  
Warranties forfeited or exercised during the year      (21,656)         (20,330) 
                                                   ---------------  -------------
Balance, at December 31                            $   31,797       $    34,230  
                                                   ===============  =============

T. RESEARCH AND DEVELOPMENT COSTS                 

                  Research and development  costs,  net of  participations,  are
                  charged to operations as incurred.  Group  sponsored  research
                  and development costs primarily include  independent  research
 and development and bid and proposal efforts.

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

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

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

U.       INCOME TAXES                                         

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

V.       CONCENTRATION OF CREDIT RISKS                        

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

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

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

W.       DERIVATIVE FINANCIAL INSTRUMENTS                     

                  Financial   Accounting  Standards  Board  Statement  No.  133,
                  "Accounting for Derivative Instruments and Hedging Activities"
                  ("SFAS  No.  133"),   requires   companies  to  recognize  all
                  derivative  instruments as either assets or liabilities in the
                  statement of financial  position at fair value. The accounting
                  for  changes  in the fair  value  (i.e.  gains or losses) of a
                  derivative   instrument   depends   on  whether  it  has  been
                  designated and qualifies as part of a hedging relationship and
                  further,  on the  type  of  hedging  relationship.  For  those
                  derivative  instruments  that are  designated  and  qualify as
                  hedging  instruments,  a company  must  designate  the hedging
                  instrument,  based upon the exposure  being hedged,  as a fair
                  value hedge, cash flow hedge or a hedge of a net investment in
a foreign operation.                        

                  For derivative  instruments that are designated and qualify as
                  a fair value hedge  (i.e.,  hedging the exposure to changes in
                  the fair  value of an asset or a  liability  or an  identified
                  portion thereof that is  attributable  to a particular  risk),
     the effective portion of the gain and loss on the

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

W.       DERIVATIVE FINANCIAL INSTRUMENTS (Cont.)             

                  derivative  instrument as well as the offsetting  loss or gain
                  on the  hedged  item  attributable  to  the  hedged  risk  are
                  recognized  in the same line item  associated  with the hedged
                  item in  current  earnings  during the period of the change in
                  fair  value.  The  remaining  gain or  loss on the  derivative
                  instrument  in  excess  of the  cumulative  change in the fair
                  value of the asset or liability  hedge,  if any, is recognized
                  as financial  expense in current earnings during the period of
                  change.  For  derivative  instruments  that are designated and
                  qualify as a cash flow hedge  (i.e.  hedging  the  exposure to
                  variability in expected future cash flows that is attributable
                  to a particular  risk),  the effective  portion of the gain or
                  loss on the  derivative  instrument is reported as a component
                  of other  comprehensive  income and reclassified into earnings
                  in  the  same  line  item   associated   with  the  forecasted
                  transaction  in the same  period or periods  during  which the
hedged transaction affects earnings.        

                  The  remaining  gain or loss on the  derivative  instrument in
                  excess of the cumulative change in the present value of future
                  cash flows of the hedged  item,  if any,  is  recognized  as a
                  financial  expense  in current  earnings  during the period of
change.                                     

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

                  As part of its hedging strategy, the Group enters into forward
                  exchange contracts in order to protect the Group from the risk
                  that the eventual  dollar cash flows from the sale of products
                  to  international  customers  will be  adversely  affected  by
changes in the exchange rates.              

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

                  As of December 31, 2005, the Group had forward  contracts with
                  a notional  amount of  approximately  $220,000 to purchase and
                  sell foreign  currencies  ($22,000 in Euro,  $194,000 in Great
           Britain Pounds ("GBP") and $4,000 in other currencies).

                  The  fair  value of the  foreign  exchange  contracts  and the
            options as of December 31, 2005 is approximately $6,300.

X.       STOCK-BASED COMPENSATION                             

                  Up until  January  1,  2004,  the  Company  elected  to follow
                  Accounting   Principles   Board  Opinion  No.  25  ("APB  25")
                  "Accounting   for  Stock   Issued  to   Employees"   and  FASB
                  Interpretation  No.  44 ("FIN  44")  "Accounting  for  Certain
                  Transactions  Involving Stock  Compensation" in accounting for
                  its  employee  stock option  plans.  Under APB 25, the Company
                  accounted for stock option  grants using the  intrinsic  value
                  method whereby compensation expense is equal to the excess, if
                  any, of the quoted market price of the stock over the exercise
                  price at the  grant  date of the award or if  applicable  at a
                  subsequent   measurement  date.  The  Company  recognized  the
expense over the vesting period of the award

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

X.       STOCK-BASED COMPENSATION (Cont.)                     

                  on a straight-line  basis.  Phantom options were accounted for
                  as variable awards and accordingly, compensation expenses were
                  measured at the end of each reporting  period and amortized on
                  an  accelerated  basis over the remaining  vesting period (See
Note 18).                                   

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

                  The  cumulative  effect on  deferred  taxes  relating to stock
                  based compensation resulting from the adoption of SFAS No. 123
                  amounted to a reduction of $152 and was recorded as a one-time
     adjustment to additional paid-in capital in 2004.

                  If the Company had elected to adopt the fair value recognition
                  provisions of SFAS No. 123 as of its original  effective date,
                  pro forma net income and pro forma  basic  diluted  net income
                  per share for the three years ended December 31, 2005 would be
as follows:                                 

                                                        [Enlarge/Download Table]

                                                     YEAR ENDED DECEMBER 31,          
                                          ------------------------------------------- 
                                               2005            2004            2003   
                                          ------------     -----------     ---------- 
                                                                                      
Net income  as reported                   $     32,487     $    51,873     $   45,945 
Add - Stock based compensation                                                        
  expense (income), net of                                                            
  related tax effects as reported                                                     
  (intrinsic method in 2003)                       172           2,710          3,793 
Deduct - Stock based compensation                                                     
  expense under fair value based                                                      
  method of SFAS 123 net of related                                                   
  of tax effects                                  (172)         (2,710)        (2,956)
                                          ------------     -----------     ---------- 
Pro forma net income                      $     32,487     $    51,873     $   46,782 
                                          ============     ===========     ========== 

Net earnings per share:                                                               
Basic net earnings per share as                                                       
  reported                                $       0.80     $      1.30     $     1.18 
                                          ============     ===========     ========== 
Diluted net earnings per share as                                                     
  reported                                $       0.78     $      1.26     $     1.14 
                                          ============     ===========     ========== 

Pro forma basic net earnings per share    $       0.80     $      1.30     $     1.20 
                                          ============     ===========     ========== 

Pro forma diluted net earnings per share  $       0.78     $      1.26     $     1.16 
                                          ============     ===========     ========== 

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X.       STOCK-BASED COMPENSATION (Cont.)                     

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

                                                                [Download Table]

                                2005              2004              2003  
                         -------------  ------------------  --------------
                                                                          
Divided yield                2.25%                2.2%             2.19%  
Expected volatility          25.6%               26.7%            19.03%  
Risk-free interest rate       4.5%                  4%             1.20%  
Expected life                 4 years            4 years          6 years 

Y.       FAIR VALUE OF FINANCIAL INSTRUMENTS                  

                  The carrying amount reported in the balance sheet for cash and
                  cash equivalents, short-term bank deposits, trade receivables,
                  short-term   bank   credit   and  loans  and  trade   payables
                  approximate their fair values due to the short-term maturities
of such instruments.                        

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

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

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

                  It was not  practicable  to  estimate  the  fair  value of the
                  Group's investments in shares of non-public companies that are
                  accounted for under the cost and equity method  because of the
                  lack of a quoted  market  price  and the  inability  to obtain
                  valuation of each company without  incurring  excessive costs.
                  The  carrying  amounts of these  companies  as of December 31,
                  2004 and 2005 were  $44,869  and  $45,197,  respectively,  and
                  represent the original cost of acquisition, and in the case of
                  affiliates also the Company's equity in the earnings/losses of
                  the affiliates and its share in the changes of the affiliates'
                  equity  since  the  dates of  acquisition.  As noted in Note H
                  above,  management is constantly  monitoring such  investments
for other-than-temporary decline in value.  

Z.       BASIC AND DILUTED NET EARNINGS PER SHARE             

                  Basic  net  earnings  per  share  are  computed  based  on the
                  weighted average number of ordinary shares  outstanding during
                  each year. Diluted net earnings per share is computed based on
                  the weighted  average  number of ordinary  shares  outstanding
                  during each year,  plus  dilutive  potential  ordinary  shares
                  considered  outstanding  during  the year.  Outstanding  stock
                  options are excluded from the  calculation  of the diluted net
                  earnings  per  ordinary   share  when  such   securities   are
                  anti-dilutive.  In all the years  presented  no stock  options
were excluded.                              

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AA.      VARIABLE INTEREST ENTITIES                           

                  FASB   Interpretation  No.  46,   "Consolidation  of  Variable
                  Interest  Entities,  an interpretation of Accounting  Research
                  Bulleting  No. 51" ("FIN 46")  provides  a new  framework  for
                  identifying   Variable   Interest   Entities   ("VIE's")   and
                  determining   when  a  company   should  include  the  assets,
                  liabilities,   non-controlling   interests   and   results  of
                 activities of a VIE in its consolidated financial statements.

                  In  general,  a VIE  is an  entity  that  either  (1)  has  an
                  insufficient  amount  of  equity  to carry  out its  principal
                  activities, without additional subordinated financial support,
                  (2) has a group  of  equity  owners  that are  unable  to make
                  significant  decisions about the entity's  activities,  or (3)
                  has a group of equity  owners that do not have the  obligation
                  to absorb the entity's  losses or the right to receive returns
                  generated by its operations. FIN 46 requires the consolidation
                  of a VIE by the primary  beneficiary.  The primary beneficiary
                  is the entity that absorbs a majority of the entity's expected
                  losses,  receives a majority of the entity's expected residual
                  returns,  or both,  as a result of ownership,  contractual  or
other financial interests in the entity.    

                  U-TacS is considered to be a variable  interest entity. As the
                  Company is the primary beneficiary,  U-TacS is consolidated in
the Company's financial statements.         

