Elbit Systems — Interim / Quarterly Report 2003

Aug 12, 2003

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 August 2003 ----------------------- ELBIT SYSTEMS LTD. (Translation of Registrant's Name into English) Advanced Technology Center, P.O.B. 539, Haifa 31053, Israel (Address of Principal Corporate Offices) Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F: |X| Form 20-F || Form 40-F Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934: || Yes |X| No Attached hereto as Exhibit 1 and incorporated herein by reference is the Registrant's Management Report for the three and six-month period ended June 30, 2003. Attached hereto as Exhibit 2 and incorporated herein by reference are the Registrant's Condensed Interim Financial Statements as of June 30, 2003. Attached hereto as Exhibit 3 and incorporated herein by reference is the Registrant's press release dated August 12, 2003. 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: August 12, 2003. -2- EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION ----------- ----------- 1. Management report. 2. Financial statements. 3. Press release. -3- EXHIBIT 1 --------- MANAGEMENT'S REPORT ------------------- FOR THE THREE AND SIX-MONTH PERIOD ENDED JUNE 30, 2003 ------------------------------------------------------ THIS REPORT SHOULD BE READ TOGETHER WITH THE COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 2003 AND THE COMPANY'S FORM 20-F FOR THE YEAR ENDED DECEMBER 31, 2002, FILED BY THE COMPANY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH THE ISRAELI SECURITIES AUTHORITY. A. THE COMPANY'S BUSINESS OVERVIEW ------------------------------- Elbit Systems Ltd. ("Elbit Systems") and its subsidiary companies (together the "Company" or the "Group") operate in the area of upgrading existing airborne, ground and naval defense platforms and are engaged in projects involving the design, development, manufacture, integration and marketing of advanced integrated defense systems, electronic systems, electro-optic systems and products and software intensive programs and products for the defense and homeland security sectors. In addition, the Company provides support services for such platforms, systems and products. The Company is engaged in leading projects in Israel and worldwide, in areas such as air, ground and naval Command, Control, Communication, Computers, Intelligence, Surveillance and Reconnaissance ("C4ISR") systems, digital maps, night vision systems, pilot helmet mounted systems, display and data processing systems, unmanned air vehicles ("UAVs"), computerized simulators, communication systems, thermal imaging products, laser products, optical systems for space applications, airborne reconnaissance systems, optic communication systems and products, security systems and products, surveillance products and systems and electric drive systems. The Company provides a wide range of logistic support services, including operation of pilot training services for the Israeli Air Force on a private financing initiative ("PFI") basis. Several of the Group's companies also provide advanced engineering and manufacturing services to various customers, utilizing their significant manufacturing capabilities. The Company often cooperates with industries in Israel and in various other countries. B. BACKLOG OF ORDERS ----------------- The Company's backlog of orders as of June 30, 2003 reached $1,695 million, of which 61.0% were for orders outside Israel. The Company's backlog as of December 31, 2002 was $1,689 million, out of which 62% were for orders outside Israel. Approximately 71.0% of the Company's backlog as of June 30, 2003 is scheduled to be performed in the following two quarters of 2003 and during 2004. The majority of the 29.1% balance is scheduled to be performed in 2005 and 2006. The relatively small increase in the Company's backlog was caused primarily by a slowdown in orders received from the Israeli Ministry of Defense ("IMOD") due to the delay in placing new orders in view of the IMOD's prolonged budget approval process. C. MAJOR SUBSIDIARIES AND AFFILIATED COMPANIES ------------------------------------------- o Elop Electro-Optics Industries Ltd. ("El-Op") - a wholly owned subsidiary registered in Israel, is engaged in the field of advanced electro-optical products for defense, homeland security and civil applications. El-Op's main areas of activity include development and production of thermal imaging products, laser products, optical systems for space applications, airborne reconnaissance systems, optical communications systems, fire control systems for combat vehicles, homeland security products and other systems for defense applications. o EFW Inc. ("EFW") - a wholly owned subsidiary registered in the United States, serves as the base for the Group's activities in the United States, mainly in the area of development, production and maintenance of advanced defense products and systems. o Vision Systems International LLC ("VSI") - an affiliated company in the United