AB.      IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS       

                  (1)      On December 2004, the FASB issued the revised FAS No.
                           123,  "Share-Based  Payment"  ("FAS  123(R)"),  which
                           addresses  the  accounting  for  share-based  payment
                           transactions  in which the Company  obtains  employee
                           services in exchange for: (a) equity  instruments  of
                           the Company; or (b) liabilities that are based on the
                           fair value of the  Company's  equity  instruments  or
                           that may be settled by the  issuance  of such  equity
                           instruments. This Statement eliminates the ability to
                           account for employee share-based payment transactions
                           using  APB  25,   "Accounting  for  Stock  Issued  to
                           Employees",    and   requires   instead   that   such
                           transactions  be accounted  for using the  grant-date
                           fair value based method.  This  Statement was to have
                           been  effective  as of the  beginning  of  the  first
                           interim or annual  reporting  period  that  commences
                           after June 15,  2005 (July 1, 2005 for the  Company);
                           however,   on  April  14,  2005,  the  United  States
                           Securities and Exchange  Commission  ("SEC")  delayed
                           effectiveness  for companies with fiscal years ending
                           December 31 (such as the Company) to January 1, 2006.
                           This  Statement  applies  to all  awards  granted  or
                           modified  after the  Statement's  effective  date. In
                           addition,  compensation cost for the unvested portion
                           of previously  granted awards that remain outstanding
                           on the Statement's effective date shall be recognized
                           on or  after  the  effective  date,  as  the  related
                           services   are   rendered,   based  on  the   awards'
                           grant-date  fair value as previously  calculated  for
                           the  pro-forma  disclosure  under SFAS 123.  In March
                           2005, the SEC released SEC staff Accounting  Bulletin
                           No.107 (SAB 107),  "Share-Based  Payment" (SAB 107").
                           SAB 107 provides the SEC staff's  position  regarding
                           the  application  of  statement  123(R) and  contains
                           interpretive  guidance  related  to  the  interaction
                           between  Statement  123(R) and  certain SEC rules and
                           regulations  and also  provides the SEC staff's views
                           regarding  the  valuation  of   share-based   payment
        arrangements for public companies.

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

 AB.      IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Cont.)

                  (2)      The Company  adopted the  fair-value-based  method of
                           accounting for share-based payments effective January
                           1,  2004  using  the  "modified  prospective  method"
                           described in FASB Statement No. 148,  "Accounting for
                           Stock-Based    Compensation    -    Transition    and
                           Disclosure".   Currently,   the   Company   uses  the
                           Black-Scholes-Merton formula to estimate the value of
                           stock options granted to employees.  The Company does
                           not  anticipate  that adoption of SFAS 123(R) and SAB
                           107 will have a  material  impact on its  results  of
                           operations or its financial position.  However,  SFAS
                           123(R)  also   requires  that  the  benefits  of  tax
                           deductions in excess of recognized  compensation cost
                           be reported as a financing cash flow,  rather than as
                           an  operating  cash flow as  required  under  current
                           literature.   This   requirement   will   reduce  net
                           operating  cash flows and increase net financing cash
                           flows in periods after the effective date.  While the
                           Company cannot estimate what those amounts will be in
                           the  future  (because  they  depend on,  among  other
                           things,  when employees exercise stock options),  the
                           amount of operating  cash flows  recognized  in prior
                           periods  for such  excess  tax  deductions  was $652,
                           $1,179 and $758 in 2005, 2004 and 2003, respectively.

                  (3)      In May 2005,  the FASB issued  Statement of Financial
                           Accounting Standard No. 154 ("FAS 154"),  "Accounting
                           Changes and Error Corrections" - a replacement of APB
                           No. 20, Accounting Changes" and FAS No. 3, "Reporting
                           Accounting Changes in Interim Financial  Statements".
                           FAS 154 provides  guidance on the  accounting for and
                           reporting   of    accounting    changes   and   error
                           corrections.  APB Opinion 20 previously required that
                           most  voluntary  changes in  accounting  principle be
                           recognized  by  including in net income of the period
                           of the change the  cumulative  effect of  changing to
                           the  new  accounting  principle.   FAS  154  requires
                           retrospective application to prior periods' financial
                           statements  of  a  voluntary   change  in  accounting
                           principle  unless it is  impracticable  to do so. FAS
                           154  is   effective   for   accounting   changes  and
                           corrections of errors made in fiscal years  beginning
after December 15, 2005.  

                  (4)      In June 2005, the Emerging Issues Task Force ("EITF")
                           released  Issue  No.  04-5  "Determining   Whether  a
                           General  Partner,  or the General Partner as a Group,
                           Controls a Limited Partnership or Similar Entity When
                           the Limited  Partners  Have  Certain  Rights"  ("EITF
                           04-5").  EITF 04-5 provides  guidance in  determining
                           whether  a  general   partner   controls   a  limited
                           partnership  and  therefore  should  consolidate  the
                           limited  partnership.   EITF  04-5  states  that  the
                           general partner in a limited  partnership is presumed
                           to  control  that  limited  partnership  and that the
                           presumption  may be overcome if the limited  partners
                           have either (1) the  substantive  ability to dissolve
                           or  liquidate  the limited  partnership  or otherwise
                           remove  the  general  partner  without  cause  or (2)
                           substantive  participating rights. The effective date
                           for  applying  the guidance in EITF 04-5 was (1) June
                           29,  2005  for  all  new  limited   partnerships  and
                           existing   limited   partnerships   for   which   the
                           partnership  agreement  was modified  after that date
                           and (2) no later  than  the  beginning  of the  first
                           reporting  period in  fiscal  years  beginning  after
                           December   15,   2005,    for   all   other   limited
partnerships.             

                           The Company  estimates that the adoption of EITF 04-5
                           will not have a  significant  impact on its financial
position.                 

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

 AB.      IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Cont.)

                  (5)      In November 2005, the FASB issued FSP FAS 115-1.  The
                           FSP  addresses  the   determination  as  to  when  an
                           investment  is  considered  impaired,   whether  that
                           impairment   is   other   than   temporary   and  the
                           measurement  of an  impairment  loss.  The  FSP  also
                           includes accounting  considerations subsequent to the
                           recognition  of other  than-temporary  impairment and
                           requires certain  disclosures about unrealized losses
                           that have not been recognized as other-than-temporary
                           impairments. The guidance in this FSP amends SFAS No.
                           115,  "Accounting for Certain Investments in Debt and
                           Equity".  The FSP replaces the impairment  evaluation
                           guidance  of EITF  Issue No.  03-1,  "The  Meaning of
                           Other-Than-Temporary  Impairment and Its  Application
                           to  Certain  Investments",  with  references  to  the
                           existing  other-than-temporary  impairment  guidance.
                           The FSP clarifies that an investor  should  recognize
                           an impairment  loss no later than when the impairment
                           is deemed other-than-temporary, even if a decision to
                           sell an  impaired  security  has not been  made.  The
                           guidance  in this FSP is to be applied  to  reporting
                           periods  beginning  after  December 15,  2005.  As of
                           December 31, 2005,  adoption of FSP FAS 115-1 has not
                           had a  material  impact  on the  Company's  financial
        position or results of operations.

AC.      RECLASSIFICATIONS                                    

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

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U.S. dollars (In thousands)                                                     

NOTE 3 - TRADE RECEIVABLES, NET                                                 

Trade receivables                                   

                                                        [Enlarge/Download Table]

                                                                               DECEMBER 31,         
                                                                   ---------------------------------
                                                                          2005             2004     
                                                                   ---------------- ----------------
                                                                                                    
                 Open accounts (*)                                     $  254,056     $    176,163  
                 Unbilled receivables                                      95,854           41,717  
                 Less - allowance for doubtful accounts                    (3,221)          (3,064) 
                                                                   ---------------- ----------------
                                                                       $  346,689     $    214,816  
                                                                   ================ ================
                 (*)     Includes affiliated companies             $        6,283      $     10,823 
                                                                   ================ ================

NOTE 4 - OTHER RECEIVABLES AND PREPAID EXPENSES                                                     

                                                                               DECEMBER 31,         
                                                                   ---------------------------------
                                                                          2005             2004     
                                                                   ---------------- ----------------
                                                                                                    
                 Deferred income taxes                              $      18,708    $      21,355  
                 Prepaid expenses                                          22,065           16,621  
                 Government institutions                                    9,451            5,719  
                 Employees                                                  1,029            1,204  
                 Others                                                    15,843            6,895  
                                                                   ---------------- ----------------
                                                                      $    67,096    $      51,794  
                                                                   ================ ================

NOTE 5 - INVENTORIES, NET OF ADVANCES                                                               

                                                                               DECEMBER 31,         
                                                                   ---------------------------------
                                                                          2005             2004     
                                                                   ---------------- ----------------
                                                                                                    
                 Cost incurred on long-term contracts in progress      $  311,800     $    254,009  
                 Raw materials                                             84,343           70,813  
                 Advances to suppliers and subcontractors                  40,095           21,164  
                                                                   ---------------- ----------------
                                                                          436,238          345,986  
                 Less -                                                                             
                 Cost incurred on contracts in progress deducted                                    
                    from customer advances                                 16,178           14,533  
                                                                   ---------------- ----------------
                                                                          420,060          331,453  
                 Less -                                                                             
                  Advances received from customers (*)                     84,083           75,776  
                  Provision for losses                                      7,549            7,636  
                                                                   ---------------- ----------------
                                                                       $  328,428     $    248,041  
                                                                   ================ ================

              The Company has transferred  legal title of inventories to certain
customers as collateral for advances received.      

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

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NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES   

A. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD:              

                                                                [Download Table]

                        DECEMBER 31,          
             ---------------------------------
                    2005             2004     
             ---------------- ----------------
                                              
Tadiran (1)    $    156,142    $      14,749  
SCD (2)              25,059    $      19,186  
VSI (3)               6,451            6,966  
RedC (4)                  -            3,100  
Opgal (5)             3,380            2,873  
Chip PC (6)           2,516                -  
Others (8)            1,446              999  
             ---------------- ----------------
               $    194,994    $      47,873  
             ================ ================

                  (1)      Tadiran   Communications   Ltd.   ("Tadiran")   -   a
                           publicly-traded  40%-owned  subsidiary  registered in
                           Israel,  is  involved  in the  worldwide  market  for
                           military  communications systems and equipment and is
                        also active in the civilian communications market.

                  (2)      Semi   Conductor   Devices   ("SCD")  is  an  Israeli
                           partnership,  held  50% by  the  Company  and  50% by
                           Rafael   Armaments    Development    Authority   Ltd.
                           ("Rafael").  SCD is  engaged in the  development  and
                           production  of various  thermal  detectors  and laser
                           diodes.  SCD is jointly  controlled  and therefore is
                           not   consolidated   in   the   Company's   financial
statements.               

                  (3)      Vision Systems International LLC ("VSI") based in San
                           Jose, is a California  limited liability company that
                           is  held  50%  by ESA  and  50%  by a  subsidiary  of
                           Rockwell  Collins  Inc.  VSI  operates in the area of
                           helmet  mounted   display   systems  for  fixed  wing
                           military and  paramilitary  aircraft.  VSI is jointly
                           controlled and therefore is not  consolidated  in the
     Company's financial statements.

                  (4)      RedC  Optical  Networks  Inc.  ("RedC"),   a  company
                           registered in Delaware, is engaged in the multi-focal
                           optic  communications  sector and as of December  31,
                           2003 was held 36.5% by El-Op.  RedC designs  develops
                           and   manufactures   optical   amplifiers  for  dense
                           wave-length   multiplexing   optical   networks   for
telecommunications.       

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

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NOTE 6 - INVESTMENTS IN AFFILIATED  COMPANIES,  PARTNERSHIP  AND OTHER COMPANIES
(CONT.)                                                                         

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

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

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

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

                  (5)      Opgal  Optronics  Industries  Ltd.  ("Opgal")  is  an
                           Israeli  company owned 50.1% by the Company and 49.9%
                           by a subsidiary of Rafael.  Opgal  focuses  mainly on
                           commercial   applications   of  thermal  imaging  and
                           electro-optic   technologies.   The  Company  jointly
                           controls  Opgal with Rafael,  and therefore  Opgal is
                           not   consolidated   in   the   Company's   financial
statements.               

                  (6)      Chip PC is an Israeli company, of which approximately
                           20% is held by the  Company.  Chip  PC  develops  and
                           manufactures "Post PC" solutions, focused on enabling
                           server-based-computing    technologies   to   replace
                           traditional  PCs and deploy and control large numbers
of workstations.          

                  (7)      Mediguide   Inc.   ("Mediguide")   and  its   Israeli
                           subsidiary,  Mediguide Ltd., were established in 2000
                           as a spin-off from the Company.  The share capital of
                           Mediguide  consists of Common shares and Preferred A,
                           B,  C  and  D  shares.  The  Common  shares  and  the
                           Preferred  shares,   both  have  voting  rights.  The
                           Company  holds all of the Common  shares of Mediguide
                           which  constitute  approximately  55% (41% on a fully
                           diluted  basis) of the  voting  rights of  Mediguide.
                           During 2001 - 2004, Mediguide issued Preferred shares
                           to other investors in consideration for approximately
                           $34,355.  The  Preferred  shares  issued  entitle the
                           other  investors to  preference  rights senior to all
                           other   classes  of  shares   previously   issued  by
                           Mediguide in a  liquidation  or a deemed  liquidation
                           event. Therefore, the Company did not record any gain
                           as a result of the above  transaction.  In  addition,
                           the Preferred shares entitle their holders to certain
                           participating  rights.  Accordingly,   based  on  the
                           guidance  in  EITF  96-16,   the  Company   does  not
                           consolidate  Mediguide.  The  carrying  value  of the
      investment in Mediguide is zero.

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NOTE 6 - INVESTMENTS IN AFFILIATED  COMPANIES,  PARTNERSHIP  AND OTHER COMPANIES
(CONT.)                                                                         

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

                           (8)      The   summarized    financial    information
                                    regarding  Tadiran  (see  Note  1(G))  is as
follows:

                  Balance Sheet Information:

                                  DECEMBER 31,
                                 ---------------------
                                 2005         2004
                                 --------     --------

     Current assets              $312,093     $296,668
     Non-current assets           104,118      117,716
                                 --------     --------
     Total assets                 416,211      414,384
                                 ========     ========

     Current liabilities          243,972      258,138
     Non-current liabilities       43,840       36,097
     Shareholders' equity         128,399      120,149
                                 --------     --------
                                 $416,211     $414,384
                                 ========     ========

Income Statement Information:               

           YEAR ENDED DECEMBER 31,
           ---------------------
           2005         2004
           --------     --------
Revenues         $271,424     $316,036      
Gross profit      120,510      158,981      
Net income         29,879       47,992      

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NOTE 6 - INVESTMENTS IN AFFILIATED  COMPANIES,  PARTNERSHIP  AND OTHER COMPANIES
(CONT.)                                                                         

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

                  (9)      The  summarized  aggregate  financial  information of
                           companies  accounted  for  under the  equity  method,
                          excluding Tadiran (see Note 6(A) (8)) is as follows:

  Balance Sheet Information:

                                              DECEMBER 31,
                                             ---------------------
                                             2005         2004
                                             --------     --------

            Current assets                   $138,312     $124,352
            Non-current assets                 19,115       21,646
                                             --------     --------
            Total assets                      157,427      145,998
                                             ========     ========

            Current liabilities                59,067       68,655
            Non-current liabilities            13,622        3,868
            Shareholders' equity               84,738       73,475
                                             --------     --------
                                             $157,427     $145,998
                                             ========     ========

Income Statement Information:               

                         YEAR ENDED DECEMBER 31,
                        ----------------------------------
                        2005         2004         2003
                        --------     --------     --------
       Revenues         $266,841     $213,680     $183,426
       Gross profit       63,938      55, 285       45,616
       Net income         13,345       15,195       13,976

(10) See Note 17(F) for guarantees.         

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NOTE 6 - INVESTMENTS IN AFFILIATED  COMPANIES,  PARTNERSHIP  AND OTHER COMPANIES
(CONT.)                                                                         

                  B.       INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE COST
METHOD                    

      DECEMBER 31,
     -------------------
     2005       2004
     -------     -------
Sultam (1)     $ 3,500     $ 3,500          
ISI (2)          1,830       7,230          
AAI (3)          1,000       1,000          
Others              15          15          
     -------     -------
     $ 6,345     $11,745
     =======     =======

                  (1)      Sultam  Systems  Ltd.  ("Sultam"),  held  10%,  is an
                           Israeli   company  engaged  in  the  development  and
                           manufacturing  of military  systems in the  artillery
sector.                   

                  (2)      ImageSat International N.V. ("ISI"), held 14% (10% on
                           a fully diluted  basis),  is engaged in the operation
                           of satellite  photography  formations  and commercial
                           delivery of satellite photography for civil purposes.
                           During the fourth  quarter of 2005, the fair value of
                           ISI  decreased  as a result  of a  decrease  in ISI's
                           backlog and estimated  future cash flows.  Based on a
                           valuation  performed by an independent  advisor,  the
                           Company   wrote-off   approximately   $5,400  of  its
investment in ISI.        

                  (3)      AeroAstro  Inc.  ("AAI"),  held  8.33%  (on  a  fully
                           diluted basis) is a Delaware  corporation  engaged in
                           innovative micro and nanospacecraft applications. AAI
                           manufactures    low-cost    satellite   systems   and
                           components,  used  in  its  own  spacecraft  and  for
                    spacecraft development in and outside the U.S.

NOTE 7 - COMPENSATION RECEIVABLES IN RESPECT OF FIRE DAMAGE                     

                                                                [Download Table]

                                                          DECEMBER 31,    
                                                              2005        
                                                   -----------------------
                                                                          
Receivables from insurance company (A)                       25,884       
Net of contingent to Koor (B)                                10,354       
                                                   -----------------------
                                                             15,530       
                                                   =======================

         A.       On March  17,  2001,  a fire  broke  out in the  manufacturing
                  plants in two of Elisra's subsidiaries ("the companies").  The
                  fire caused damage to equipment,  building, inventory and work
                  in progress.  The book value of the  equipment,  inventory and
                  costs  invested  in the work in  progress  damaged by the fire
                  together  with the costs of  repairing  the building and other
                  costs,  are  estimated at  approximately  $36  million.  Up to
                  December 31, 2005,  advances  were received from the insurance
                 company in the aggregate amount of approximately $10 million.

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NOTE 7 - COMPENSATION RECEIVABLES IN RESPECT OF FIRE DEMAGE (CONT.)             

                  The claim submitted by the companies to the insurance  company
                  and which is based on the terms of the insurance policy,  also
                  includes a demand for  consequential  damages along with other
                  damages  that  the  companies   believe  are  covered  by  the
                  insurance policy.  Therefore, the total amount of the claim is
                  much  higher than the book value of the damage and the cost of
repairing the building.                     

                  The  companies are taking legal action in order to receive the
                  insurance  amounts and they have also submitted a claim to the
                  District Court of Tel-Aviv  against the insurance  company and
                  its  assessors,  in the  aggregate  amount of $96 million.  In
                  light of the duration of the  proceedings,  the managements of
                  the   companies   decided  to  classify  the  balance  of  the
                  compensation  receivable  from  the  insurance  company  as  a
long-term receivable.                       

                  In April 2004,  the companies  filed a request with the Court,
                  for  issuance  of a  partial  judgment,  in the  amount of $33
                  million  (in  excess  of  the  advances  already  paid  by the
                  insurance   company)  based  on  the  admission  made  by  the
                  insurance  company and its  representatives  of an  obligation
                  deriving  from the  insurance  event,  while  the  dispute  is
regarding the amount of the damages.        

                  In December  2004, a hearing was held in the Court wherein the
                  force of a judgment  was given to an  agreement of the parties
                  pursuant to which a separate  bank account will be opened,  in
                  which the  insurance  company will deposit $15 million.  Every
                  withdrawal  from such account  requires  approval of the Court
                  until  the   proceedings  on  the  claim  are  concluded.   In
                  accordance  with  the  aforesaid  agreement,   the  claim  was
                  transferred  for  mediation,  and  during  this time the Court
                  proceedings in the matter have been postponed.  At the balance
                sheet date the mediation process has not yet been concluded.

                  In the opinion of the companies, based on, among other things,
                  the opinion of their legal advisors  regarding this matter, it
                  is  difficult  at this stage to estimate  the chances that the
                  companies  will  receive  the full  amount of the claim,  even
                  though it is considered to be well founded.  Nonetheless,  the
                  managements of the companies  estimate,  based, on the opinion
                  of their legal advisors that the chances are good of receiving
                  indemnification  from  the  insurance  company,  in an  amount
                  greater than the balance of the receivable which they recorded
as an asset in the financial statements.    

         B.       In the  agreement  the  Company  signed  with  Koor,  for  the
                  purchase  of Elisra's  shares,  it was agreed that the Company
                  will  pay  Koor  40% of the  consideration  received  from the
                  insurance  company,  up to  consideration  of $30  million and
                  25-27.5%  for  additional  consideration  received  (see  Note
1(H)).                                      

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NOTE 8 - LONG-TERM BANK DEPOSITS AND TRADE RECEIVABLES                          

                                                        [Enlarge/Download Table]

                                                                                              DECEMBER 31,         
                                                                                  ---------------------------------
                                                                                          2005             2004    
                                                                                  ---------------- ----------------
                                                                                                                   
                     Deposits with banks for loans granted to employees (*)        $       1,200   $        1,603  
                     Long-term trade receivables                                           1,219              452  
                     Other deposits with banks                                                38               47  
                                                                                  ---------------- ----------------
                                                                                  $        2,457   $        2,102  
                                                                                  ================ ================

                    (*)  The deposits are linked to the Israeli CPI, bear annual                                   
                         interest  of  4%  and  are  presented  net  of  current                                   
                         maturities of $539 (2004 - $534).                                                         

NOTE 9 - PROPERTY, PLANT AND EQUIPMENT, NET                                                                        

                                                                                              DECEMBER 31,         
                                                                                  ---------------------------------
                                                                                         2005              2004    
                                                                                  ---------------- ----------------
                                                                                                                   
               Cost (1):                                                                                           
               Land, buildings and leasehold improvements (2)                       $   177,434     $    151,432   
               Instruments, machinery and equipment (3)                                 333,527          222,313   
               Office furniture and other                                                37,836           26,521   
               Motor vehicles                                                            49,538           37,308   
                                                                                  ---------------- ----------------
                                                                                        598,335          437,574   
               Accumulated depreciation                                                (313,338)        (193,286)  
                                                                                  ---------------- ----------------
               Depreciated cost                                                     $   284,997     $    244,288   
                                                                                  ================ ================

         Depreciation  expenses for the years ended December 31, 2005,  2004 and
2003 amounted to $44,576, $35,001 and $30,775, respectively.  