States, owned 50% each by EFW and Rockwell Collins Inc., is engaged in the area of helmet mounted systems primarily for fighter aircraft. o Cyclone Aviation Products Ltd. ("Cyclone") - a wholly owned subsidiary registered in Israel, provides logistic support and maintenance services for aircraft and helicopters and manufactures structure components and sub-assemblies for aircraft. o Silver Arrow LP - a wholly owned limited partnership registered in Israel, is engaged in the business of UAV systems and products. o Ortek Ltd. ("Ortek") - a wholly owned subsidiary registered in Israel, is engaged mainly in the area of security products and systems and night vision equipment. o Kinetics Ltd. ("Kinetics") - a 51% owned subsidiary registered 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, owned 50% each by 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 -2- subsidiary of Rafael, is engaged mainly in the area of thermal imaging systems for commercial applications. o 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 technology spin-off companies whose activities are based on technologies that were developed by the Company. The spin-off companies are involved primarily in the areas of medical equipment, optical communications 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 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. D. 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, 2002. 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 U.S. ("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. In the Company's opinion, its most critical accounting policy relates to revenue recognition based on SOP 81-1 "Accounting for Performance of Construction Type and Certain Production Type Contracts", which is relevant to most of its revenues. Under SOP 81-1, the Company has adopted the "percentage of completion" accounting method. Under this method, the Company recognizes revenues and profits on long-term fixed price contracts generally based on the ratio of costs incurred to estimates of costs to be incurred for the total contract. Under this approach, the Company compares estimated costs to complete an entire contract to total revenues for the term of the contract in order to arrive at an estimated gross margin percentage for each contract. The updated estimated gross margin percentage is applied, and the current period gross profit is the difference between the cumulative earned gross profit and gross profit reported for prior periods. -3- Management reviews these estimates periodically and the effect of any change in the estimated gross margin percentage for a contract is reflected in cost of sales in the period in which the change becomes known. If increases in projected costs to complete are sufficient to create a loss contract, the entire estimated loss is charged to cost of sales in the period the loss first becomes known. A number of internal and external factors affect the Company's cost estimates, including labor rates, estimated future material prices, revised estimates of uncompleted work, efficiency variances, linkage to indices and exchange rates, customer specifications and requirements and testing requirement changes. If any of the above factors were to change, or if different assumptions were used in the application of this and other accounting policies, it is likely that materially different amounts would be reported in the Company's consolidated financial statements. E. 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. As of June 30, 2003, the Company's goodwill and assembled work force amounted to $32.2 million. 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 June 30, 2003, the Company's long-lived assets amounted to $285.6 million, including $70.2 million in intangible assets, and the Company concluded that no assessment of 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. F. SPECIAL EVENTS THAT AFFECTED THE BUSINESS RESULTS ------------------------------------------------- The increase in the Company's share price affected the Company's financial results in the first half of 2003 due to the employee stock option plan for key employees adopted in October 2000. The program was comprised of options for 5 million shares, divided into options to purchase up to 2.5 million shares and additional 2.5 million "phantom" options. The phantom options grant the option holders a number of shares corresponding to the benefit component of the options exercised, as calculated on the exercise date, in consideration for their par value only, and are defined as a variable option plan. The actual number of options granted as of June 30, 2003 was approximately 4.5 million. -4- The Company's share price increased during the first six months of 2003 by $3.46 (or 21.6%). The increase in the share price during the second quarter of 2003 was $2.86 (or 17.2%) above the share price at the end of the first quarter. Under U.S. GAAP, the increase in the share price is recorded periodically as compensation expense based on the vesting period