         (1)      Net of investment  grants  received  (mainly for  instruments,
                  machinery  and  equipment) in the amounts of  approximately  $
                  32,879  and  $29,800  as  of  December   31,  2005  and  2004,
respectively.                               

         (2)      Includes,  rights in approximately 9,225 square meters of land
                  in Tirat Hacarmel,  Israel. The land is leased from the Israel
                  Land  Administration  until  the  years  2014 to  2024  with a
                  renewal option for additional  periods of up to 49 years.  The
                  Company's  rights in the land have not yet been  registered in
its name.                                   

                  Includes rights in approximately  10,633 square meters of land
                  in  Rehovot,  Israel.  The land is leased from the Israel Land
                  Administration  until the year of 2043  with a renewal  option
                  for additional periods of up to 49 years. The Company's rights
         in the land have not yet been registered in its name.

                  Includes rights in approximately  10,386 square meters of land
                  in Bnei Brak,  Israel. The land is leased from the Israel Land
                  Administration  until the year of 2022  with a renewal  option
                  for additional periods of up to 49 years. The Company's rights
         in the land have not yet been registered in its name.

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NOTE 9 - PROPERTY, PLANT AND EQUIPMENT, NET (CONT.)                             

         (3)      Includes  equipment  produced  by the Group for its own use in
                  the aggregate amount of $82,518 and $69,146 as of December 31,
2005 and 2004, respectively.                

(4)      As for pledges of assets - see Note 17(I).           

NOTE 10 - INTANGIBLE ASSETS, NET                                                

A.                                                          

                                                        [Enlarge/Download Table]

                             WEIGHTED AVERAGE NUMBER                                              
                               OF YEARS OF AMORTIZATION                     DECEMBER 31,          
                           -------------------------------  --------------------------------------
                                                                      2005               2004     
                                                                   ---------        -----------   
                                                                                                  
Original cost:                                                                                    
  Technology (1)                               14                  $ 108,786        $    84,554   
  Trade marks (2)                              17                      8,000              8,000   
                                                                   ---------        -----------   
                                                                     116,786             92,554   
                                                                   ---------        -----------   
Accumulated amortization:                                                                         
  Technology                                                          35,707             28,365   
  Trade marks                                                          2,308              1,908   
                                                                   ---------        -----------   
                                                                      38,015             30,273   
                                                                   ---------        -----------   
Amortized cost                                                     $  78,771        $    62,281   
                                                                   =========        ===========   
Goodwill (3)                                                       $  63,957        $    33,706   
                                                                   =========        ===========   

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

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

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

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NOTE 10 - INTANGIBLE ASSETS, NET (CONT.)                                        

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

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

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

                           In 2005, the Company  acquired 70% of Elisra's shares
                           as detailed in Note 1(H) above, in consideration  for
                           $68,800.  An amount of $21,300 was  allocated  to the
                           technology   related  to   electronic   warfare  (EW)
                           systems,  command  communication  (C(2))  systems and
data link products.       

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

                  (3)      Includes  mainly  goodwill  resulting from the merger
                           with El-Op ($34,200) in 2000,  goodwill acquired from
                           Honeywell   Inc.   ($1,800)  in  2000  and   goodwill
                           resulting from the acquisition of Elisra ($29,900) in
2005.                     

         B.       Amortization  expenses  amounted to $7,742,  $7,260 and $7,222
                  for  the  years  ended  December  31,  2005,  2004  and  2003,
respectively.                               

C.                 The annual amortization expense relating to intangible assets
                   other then  goodwill  existing  as of  December  31,  2005 is
estimated to be approximately as follows: 

                        2006                         $   8,200
                        2007                             8,100
                        2008                             7,800
                        2009                             7,200
                        2010                             6,500
                        Thereafter                      41,000
                                                      --------
                        Total                         $ 78,800
                                                      ========

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NOTE 11 - SHORT-TERM BANK CREDIT AND LOANS                                      

                                                        [Enlarge/Download Table]

                                                                  DECEMBER 31,                  
                                ----------------------------------------------------------------
                                      2005           2004             2005             2004     
                                                               ---------------- ----------------
                                                                                                
Short-term bank loans:                    Interest Rate                                         
                                -------------------------------                                 
  In U.S. dollars                   6-6.2%        4.2-4.6%          $ 17,491      $     3,967   
                                                               ---------------- ----------------

Short-term bank credit:                                                                         
  In NIS unlinked                    5.8%         5.7-8.1%             2,828            2,120   
  In U.S. dollars                  6-6.4%             4.4%             9,977            2,505   
                                                               ---------------- ----------------
                                                                      12,805            4,625   
                                                               ---------------- ----------------
                                                                    $ 30,296      $     8,592   
                                                               ================ ================
Weighted Average Interest Rate       5.9%            4.7%                                       

NOTE 12 - OTHER PAYABLES AND ACCRUED EXPENSES                                   

                                                                [Download Table]

                                                          DECEMBER 31,    
                                                     ---------------------
                                                       2005         2004  
                                                     --------     --------
                                                                          
Payroll and related expenses                         $ 65,400     $ 42,491
Provision for vacation pay                             32,879       26,936
Provision for income taxes, net of advanced paid        8,041       14,681
Provisions for royalties                               22,943       20,638
Provision for warranty                                 31,797       34,230
Deferred income taxes                                   2,140            -
Cost provisions and others (*)                         53,339       33,133
                                                     --------     --------
                                                     $216,539     $172,109
                                                     ========     ========

         (*)  The  other  cost  provision,  primarily  includes  provisions  for
         estimated  future costs in respect of potential  contractual  penalties
         and the probable loss from claims (legal or unasserted) in the ordinary
         course of business (e.g. damages caused by the items sold and claims as
to the specific products ordered).                            

NOTE 13 - CUSTOMERS  ADVANCES  AND  AMOUNTS  IN  EXCESS  OF COSTS  INCURRED  ON 
CONTRACTS IN PROGRESS                                       

                                                                [Download Table]


                                                          DECEMBER 31,    
                                                     ---------------------
                                                       2005         2004  
                                                     --------     --------
                                                                          
Advances received                                    $460,242     $180,738
Less -                                                                    
  Advances presented under long-term liabilities      122,263       10,320
  Advances deducted from inventories                   84,083       75,776
                                                     --------     --------
                                                      253,896       94,642
Less -                                                                    

  Costs incurred on contracts in progress              16,178       14,533
                                                     --------     --------
                                                     $237,718     $ 80,109
                                                     ========     ========

As for guarantees and liens see Note 17(F).     

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NOTE 14 - LONG-TERM LOANS                                                       

                                                        [Enlarge/Download Table]

                                           INTEREST  YEARS OF          DECEMBER 31,  
                              CURRENCY          %     MATURITY      2005         2004
                              --------     --------   --------      ----         ----
                                                                                     
                                            Libor +    mainly                        
Banks                    U.S. dollars     0.8%-2.3%     2-3     $ 229,370    $ 83,469
Office of Chief          NIS-linked to                                               
Scientist                the Israeli-CPI     3.2%         2         2,713       4,131
Other                                                                 254         290
                                                                ---------    --------
                                                                  232,337      87,890
Less-current maturities                                             7,355       1,656
                                                                ---------    --------
                                                                $ 224,982    $ 86,234
                                                                =========    ========

The Libor rate as of December 31, 2005 was 3.2%.              

       The maturities of these loans after December 31, 2005 are as follows:

       2006 - current maturities                     $       7,355
       2007                                                210,161
       2008                                                  9,865
       2009                                                  2,170
                                                     -------------
       2010 and thereafter                                   2,611
                                                     -------------
                                                     $     232,337
                                                     =============

See Note 17(G) for covenants.                                 

         During 2004, a subsidiary  of the Company  consolidated  its  long-term
         debt. As a result, all of the prior bank loans outstanding were paid in
         full.  The  Company's  subsidiary  increased  this line during 2005 and
         maintains  a  single  revolving   credit  facility  of  $120,000.   The
         outstanding  balance as of December  31,  2005 was  $5,700.  The stated
         interest rate on this facility is 7.25% Prime on $2,200 and  Euro/Libor
         rate  4.4 + .75% on the  Euro  Loan  Balance  of  $3,500.  The  note is
scheduled to be renewed in 2007.                              

NOTE 15 - BENEFIT PLANS                                                         

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

DEFINED BENEFIT RETIREMENT PLAN                               

         ESA has two defined benefit  pension plans (the "Plans")  substantially
         covering its employees in the U.S.  Monthly benefits are based on years
         of benefit service and annual compensation. Annual contributions to the
         Plans are  determined  using the unit credit  actuarial cost method and
         are equal to or exceed the minimum required by law. Pension fund assets
         of the  Plans are  invested  primarily  in  stock,  bonds and cash by a
        financial institution, as the investment manager of the Plans' assets.

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NOTE 15 - BENEFIT PLANS (CONT.)                                                 

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

                                                                [Download Table]

                                                             DECEMBER 31,      
                                                       ----------------------- 
                                                         2005           2004   
                                                       --------       -------- 
                                                                               
Benefit obligation at beginning of year                $ 42,698       $ 34,965 
Service cost                                              3,242          3,000 
Interest cost                                             2,543          2,191 
Amendments                                                  321              - 
Actuarial losses                                          3,516          2,308 
Unrecognized transition obligation                            -          1,056 
Benefits repaid                                          (1,015)          (822)
                                                       --------       -------- 
Benefit obligation at end of year                      $ 51,305       $ 42,698 
                                                       ========       ======== 

Plans assets at beginning of year                        25,102         21,196 
Actual return on Plan assets                              1,215          1,756 
Contributions by employer                                 8,042          2,972 
Benefits repaid                                          (1,015)          (822)
                                                       --------       -------- 
Plans assets at end of year                            $ 33,344       $ 25,101 
                                                       ========       ======== 

Funded status of Plans (underfunded)                    (17,962)       (17,595)
Unrecognized prior service cost                             156            180 
Unrecognized transition obligation                            -          1,056 
Unrecognized net actuarial loss                          15,480         11,447 
                                                       --------       -------- 
Net amount recognized                                  $ (2,326)      $ (5,272)
                                                       ========       ======== 
Net asset (liability) consists of:                                             
Accrued benefit liability                              $(13,700)      $(13,899)
Intangible asset                                            157            895 
Accumulated other comprehensive income                   11,217          7,732 
                                                       --------       -------- 
Net amount recognized                                  $(2,326)       $ (5,272)
                                                       ========       ======== 
Weighted average assumptions:                                                  
   Discount rate as of December 31,                      5.75%          6.00%  
   Expected long-term rate of return on Plan's assets    8.50%          8.50%  
   Rate of compensation increase                         3.00%          3.00%  
                                                                [Download Table]

                                                    YEAR ENDED DECEMBER 31,    
                                             --------------------------------- 
                                               2005        2004          2003  
                                             -------      -------      ------- 
                                                                               
Components of net periodic pension cost:                                       
  Service cost                               $ 3,242      $ 3,000      $ 2,480 
   Interest cost                               2,543        2,191        1,921 
   Expected return on  Plans' assets          (2,133)      (1,951)      (1,573)
  Amortization of prior service cost             (15)         (15)         (15)
  Amortization of transition amount               69            -            - 
  Recognized net actuarial loss                  569          451          339 
                                             -------      -------      ------- 
   Net periodic pension cost                 $ 4,275      $ 3,676      $ 3,152 
                                             =======      =======      ======= 

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NOTE 15 - BENEFIT PLANS (CONT.)                                                 

                                                        [Enlarge/Download Table]

                                                                   YEAR ENDED DECEMBER 31,            
                                                    --------------------------------------------------
                                                          2005              2004              2003    
                                                    --------------    --------------    --------------
                                                                                                      
Additional information:                                                                               
   Accumulated benefit obligation                     $  47,043         $  39,001       $  32,207     
                                                    ==============    ==============    ==============
   Increase in minimum liability included in other                                                    
  comprehensive income                                $   3,486        $    1,341       $   1,392     
                                                    ==============    ==============    ==============

ASSET ALLOCATION BY CATEGORY                      

                           2005           2004
                         -------------- --------------
Asset Category                                                                  
Equity Securities                     65.9%          62.4%            
Debt Securities                       26.4%          28.5%            
Other                                  7.7%           9.1%            
                         -------------- --------------
Total                                     100.0%         100.0%                 

         The  investment  policy  of ESA is  directed  toward  a broad  range of
         securities.  The  diversified  portfolio  seeks to maximize  investment
         return while minimizing the risk levels associated with investing.  The
         investment  policy is  structured  to consider  the  retirement  plan's
         obligations  and the expected  timing of benefit  payments.  The target
asset allocation for the Plan years presented is as follows:  

                           2005           2004
                         -------------- --------------
Asset Category                                                                  
Equity Securities                     60.0%          60.0%            
Debt Securities                       37.0%          37.0%            
Other                                  3.0%           3.0%            
                         -------------- --------------
Total                                     100.0%         100.0%                 

         In developing the overall  expected  long-term rate of return on assets
         assumption, ESA used a building block approach in which rates of return
         in  excess  of  inflation   were   considered   separately  for  equity
         securities,  debt  securities,  real estate and all other  assets.  The
         excess returns were weighted by the  representative  target  allocation
         and added along with an  approximate  rate of  inflation to develop the
overall expected long-term rate of return.                    

         It is the  policy  of  ESA  to,  at  least,  meets  the  ERISA  minimum
         contribution  requirements  for a plan year.  The minimum  contribution
         requirements  for the 2005  Plan year and the  quarterly  contributions
         requirements  for the 2005 Plan year have been satisfied as of December
         31, 2005.  However,  ESA  anticipates  that it will make an  additional
         discretionary contribution of approximately $3,400 during 2006 in order
         to increase the Plan's funded  current  liability  percentage.  Benefit
         payments  over the next five years are  expected  to be $1,384 in 2006;
    $1,566 in 2007; $1,744 in 2008; $2,024 in 2009 and $2,334 in 2010.

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NOTE 15 - BENEFIT PLANS (CONT.)                                                 

DEFINED CONTRIBUTION PLAN                                     

         The  401(k)  savings  plan  ("401(k)  plan") is a defined  contribution
         retirement  plan that  covers  all  eligible  employees,  as defined in
         section 401(k) of the U.S.  Internal  Revenue Code. ESA's employees may
         elect to contribute a percentage of their annual gross  compensation to
         the 401(k) plan. ESA may make discretionary  matching  contributions as
         determined  by the  subsidiary.  Total  expense  under the 401(k)  plan
         amounted to $1,984 for the year ended December 31, 2005 (2004 - $1,744,
2003 - $1,629).                                               

NOTE 16 - TAXES ON INCOME                                                       

A.       APPLICABLE TAX LAWS                                  

                  (1)      MEASUREMENT OF TAXABLE  INCOME UNDER ISRAEL'S  INCOME
               TAX (INFLATIONARY ADJUSTMENTS) LAW, 1985:

                           Results for tax  purposes for the Company and certain
                           of  its  Israeli   subsidiaries   are   measured  and
                           reflected  in  accordance  with  the  change  in  the
                           Israeli  Consumer Price Index  ("CPI").  As explained
                           above  in  Note  2(B),  the  consolidated   financial
                           statements  are  presented  in  U.S.   dollars.   The
                           differences between the change in the Israeli CPI and
                           in  the  NIS/U.S.   dollar   exchange  rate  cause  a
                           difference  between  taxable  income  and the  income
                           before taxes reflected in the consolidated  financial
statements.               

                           In accordance  with  paragraph  9(f) of SFAS No. 109,
                           the Company has not provided deferred income taxes on
                           the  above  differences  resulting  from  changes  in
                   exchange rates and indexing for tax purposes.

                  (2)      TAX BENEFITS UNDER ISRAEL'S LAW FOR THE ENCOURAGEMENT
OF INDUSTRY (TAXES), 1969:

                           The  Company  and  certain   subsidiaries  in  Israel
                           (mainly El-Op and Cyclone Aviation Products Ltd.) are
                           "Industrial Companies", as defined by the Law for the
                           Encouragement of Industry (Taxes), 1969, and as such,
                           these companies are entitled to certain tax benefits,
                           mainly amortization of costs relating to know-how and
                           patents  over eight years,  accelerated  depreciation
                           and the right to deduct public issuance  expenses for
tax purposes.             

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

                           Several expansion programs of the Company and certain
                           of its Israeli  subsidiaries  ("the  companies") have
                           been  granted  "Approved   Enterprise"  status  under
                           Israel's  Law  for  the   Encouragement   of  Capital
                           Investments,  1959. For some expansion programs,  the
                           companies  have  elected  the  grants  track  and for
                           others they have elected the alternative tax benefits
                         track, waiving grants in return for tax exemptions.

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NOTE 16 - TAXES ON INCOME (CONT.)                                               

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

                           Accordingly, certain income of the companies, derived
                           from the "Approved  Enterprise" expansion programs is
                           tax exempt for  two-years  and subject to reduced tax
                           rates of 25% for a five-year to eight-year  period or
                           tax exempt for a ten-year  period  commencing  in the
                           year  in  which  the  companies  had  taxable  income
                           (limited  to  twelve  years  from   commencement   of
                           production  or  fourteen   years  from  the  date  of
                           approval,  whichever is earlier).  As of December 31,
                           2005,  the tax benefits for these  exiting  expansion
                           programs  will  expire  within  the period of 2006 to
2012.                     

                           The  entitlement  to the above benefits is subject to
                           the companies  fulfilling the conditions specified in
                           the  above   referred  law,   regulations   published
                           hereunder   and  the  letters  of  approval  for  the
                           specific  investments in "Approved  Enterprises".  In
                           the event of failure to comply with these conditions,
                           the benefits may be canceled and the companies may be
                           required  to refund  the amount of the  benefits,  in
                           whole or in part,  including  interest.  (For liens -
                           see Note 17(J)). As of December 31, 2005,  Management
                           believes   that  the   companies   are   meeting  all
  conditions of the approvals.

                           As of December 31, 2005,  retained  earnings included
                           approximately  $126,400 in tax-exempt  profits earned
                           by  the  companies'  "Approved  Enterprises".  If the
                           retained  tax-exempt income is distributed,  it would
                           be taxed at the corporate tax rate applicable to such
                           profits  as  if  the  Company  had  not  elected  the
                           alternative tax benefits track (currently - 25%), and
                           an  income  tax   liability   would  be  incurred  of
                    approximately $31,600 as of December 31, 2005.

                           The companies'  boards of directors have decided that
                           their policy is not to declare  dividends out of such
                           tax-exempt  income.  Accordingly,  no deferred income
                           taxes have been  provided on income  attributable  to
                           the  companies'  "Approved   Enterprises",   as  such
                           retained   earnings  are  essentially   permanent  in
duration.                 

                           In  Israel,   income  from  sources  other  than  the
                           "Approved  Enterprise" during the benefit period will
                           be subject to tax at the regular  corporate  tax rate
   of 34% (see also Note 16(H)).

                           Since the companies are operating under more than one
                           approval,  and since part of their taxable  income is
                           not  entitled  to  tax   benefits   under  the  above
                           mentioned law and is taxed at the regular tax rate of
                           34%,  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.

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NOTE 16 - TAXES ON INCOME (CONT.)                                               

B.       NON - ISRAELI SUBSIDIARIES                           

                  Non-Israeli  subsidiaries are taxed based on tax laws in their
countries of residence (mainly in the U.S.).

C.       INCOME BEFORE TAXES ON INCOME                        

                                                                [Download Table]

                                        YEAR ENDED DECEMBER 31,   
                                   -------------------------------
                                     2005       2004         2003 
                                   -------     -------     -------
                                                                  
Income before taxes on income:                                    
   Domestic                        $27,391     $43,642     $38,423
   Foreign                          23,125      16,985      11,090
                                   -------     -------     -------
                                   $50,516     $60,627     $49,513
                                   =======     =======     =======

D.       TAXES ON INCOME                                      

                                                                [Download Table]

                                 YEAR ENDED DECEMBER 31,       
                           ----------------------------------- 
                             2005         2004          2003   
                           --------     --------      -------- 
                                                               
Taxes on income:                                               
Current taxes:                                                 
   Domestic                $  5,161     $  7,415      $ 12,346 
   Foreign                    4,506        7,651           718 
                           --------     --------      -------- 
                              9,667       15,066      $ 13,064 
                           --------     --------      -------- 
Deferred income taxes:                                         
   Domestic                   4,029          709        (4,672)
   Foreign                    2,639         (556)        2,942 
                           --------     --------      -------- 
                              6,668          153        (1,730)
                           --------     --------      -------- 
                           $ 16,335     $ 15,219      $ 11,334 
                           ========     ========      ======== 

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NOTE 16 - INCOME TAXES (CONT.)                                                  

E.       DEFERRED INCOME TAXES                                

                  Deferred  income taxes reflect the net tax effect of temporary
                  differences   between  the  carrying   amount  of  assets  and
                  liabilities for financial  reporting  purposes and the amounts
                  used for income tax  purposes.  Significant  components of net
       deferred tax assets and liabilities are as follows:

                                                                [Download Table]

                                                             DEFERRED (1)       
                                                         TAX ASSET (LIABILITY)  
                                                        ----------------------  
                                            TOTAL        CURRENT     NON-CURRENT
                                          --------      --------      --------  
                                                                                
As of December 31, 2005                                                         
Deferred tax assets:                                                            
Reserves and allowances                   $ 20,150      $ 15,520      $  4,630  
Inventory                                    8,059         8,059             -  
Intangible assets                              562           562             -  
Net operating loss carryforwards            10,233           134        10,099  
                                          --------      --------      --------  
                                            39,004        24,275        14,729  
Valuation allowance                        (18,774)       (5,567)      (13,207) 
                                          --------      --------      --------  
Net deferred tax assets                     20,230        18,708         1,522  
                                          --------      --------      --------  
Deferred tax liabilities:                                                       
Reserves and allowances                      1,480         3,295        (1,815) 
Inventory                                   (5,435)       (5,435)            -  
Property, plant and equipment              (15,842)            -       (15,842) 
Intangible assets                          (16,330)            -       (16,330) 
                                          --------      --------      --------  
                                           (36,127)       (2,140)      (33,987) 
Valuation allowance                          1,041             -         1,041  
                                          --------      --------      --------  
                                           (35,086)       (2,140)      (32,946) 
                                          --------      --------      --------  
Net deferred tax assets (liabilities)     $(14,856)     $ 16,568      $(31,424) 
                                          ========      ========      ========  
As of December 31, 2004                                                         
Deferred tax assets:                                                            
Reserves and allowances                   $ 12,797      $ 13,191      $   (394) 
Inventory                                    5,376         5,376             -  
Intangible assets                            2,639         2,639             -  
Net operating loss carryforwards             5,395           149         5,246  
                                          --------      --------      --------  
                                            26,207        21,355         4,852  
Valuation allowance                         (3,445)            -        (3,445) 
                                          --------      --------      --------  
Net deferred tax assets                     22,762        21,355         1,407  
                                          --------      --------      --------  
Deferred tax liabilities:                                                       
Property, plant and equipment              (12,999)            -       (12,999) 
Intangible assets                          (12,924)            -       (12,924) 
                                          --------      --------      --------  
                                           (25,923)            -       (25,923) 
                                          --------      --------      --------  
Net deferred tax assets (liabilities)     $ (3,161)     $ 21,355      $(24,516) 
                                          ========      ========      ========  

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

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NOTE 16 - INCOME TAXES (CONT.)                                                  

         F.       As of December 31, 2005, The Group's Israeli subsidiaries have
                  estimated   total   available   carryforward   tax  losses  of
                  approximately    $30,100,    and   the   Group's   non-Israeli
                  subsidiaries have estimated available  carryforward tax losses
                  of  approximately  $7,400.  These losses can be offset against
                  future taxable profits for an indefinite period.  Deferred tax
                  assets in respect of the above  carryforward  losses amount to
                  approximately $1,700 in respect of which a valuation allowance
            has been recorded in the amount of approximately $8,600.

                  G. Reconciliation of the theoretical tax expense, assuming all
                  income is taxed at the statutory rate  applicable to income of
                  the  Group,  and the actual tax  expense  as  reported  in the
statements of operations, is as follows:    

                                                        [Enlarge/Download Table]

                                                            YEAR ENDED DECEMBER 31,       
                                                   -------------------------------------- 
                                                      2005          2004           2003   
                                                   --------       --------       -------- 
                                                                                          
Income  before taxes as reported in the                                                   
  consolidated statements of operations            $ 50,516       $ 60,627       $ 49,513 
Statutory tax rate                                       34%            35%            36%
                                                   ========       ========       ======== 
Theoretical tax expense                            $ 17,175       $ 21,219       $ 17,825 
Tax benefit arising from reduced rate as an                                               
   "Approved Enterprise" and other tax                                                    
   benefits                                          (4,515)        (7,196)        (8,391)
Tax adjustment in respect of different tax                                                
  rates for foreign subsidiaries                        654            496            279 
Operating carryforward losses for which valuation                                         
   allowance was provided                              (818)          (434)           126 
Increase (decrease) in taxes resulting                                                    
  from nondeductible expenses                         1,309          1,095            993 
Difference in basis of measurement for financial                                          
   reporting and tax return purposes                  2,547           (210)           846 
Taxes in respect of prior years                           -              -                
Other differences, net                                  (17)           248           (344)
                                                   --------       --------       -------- 
Actual tax expenses                                $ 16,335       $ 15,219       $ 11,334 
                                                   ========       ========       ======== 
Effective tax rate                                     32.3%          25.1%          22.9%
                                                   ========       ========       ======== 

H.       AMENDMENT TO THE INCOME TAX ORDINANCE                

                  On July 25, 2005, the Knesset  (Israeli  Parliament)  approved
                  the Law for the  Amendment  of the Income Tax  Ordinance  (No.
                  147),  2005,  which  prescribes,  among  other  provisions,  a
                  gradual  decrease in the  corporate  tax rate in Israel to the
                  following  tax rates:  in 2006 - 31%, in 2007 - 29%, in 2008 -
                  27%,  in 2009 - 26%  and in 2010  and  thereafter  - 25%.  The
                  change in the future tax rates, did not have a material effect
                  on the Company's  financial position and results of operations
in 2005.                                    

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NOTE 17 - COMMITMENTS  AND CONTINGENT LIABILITIES                               

A.       ROYALTY COMMITMENTS                                  

                  1.       The   Company  and   certain   Israeli   subsidiaries
                           partially  finance  their  research  and  development
                           expenditures  under programs sponsored by the OCS for
                           the support of research  and  development  activities
                           conducted in Israel.  At the time the  participations
                           were received,  successful development of the related
projects was not assured. 

                           In exchange for  participation in the programs by the
                           OCS, the Company and the  subsidiaries  agreed to pay
                           2% - 5% of total sales of products  developed  within
                           the framework of these  programs.  The royalties will
                           be paid up to a maximum amount  equaling 100% to 150%
                           of the  grants  provided  by the OCS,  linked  to the
                           dollar and for grants received after January 1, 1999,
                           also  bearing  annual  interest  at a rate  based  on
                           LIBOR.  The  obligation  to pay  these  royalties  is
                           contingent  on actual sales of the  products,  and in
                           the absence of such sales payment of royalties is not
required.                 

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

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

                           Royalties  expensed  amounted  to $4,849,  $5,423 and
                  $7,812 in 2005, 2004 and 2003, respectively.

                  2.       In September  2001, the OCS issued  "Regulations  for
                           the  Encouragement  of Research  and  Development  in
                           Industry"   (rules  for  determining  the  level  and
                           payment  of  royalties)  (the   "regulations").   The
                           regulations  allow large R&D  intensive  companies to
                           reach  certain  agreements  with  the  OCS  regarding
                           determination  of the amount and payment  schedule of
               royalties, subject to certain conditions.

                           If the Company  elects to adopt the  regulations,  it
                           will have to record a  significant  one-time  expense
                           resulting  from  accruing a liability for an absolute
amount of royalties.      

                           In 2002,  El-Op's  Board  of  Directors  approved  an
                           arrangement,  proposed by the OCS, according to which
                           El-Op pays  commencing  in 2002,  an agreed amount of
                           $10,632   in   exchange   for  a  release   from  all
                           obligations  to pay  royalties  in the  future.  As a
                           result,  El-Op  recorded  an  expense  for the agreed
                           amount net of the  accrual for  royalties  previously
                           recorded  by  El-Op in the  amount  of  $9,801.  This
           expense is included cost of revenues.

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NOTE 17 - COMMITMENTS  AND CONTINGENT LIABILITIES (CONT.)                       

B.       COMMITMENTS IN RESPECT OF LONG-TERM PROJECTS         

                  In connection  with long-term  projects in certain  countries,
                  the Company and certain  subsidiaries  undertook  to use their
                  respective  best  efforts to make or  facilitate  purchases or
                  investments in those  countries at certain  percentages of the
                  amount of the projects.  The companies'  obligation to make or
                  facilitate third parties making such investments and purchases
                  is  subject  to  commercial  conditions  in the local  market,
                  typically without a specific  financial  penalty.  The maximum
                  aggregate  undertaking  as of December  31,  2005  amounted to
                  $682,000 to be performed over a period of up to 10 years. This
                  amount is typically  tied to a percentage  (up to 100%) of the
amount of a specific contract.              

                  In the opinion of the Company's Management,  the actual amount
                  of the  investments  and purchases is  anticipated  to be less
                  than that  mentioned  above,  since  certain  investments  and
                  purchases  can result in reducing the overall  undertaking  on
more than a one-to-one basis.               

C.       LEGAL CLAIMS                                         

                  The Company and its  subsidiaries are involved in legal claims
                  arising in the ordinary course of business,  including  claims
                  by employees,  consultants and others.  Company's  Management,
                  based on the opinion of its legal  counsel,  believes that the
                  financial  impact for the  settlement of such claims in excess
                  of the accruals recorded in the financial  statements will not
                  have a material  adverse  effect on the financial  position or
results of operations of the Group.         

                  For information on Elisra's  insurance claim for damage,  as a
result of a fire in 2001, see Note 7.       

D.       LEASE COMMITMENTS                                    

                  The  future  minimum  lease  commitments  of the  Group  under
                  various  non-cancelable  operating lease agreements in respect
                  of premises,  motor  vehicles and office  equipment  are as of
December 31, 2005 as follows:               

                    2006                          $     13,081
                    2007                                10,348
                    2008                                 8,607
                    2009                                 8,047
                    2010 and thereafter                 17,596
                                                  ------------
                                                  $     57,679
                                                  ============

                  Rent expenses for the years ended December 31, 2005,  2004 and
              2003 amounted to $ 8,055, $6,842 and $9,177, respectively.

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NOTE 17 - COMMITMENTS  AND CONTINGENT LIABILITIES (CONT.)                       

E.       PUT OPTION                                           

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

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

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

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

              The aforementioned option expired as of December 31, 2005.

F.       GUARANTEES                                           

                  1.       As of December 31, 2005,  guarantees in the amount of
                           approximately $667,000 were issued by banks on behalf
                           of  Group   companies  in  order  to  secure  certain
                    advances from customers and performance bonds.

                  2.       The Company has provided,  on a proportional basis to
                           its ownership  interest,  guarantees for three of its
                           investees in respect of credit lines  granted to them
                           from banks amounting to $13,300 (2004 - $12,000),  of
                           which $12,500 (2004 - $11,500) relates to a 50%-owned
                           foreign  investee.  The guarantees will exist as long
                           as the credit lines are in effect.  The Company would
                           be liable under the  guarantee for any debt for which
                           the investee  would be in default  under the terms of
                           the credit line. The fair value of such guarantees as
           of December 31, 2005 is not material.

G.       COVENANTS                                            

                  In   connection   with  bank  credits  and  loans,   including
                  performance  guarantees issued by banks and bank guarantees in
                  order to secure certain  advances from customers,  the Company
                  and  certain   subsidiaries  are  obligated  to  meet  certain
                  financial  covenants.  Such covenants include requirements for
                  shareholders' equity,  current ratio, operating profit margin,
                  tangible net worth, EBITDA,  interest coverage ratio and total
                  leverage.  As of  December  31,  2005,  the  Company  and  its
                  subsidiaries  except Elisra were in full  compliance  with all
covenants.                                  

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NOTE 17 - COMMITMENTS  AND CONTINGENT LIABILITIES (CONT.)                       

G.       COVENANTS (Cont.)                                    

                  As at December  31,  2005,  Elisra did not comply with some of
                  the   above-mentioned   financial   covenants.    Nonetheless,
                  subsequent  to the balance  sheet date,  a letter was received
                  from one of the banks,  waving its demand for repayment of the
                  loan for a period of 15 months from the balance sheet date. In
                  addition,  a letter was also received from the other bank that
                  retroactively  updates the financial  covenants as at December
                  31,  2005  (based on the actual  ratios at that time) and also
                  provides updated financial covenants for the coming years. The
                  bank  will  examine  these  updated  financial   covenants  on
                  December 31, 2006, and in Management's  estimation Elisra will
                  comply with those covenants at that date. Accordingly,  loans,
                  in the amount of $10  million,  are  classified  as  long-term
loans.                                      

H.       CONTRACTUAL OBLIGATIONS                              

                  Substantially  all  of  the  purchase  commitments  relate  to
                  obligations  under purchase  orders and  subcontracts  entered
                  into by the Company.  These purchase  orders and  subcontracts
                  are  typically in a standard  format  proposed by the Company,
                  with the  subcontracts  and  purchase  orders also  reflecting
                  provisions from the Company's  applicable  prime contract that
                  are  appropriate to flow down to  subcontractors  and vendors.
                  The terms  typically  included  in these  purchase  orders and
                  subcontracts  are  consistent  with  Uniform  Commercial  Code
                  provisions in the United States for sales of goods, as well as
                  with   specific   terms   called  for  by  its   customers  in
                  international  contracts.  These terms  include the  Company's
                  right to terminate the purchase  order or  subcontract  in the
                  event of the vendor's or subcontractor's  default,  as well as
                  the Company's  right to terminate the order or subcontract for
                  the  Company's   convenience   (or  if  the  Company's   prime
                  contractor  has  so  terminated  the  prime  contract).   Such
                  purchase orders and subcontracts  typically are not subject to
                  variable  price  provisions.  As of December 31, 2005 and 2004
                  the   purchase   commitments   were   $661,000   and  $345,000
respectively.                               

         I.       In order to  secure  bank  loans  and bank  guarantees  in the
                  amount  of $8,600  as of  December  31,  2005,  certain  Group
                  companies  recorded fixed liens on most of their machinery and
                  equipment, mortgages on most of their real estate and floating
charges on most of their assets.            

         J.       A lien on the Group's Approved Enterprises has been registered
              in favor of the State of Israel (see Note 16(A)(3) above).

NOTE 18 - SHAREHOLDER'S EQUITY                                                  

A.       SHARE CAPITAL                                        

                  Ordinary  shares confer upon their holders voting rights,  the
                  right to  receive  dividends  and the right to share in equity
upon liquidation of the Company.            

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NOTE 18 - SHAREHOLDER'S EQUITY (CONT.)                                          

B.       2000 EMPLOYEE STOCK OPTION PLAN                      

                  In 2000, the Company adopted an employee stock option plan for
                  employees  comprising  options  to  purchase  up to  2,500,000
                  ordinary  shares.  The exercise price  approximates the market
                  price of the shares at the grant  date.  The plan  includes an
                  additional  2,500,000  options to be issued as "phantom" share
                  options  that  grant  the  option  holders  a number of shares
                  reflecting the benefit component of the options exercised,  as
                  calculated at the exercise  date, in  consideration  for their
                  par  value  only.  Options  vest  over a period of one to four
                  years  from the date of grant  and  expire  no later  than six
years from the date of grant.               

                  Any options which are canceled or forfeited before  expiration
                  become  available for future grants.  As of December 31, 2005,
                  405,794 options of the Company were still available for future
grants.                                     

C.       "PHANTOM" SHARE OPTIONS                              

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

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

                                                        [Enlarge/Download Table]

                                       2005                          2004                         2003             
                           ----------------------------   ----------------------------  ---------------------------
                                               WEIGHTED                      WEIGHTED                    WEIGHTED  
                                               AVERAGE                       AVERAGE                     AVERAGE   
                           NUMBER OF           EXERCISE     NUMBER OF        EXERCISE    NUMBER OF       EXERCISE  
                            OPTIONS             PRICE        OPTIONS         PRICE        OPTIONS         PRICE    
                          -----------         ----------  ------------    ------------  -----------     -----------
                                                                                                                   
Outstanding -                                                                                                      
  beginning of  the year   2,130,257          $ 12.60      3,735,602      $     12.30    4,511,724       $ 12.26   
  Granted                     22,000          $ 19.36        130,500            15.67       13,000         14.91   
  Exercised                 (549,505)         $ 12.38     (1,666,774)           12.12     (757,947)        12.13   
  Forfeited                       -               -          (69,071)           12.10      (31,175)        12.29   
                          -----------         ----------  ------------    ------------  -----------     -----------
Outstanding -                                                                                                      
  end of the year          1,602,752          $ 12.83      2,130,257      $     12.60    3,735,602       $ 12.30   
                          ===========         ==========  ============    ============  ===========     ===========
Options exercisable at                                                                                             
   the end of the year     1,470,752          $ 12.47      1,950,903      $     12.36    2,547,196       $ 12.23   
                          ===========         ==========  ============    ============  ===========     ===========


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NOTE 18 - SHAREHOLDER'S EQUITY (CONT.)                                          

         E.       The options  outstanding  as of December 31,  2005,  have been
         separated into ranges of exercise prices, as follows:

                                                        [Enlarge/Download Table]

                                  OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE     
                 -------------------------------------------------  -----------------------------
                    NUMBER           WEIGHTED                                          WEIGHTED  
                  OUTSTANDING        AVERAGE          WEIGHTED         NUMBER          AVERAGE   
                     AS OF          REMAINING         AVERAGE       OUTSTANDING AS     EXERCISE  
                  DECEMBER 31,     CONTRACTUAL        EXERCISE        OF DECEMBER      PRICE PER 
EXERCISE PRICE       2005          LIFE (YEARS)    PRICE PER SHARE     31, 2005          SHARE   
--------------    ------------     ------------    ---------------  --------------    -----------
                                                                                                 
$12.18 - $19.36    1,602,752       $       1.34     $     12.83         1,470,752     $    12.47 

                  Compensation  expense (income)  amounting to $172,  $3,387 and
                  $4,741 was  recognized  during the years  ended  December  31,
                  2005,  2004  and  2003,  respectively.  All  the  compensation
                  expenses  stet in the year 2003 were  related  to the  phantom
                  share  options  under the stock option  plan.  The expenses in
                  2004  were  recorded  based on SFAS No.  123 and SFAS No.  148
                  according to the  modified  prospective  method.  The expenses
(income) were recorded as follows:          

                                                        [Enlarge/Download Table]

                                                      YEAR ENDED DECEMBER 31,              
                                     ------------------------------------------------------
                                             2005              2004              2003      
                                     ----------------- -------------------- ---------------
                                                                                           
Cost of revenues                     $         96       $      1,863        $      2,608   
R&D and marketing expenses                     34                677                 948   
General and administration expenses            42                847               1,185   
                                     ------------       ------------        ------------   
                                     $        172       $      3,387        $      4,741   
                                     ============       ============        ============   

         F.       The weighted  average exercise price and fair value of options
                  granted  during the years ended  December 31,  2005,  2004 and
2003 were:                                  

                                                        [Enlarge/Download Table]

                                                    LESS THAN MARKET PRICE               
                                   ------------------------------------------------------
                                                    YEAR ENDED DECEMBER 31,              
                                   ------------------------------------------------------
                                           2005              2004              2003      
                                   ----------------- -------------------- ---------------
                                                                                         
Weighted average   exercise price  $      19.36       $      15.67        $      14.91   
Weighted average fair value on                                                           
  grant date                       $       6.47       $       6.62        $       4.63   

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

NOTE 18 - SHAREHOLDER'S EQUITY (CONT.)                                          

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

                                                        [Enlarge/Download Table]

                                 YEAR ENDED                            YEAR ENDED                              YEAR ENDED           
                              DECEMBER 31, 2005                     DECEMBER 31, 2004                      DECEMBER 31, 2003        
                   -------------------------------------- ------------------------------------- ------------------------------------
                                                           NET INCOME                                                               
                   NET INCOME TO   WEIGHTED                    TO         WEIGHTED             NET INCOME TO    WEIGHTED            
                    SHAREHOLDERS   AVERAGED               SHAREHOLDERS    AVERAGED              SHAREHOLDERS    AVERAGED      PER   
                    OF ORDINARY    NUMBER OF   PER SHARE  OF ORDINARY    NUMBER OF   PER SHARE  OF ORDINARY     NUMBER OF    SHARE  
                       SHARES     SHARES (*)    AMOUNT       SHARES      SHARES (*)    AMOUNT       SHARES      SHARES (*)   AMOUNT 
                   -----------------------------------------------------------------------------------------------------------------
                                                                                                                                    
Basic net earnings   $    32,487       40,750      $0.80    $   51,873       39,952       $1.30    $ 45,945       39,061      $1.18 

Effect of dilutive                                                                                                                  
 securities:                                                                                                                        
Employee stock                                                                                                                      
options                       -           873                        -        1,089                       -        1,169            
                     -----------                   -----    ----------       ------                --------       ------            
Diluted net earnings $    32,487       41,623      $0.78    $   51,873       41,041       $1.26    $ 45,945       40,230      $1.14 
                     ===========       ======      =====    ==========       ======       =====    ========       ======      ===== 

* In thousands                                                              

H.       TREASURY SHARES                                      

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

I.       DIVIDEND POLICY                                      

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

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

NOTE 19 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION                             

         The Group applies Statement of Financial  Accounting Standards No. 131,
         "Disclosures  about Segments of an Enterprise and Related  Information"
         ("SFAS No. 131").  The Group  operates in one  reportable  segment (see
Note 1 for a brief description of the Group's business).      

         A.       Revenues are attributed to geographic  areas based on location
of the end customers as follows:            

                                                                [Download Table]

                         Year ended December 31,              
        ------------------------------------------------------
                2005            2004              2003        
        ------------------ ------------------- ---------------
                                                              
Europe    $   104,239      $    124,130        $ 109,409      
U.S.          397,479           348,509          332,323      
Israel        315,376           241,601          255,742      
Others        252,782           225,685          200,506      
        ------------------ ------------------- ---------------
          $ 1,069,876      $    939,925        $ 897,980      
        ================== =================== ===============

B. Revenues are generated by the following product lines:                       

                                                        [Enlarge/Download Table]

                                                           YEAR ENDED DECEMBER 31,             

                                          -----------------------------------------------------
                                                  2005           2004              2003        
                                          ----------------- ------------------- -------------- 
                                                                                               
Airborne systems                            $   420,815     $    367,927        $ 373,580      
Land vehicles systems                           117,358          199,224          199,800      
Command, control, communications,                                                              
computers, intelligence, surveillance and                                                      
reconnaissance systems (C(4)ISR)                217,343          108,925          133,900      
Electro-optical systems                         242,274          200,322          140,500      
Others                                           72,086           63,527           50,200      
                                          ----------------- ------------------- -------------- 
                                            $ 1,069,876     $    939,925        $ 897,980      
                                          ================= =================== ===============

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

                                                                [Download Table]

                                   YEAR ENDED DECEMBER 31,             
                 ------------------------------------------------------
                         2005            2004              2003        
                 ------------------ ------------------- ---------------
                                                                       
IMOD                      26%               18%              21%       
U.S. Government           10%               10%               *        
*Less than 10%                                                         

D.       Long-lived assets by geographic areas:               

                                                                [Download Table]

                         YEAR ENDED DECEMBER 31,              
        ------------------------------------------------------
                2005            2004              2003        
        ------------------ ------------------- ---------------
                                                              
Israel     $  322,521      $    237,887        $ 229,396      
U.S.           87,998            84,701           81,261      
Others         17,206            17,687           18,576      
        ------------------ ------------------- ---------------
           $  427,725      $    340,275        $ 329,233      
        ================== =================== ===============

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

NOTE 20 - RESEARCH AND DEVELOPMENT EXPENSES, NET                                

                                                                [Download Table]

                                         YEAR ENDED DECEMBER 31,         
                       --------------------------------------------------
                               2005           2004             2003      
                       ------------------ ------------------- -----------
                                                                         
Total expenses          $      92,375       $    86,368    $     65,487  
Less - participations         (20,472)          (19,522)        (10,568) 
                       ------------------ ---------------- --------------
                        $      71,903       $    66,846    $     54,919  
                       ================== ===============  ==============

NOTE 21 - FINANCIAL EXPENSES, NET                                               

                                                        [Enlarge/Download Table]

                                                      YEAR ENDED DECEMBER 31,              
                                     ------------------------------------------------------
                                             2005              2004              2003      
                                     ------------------ ---------------- ------------------
                                                                                           
Expenses:                                                                                  
On long-term bank debt                $      (6,359)      $     (1,544)  $     (2,215)     
On short-term bank credit and loans          (3,433)            (2,309)        (2,182)     
Others                                       (5,147)            (3,181)        (3,905)     
                                     ------------------ ---------------- ------------------
                                            (14,939)            (7,034)        (8,302)     
                                     ------------------ ---------------- ------------------
Income:                                                                                    
Interest on cash, cash equivalents                                                         
  and bank deposits                          2,205                 628            309      
Others                                           -               1,115          4,397      
                                     ------------------ ---------------- ------------------
                                             2,205               1,743          4,706      
                                     ------------------ ---------------- ------------------
Gain (loss) from exchange rate                                                             
  differences                                1,262                (561)        (1,274)     
                                     ------------------ ---------------- ------------------
                                       $   (11,472)       $     (5,852)  $     (4,870)     
                                     ================= ================= ==================

NOTE 22 - RELATED PARTIES TRANSACTIONS AND BALANCES                             

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED DECEMBER 31,              
                                         ------------------------------------------------------
                                                2005             2004               2003       
                                         ------------------ ---------------- ------------------
                                                                                               
Income -                                                                                       
  Sales to affiliated companies (*)        $      63,007     $      56,346    $ 34,674         
  Participation in expenses                $       3,630     $       2,594    $  1,773         

Cost and expenses -                                                                            
  Supplies and services from affiliated                                                        
    companies (**)                         $      19,031     $      16,338    $ 21,606         
  Participation in expenses                $          91     $         627    $  1,751         
  Financial expenses                                   -     $           3    $    23          

                                                                [Download Table]

                                                        DECEMBER 31,          
                                             ---------------------------------
                                                     2005            2004     
                                             ---------------------------------
                                                                              
Trade receivables and other receivables (*)       $  4,914     $     13,214   
Trade payables (**)                               $  2,574     $      5,445   

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                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 22 - RELATED PARTIES TRANSACTIONS AND BALANCES (CONT.)                     

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

         (*)      The  significant  sales include sales of helmet mounted cueing
systems purchased from the Company by VSI.  

         (**)     Includes electro-optics  components and sensors,  purchased by
                  the Company from SCD, and electro-optics products purchased by
the Company from Opgal.                     

NOTE 23 - RECONCILIATION TO ISRAELI GAAP                                        

         As described in Note 2, the Company  prepares its financial  statements
         in accordance  with U.S. GAAP. The effects of the  differences  between
         U.S.  GAAP and  generally  accepted  accounting  principles  in  Israel
         ("Israeli  GAAP") on the Company's  financial  statements  are detailed
below.                                                        

A building purchased from Elbit Ltd.                          
------------------------------------                          

         According to Israeli GAAP,  the Company  charged to additional  paid-in
         capital reserves the excess of the amount paid over net book value of a
         building  acquired from Elbit Ltd in 1999.  According to U.S. GAAP, the
        entire amount paid is considered as the cost of the building acquired.

Proportional consolidation method                             
---------------------------------                             

         According  to Israeli  GAAP,  a jointly  controlled  company  should be
         included according to the proportional  consolidation method. According
         to U.S. GAAP, the investment in such a company is recorded according to
the equity method.                                            

Tax benefit in respect of options exercised                   
-------------------------------------------                   

         According to Israeli GAAP, tax benefits from employee options exercised
         are recorded as a reduction of tax expense. According to U.S. GAAP, the
         difference  between the above  mentioned  tax benefits and the benefits
         recorded in respect of compensation expense in the financial statements
are credited to additional paid-in capital.                   

Goodwill                                                      
--------                                                      

         Effective January 1, 2002, the Company adopted SFAS 142,  "Goodwill and
         Other  Intangible  Assets"  according to which  goodwill and intangible
         assets with indefinite lives are no longer  amortized  periodically but
         are reviewed  annually for impairment (or more frequently if impairment
         indicators   arise).   According  to  Israeli  GAAP,  all  intangibles,
including goodwill, should be amortized.                      

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

NOTE 23 - RECONCILIATION TO ISRAELI GAAP (CONT.)                                

Investment in marketable securities - Tadiran                 
---------------------------------------------                 

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

1.       EFFECT ON NET INCOME AND EARNINGS PER SHARE          

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED DECEMBER 31,               
                                        --------------------------------------------------------
                                                2005               2004               2003      
                                        ------------------ ------------------ ------------------
                                                                                                
Net income as reported according to                                                             
      U.S. GAAP                           $     32,487         $    51,873      $      45,945   
Adjustments to Israeli GAAP                     (9,637)               (458)               595   
                                        ------------------ ------------------ ------------------
  Net income according to Israeli GAAP    $     22,850         $    51,415      $      46,540   
                                        ================== ================== ==================

2.       EFFECT ON SHAREHOLDERS' EQUITY                       

                                                                [Download Table]

                                                                 AS PER ISRAELI  
                           AS REPORTED          ADJUSTMENTS      GAAP            
                         ------------------ ------------------ ------------------
                                                                                 
AS OF DECEMBER 31, 2005                                                          
  Shareholders' equity     $    450,777         $   (19,279)     $     431,498   
                         ================== ================== ==================
AS OF DECEMBER 31, 2004                                                          
  Shareholders' equity     $    432,184         $   (13,124)     $     419,060   
                         ================== ================== ==================

 # # # # # # # #

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘6-K’ Filing	Date	First	Last	Other Filings

	12/31/06	17	81	20-F
	4/10/06	5
	3/28/06	5
Filed on / For Period End:	3/16/06			6-K
	3/15/06	2	3
	3/13/06	27	30
	2/13/06	14		6-K
	2/2/06	14		6-K
	1/4/06	14
	1/2/06	14
	1/1/06	17	56
	12/31/05	2	88	20-F, 20-F/A
	12/28/05	14
	12/18/05	14
	12/15/05	18	58
	12/12/05	14		6-K
	12/4/05	14		6-K
	11/30/05	20	41	6-K
	8/25/05	41		6-K
	7/25/05	77		6-K
	7/6/05	41		6-K
	7/1/05	17	56
	6/29/05	18	57
	6/15/05	17	56
	4/14/05	17	56
	3/15/05	4		6-K
	3/10/05	14		6-K
	1/21/05	61
	1/1/05	35	80
	12/31/04	10	88	20-F
	12/27/04	40		6-K
	12/21/04	14		6-K
	1/1/04	30	82
	12/31/03	34	84	20-F, 20-F/A
	7/1/03	80
	1/1/03	34
	1/1/02	48	87
	3/17/01	64
	1/1/99	78
				List all Filings

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Filing Submission 0000910680-06-000220 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Elbit Systems Ltd – ‘6-K’ for 3/16/06

On: Thursday, 3/16/06, at 10:45am ET · For: 3/16/06 · Accession #: 910680-6-220 · File #: 0-28998

Previous ‘6-K’: ‘6-K’ on 2/16/06 for 2/15/06 · Next: ‘6-K’ on 3/21/06 for 3/16/06 · Latest: ‘6-K’ on / for 4/17/24

Report of a Foreign Private Issuer — Form 6-KFiling Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Report of a Foreign Private Issuer — Form 6-K
Filing Table of Contents