of the options. The expense, which is a non-cash expense, was allocated mainly to the Company's cost of goods sold and general and administrative expenses, with smaller amounts allocated to R&D and sales and marketing expenses . The effect of the increase of the share price on the Company's results of operation (net of taxes) in the first six months of 2003 was $5.1 million, of which $4.1 million was recorded in the second quarter of 2003. Future changes in the Company's share price will continue to effect the share price linked compensation costs. G. ACQUISITION ----------- On June 30, 2003 the Company acquired, through El-Op, all of the outstanding ordinary shares of Optronics Instruments & Products N.V. (O.I.P) from Delft Instruments N.V., in consideration for Euro 1.6 million ($1.8 million) in cash. The amount paid is equal to the estimated fair value of the net assets acquired. The acquisition has been accounted under the purchase method of accounting. The assets and liabilities of OIP are included in the Company's balance sheet as of June 30, 2003. O.I.P is based in Belgium and develops, manufactures and supports electro-optical products, mainly for the defense and space markets. It employs approximately 50 employees, and has established long-term relationships with customers in Belgium, other European countries and international customers. The acquisition of O.I.P. is expected to provide the Company with enhanced access and support to its customers in Europe and to strengthen its presence in this important market. H. ELECTION OF NEW DIRECTORS ------------------------- On August 6, 2003, the election of two new directors was approved at the annual meeting of the Company's shareholders. Mr. Avi Fischer was elected as a director to replace Mr. Lenny Recanati, who resigned from the Board of Directors in May 2003, and Mr. Yaacov Lifshitz was elected to serve as an External Director, replacing Mr. Yoel Feldschuh who resigned from the Board of Directors in May 2003. The Company and its Board of Directors express their appreciation to Messrs. Recanati and Feldschuh for their contribution to the Company during their service on the Board of Directors. -5- I. SUMMARY OF FINANCIAL RESULTS ---------------------------- The following table sets forth the reported consolidated statements of operations of the Company for the three and six-month periods ended June 30, 2003 and June 30, 2002.

NON-US GAAP DISCLOSURE ---------------------- The following table sets forth the Company's results of operations excluding the effect of the Company's phantom stock option plan ("phantom plan") in 2003 and 2002, and of the non-recurring charge related to the agreement reached by El-Op with the Office of the Israeli Chief Scientist ("OCS") in the second quarter of 2002: -6-

REVENUES -------- SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- The Company's consolidated revenues increased by 11.1%, from $379.0 million in the first six months of 2002 to $420.9 million in the first six months of 2003. -7- The following table sets forth the Company's revenue distribution by areas of operation:

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

THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- The consolidated revenues increased by 13.2% from $193.2 million in the second quarter of 2002 to $218.8 million in the second quarter of 2003. The following table sets forth the Company's revenue distribution by areas of operation:

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

The Company's sales are made 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 recent economic situation in Israel has created some uncertainty with respect to the Israeli Government's general and defense budgets. -8- 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. SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- Reported gross profit in the six months ended June 30, 2003 was $114.1 million as compared to $95.5 million in the six months ended June 30, 2002. The reported gross profit margin in the six months ended June 30, 2003 was 27.1% as compared to 25.2% in the corresponding period of the previous year. The Company's cost of goods sold in the six months ended June 30, 2003 included $3.5 million in non-cash expenses resulting from its phantom option plan, as compared to an immaterial amount in the six months ended June 30, 2002. Excluding non-cash expenses related to the Company's phantom option, gross profit in the six months ended June 30, 2003 was $117.7 million, or 28.0% of revenues. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, gross profit in the six-month period ended June 30, 2002 was $105.0 million, or 27.7% of revenues. THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- Reported gross profit in the quarter ended June 30, 2003 was $57.4 million as compared to $43.3 million in the quarter ended June 30, 2002. The reported gross profit margin in the second quarter of 2003 was 26.2% as compared to 22.4% in the same period last year. The Company's cost of goods sold in the second quarter of 2003 included $3.0 million in non-cash expenses resulting from its phantom option plan, as compared to an immaterial amount in the second quarter of 2002. Excluding non-cash expenses related to the Company's phantom option compensation costs, gross profit in the quarter ended June 30, 2003 was $60.4 million, or 27.6% of revenues. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, gross profit in the quarter ended June 30, 2002 was $52.9 million, or 27.4% of revenues. -9- 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 were in accordance with its plans. SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- Gross R&D expenses in the six months ended June 30, 2003 totaled $30.4 million (7.2% of revenues), as compared to $26.8 million (7.1% of revenues) in the six months ended June 30, 2002. Net R&D expenses (after deduction of the OCS participation) in the six months ended June 30, 2003 totaled $28.5 million (6.8% of revenues), as compared to $24.9 million (6.6% of revenues) in the six months ended June 30, 2002. THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- Gross R&D expenses in the quarter ended June 30, 2003 totaled $14.7 million (6.7% of revenues), as compared to $12.9 million (6.7% of revenues) in the quarter ended June 30, 2002. Net R&D expenses (after deduction of the OCS participation) in the quarter ended June 30, 2003 totaled $13.6 million (6.2% of revenues), as compared to $12.3 million (6.4% of revenues) in the quarter ended June 30, 2002. R&D expenses in the quarter ended June 30, 2003 included an immaterial amount of non-cash expenses related to the Company's phantom option plan. MARKETING AND SELLING EXPENSES ------------------------------ The Company invests significantly in developing new markets and pursues at any given time various business opportunities. The continued investment in developing new business opportunities, as well as the increased level of revenues and the increased length of time required for marketing efforts until orders are received, generated a higher level of sales and marketing expenses in the three and six-month periods ended June 30, 2003, as compared to the corresponding periods in 2002. -10- SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- Marketing and selling expenses in the six months ended June 30, 2003 were $35.1 million (8.3% of revenues), as compared to $29.9 million (7.9% of revenues) in the six months ended June 30, 2002. Excluding the phantom option plan non-cash expenses in 2003, marketing and selling expenses in the six months ended June 30, 2003 were $34.1 million (8.1% of revenues). THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- Marketing and selling expenses in the quarter ended June 30, 2003 were $19.1 million (8.7% of revenues), as compared to $15.3 million (7.9% of revenues) in the quarter ended June 30, 2002. Excluding the phantom option plan non-cash expenses in 2003, marketing and selling expenses in the quarter ended June 30, 2003 were $18.1 million (8.3% of revenues). GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES ------------------------------------------- SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- G&A expenses were $22.9 million (5.4% of revenues) in the six months ended June 30, 2003, as compared to $20.0 million (5.3% of revenues) in the six months ended June 30, 2002. Excluding the phantom option plan non-cash expenses in 2003, G&A expenses in the six months ended June 30, 2003 were $21.3 million (5.1% of revenues). THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- G&A expenses were $11.9 million (5.5% of revenues) in the quarter ended June 30, 2003, as compared to $10.3 million (5.3 % of revenues) in the quarter ended June 30, 2002. Excluding the phantom option plan non-cash expenses in 2003, G&A expenses in the quarter ended June 30, 2003 were $11.2 million (5.1% of revenues). -11- OPERATING PROFIT ---------------- The majority of the Company's operating expenses are related to the Company's investment in the development of future technologies and products, and in generating new business. These expenses are included in the Company's R&D and marketing and sales expenses, which together accounted for 73.5% and 73.3% of the operating expenses during the six and three-month periods ended June 30, 2003, respectively. SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- As a result of all of the above, reported operating income in the six months ended June 30, 2003 was $27.6 million (6.6% of revenues), as compared to $20.7 million (5.5% of revenues) in the six months ended June 30, 2002. For the six months ended June 30, 2003, the Company's operating profit included $6.4 million in non-cash expenses associated with the Company's phantom option plan, as compared to an immaterial amount in the six months ended June 30, 2002. Excluding phantom share compensation costs, operating income totaled $34.1 million (8.1% of revenues) in the six months ended June 30, 2003. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, operating profit in the six-month period ended June 30, 2002 was $29.8 million, or 7.9% of revenues. THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- As a result of all of the above, reported operating income in the quarter ended June 30, 2003 was $12.7 million (5.8% of revenues), as compared to $5.4 million (2.8% of revenues) in the quarter ended June 30, 2002. During the second quarter of 2003, the Company's operating profit included $5.0 million in non-cash expenses associated with the Company's phantom option plan, as compared to an immaterial amount in the second quarter of 2002. Excluding phantom share compensation costs in 2003, operating income totaled $17.8 million (8.1% of revenues) in the second quarter ended June 30, 2003. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, operating profit in the quarter ended June 30, 2002 was $14.9 million, or 7.8% of revenues. -12- FINANCE EXPENSE (NET) --------------------- SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- Net finance expense in the six months ended June 30, 2003 was $3.3 million, as compared to $0.1 million of finance expense in the six months ended June 30, 2002. THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- Net finance expense in the quarter ended June 30, 2003 was $2.0 million, as compared to $0.1 million of finance expense in the quarter ended June 30, 2002. The increase in the net finance expense during the three and six-month periods ended June 30, 2003 as compared to the respective periods in 2002 resulted mainly from a lower level of finance income generated, and from the effect of the devaluation of the US dollar against the New Israeli Shekel ("NIS") on NIS denominated loans, which occurred mainly in the second quarter of 2003. 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 changes in the effective tax rate are 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. SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- Provision for taxes in the six months ended June 30, 2003 was $6.6 million (effective tax rate of 27.0%), as compared to a provision for taxes of $5.2 million (effective tax rate of 26.0%) in the six months ended June 30, 2002. THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- Provision for taxes in the quarter ended June 30, 2003 was $3.0 million (effective tax rate of 27.7 %), as compared to a provision for taxes of $1.3 million (effective tax rate of 26.2%) in the quarter ended June 30, 2002. Excluding the effect of the non-cash expenses related to the phantom stock options plan, tax rates for the six and three-month periods ended June 30, 2003 were 25.2% and 24.5% respectively. The difference in the tax rates is due to the different tax treatment of the non-cash expense in the various tax jurisdictions in which the Company operates. -13- COMPANY'S SHARE IN EARNINGS OF AFFILIATED COMPANIES AND PARTNERSHIP ------------------------------------------------------------------- SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- In the six months ended June 30, 2003 the Company had net income of $2.9 million from its share in earnings of affiliated companies and partnership, as compared to $1.4 million in the six months ended June 30, 2002. THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- In the second quarter of 2003 the Company had net income of $1.0 million from its share in earnings of affiliated companies and partnership, as compared to $1.4 million in the second quarter of 2002. The affiliated companies and partnership in which the Company holds 50% or less in shares or voting rights and are therefore not consolidated in its financial statements operate in the Company's core business areas, including electro-optics and airborne systems. NET EARNINGS AND EARNINGS PER SHARE ("EPS") ------------------------------------------- SIX MONTHS ENDED ON JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED ON JUNE ----------------------------------------------------------------------- 30, 2002 - -------- Reported net earnings in the six months ended June 30, 2003 were $21.5 million (5.1% of revenues), as compared to reported net earnings of $16.5 million (4.3% of revenues) in the six months ended June 30, 2002. Diluted EPS in the six months ended June 30, 2003 was $0.54, as compared to $0.41 per share in the six months ended June 30, 2002. Excluding the phantom option plan non-cash expenses in 2003, net earnings in the six months ended June 30, 2003 were $26.6 million (6.3% of revenues), and the EPS was $0.66. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, net earnings in the six-month period ended June 30, 2002 was $23.8 million or 6.3% of revenues, and the EPS was $0.60. The number of shares used for computation of diluted EPS in the six months ended June 30, 2003 was 40,095 thousand shares, as compared to 39,960 thousand shares in the six months ended June 30, 2002. The increase in the number of shares used for computation of diluted EPS was due mainly to the change in the average share price during the six months ended June 30, 2003 which, due to the impact of the Company's -14- stock option plan, affects the number of shares calculated on a diluted basis, and due to exercise of options by employees during the period. THREE MONTHS ENDED ON JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED ON ---------------------------------------------------------------------- JUNE 30, 2002 - ------------- Reported net earnings in the quarter ended June 30, 2003 was $9.2 million (4.2% of revenues), as compared to reported net earnings of $4.8 million (2.5% of revenues) in the quarter ended June 30, 2002. Diluted EPS in the quarter ended June 30, 2003 was $0.23, as compared to $0.12 in the quarter ended June 30, 2002. Excluding the phantom option plan non-cash expenses in 2003, net earnings in the quarter ended June 30, 2003 were $13.3 million (6.1% of revenues), and the EPS was $0.33. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, net earnings in the quarter ended June 30, 2002 was $12.4 million (or 6.4% of revenues), and the EPS was $0.31. The number of shares used for computation of diluted EPS in the quarter ended June 30, 2003 was 40,396 thousand shares, as compared to 39,791 thousand shares in the quarter ended June 30, 2002. The increase in the number of shares used for computation of diluted EPS was due mainly to the change in the average share price during the second quarter of 2003 which, due to the impact of the Company's stock option plan, affects the number of shares calculated on a diluted basis, and due to exercise of options by employees during the period. J. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company's cash flows are effected by the cumulative cash flows of its various projects in the reported periods. Project cash flows are affected by the timing of the receipt of advances and the collection of accounts receivable from customers, which relate to specific events during the project, while expenses are on-going. As a result, the Company's cash flows may vary from one period to another. The Company's policy is to invest its cash surplus primarily in interest bearing deposits in accordance with its projected needs. The resources available to the Company include mainly profits, collection of accounts receivable, advances from customers, as well as Government of Israel grants and participation and bank financing in Israel and elsewhere based on its capital, assets and activities. In addition, the Company has the ability to raise funds through the offering of shares and debentures to the public from time to time. The Company's net cash flows generated from operating activities in the six-month period ended June 30, 2003 were $11.2 million. -15- Net cash flows used for investment activities in the six months period ended June 30, 2003 were $25.2 million, which were used mainly for procurement of property, plant and equipment. The investments were primarily in equipment for the Group's various manufacturing plants and in buildings being constructed at Elbit Systems' facility in Haifa, Israel and El-Op's site in Rehovot, Israel. The acquisition of OIP is included in the cash flow used in the reported period. Net cash flows used for financing activities in the six-month period ended June 30, 2003 were $15.3 million. The cash flows were used mainly for reduction of borrowings, which were partially offset by proceeds from share options exercised. On June 30, 2003, the Company had total borrowings in the amount of $94.9 million, including $21.8 million in short-term loans, and $392 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 June 30, 2003, the Company had a cash balance amounting to $47.0 million. As of June 30, 2003, the Company had working capital of $195.6 million, and its current ratio was 1.49. The Company's ratio of equity to total assets was 45.7%. K. DERIVATIVES AND HEDGES ---------------------- Market risks relating to the Company's operations result primarily from changes in interest rates and exchange rates, and the Company may use financial instruments to limit exposure. The Company typically enters into forward contracts in connection with transactions that are denominated in currencies other than US dollars and NIS. The Company may enter from time to time into forward contracts related to NIS. On June 30, 2003, 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. The Company's deposits and loans are based on variable interest rates, and their value as of June 30, 2003 was therefore not exposed to changes in 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 its liabilities and the return on its assets that are based on variable rates. The Company's functional currency is the U.S. dollar. On June 30, 2003, the Company had exposure due to liabilities denominated in NIS of $43.4 million in excess of its NIS denominated assets. These liabilities represent mostly wages, trade payables and loans. The amount of the Company's exposure to the changes in the NIS/US$ exchange rate may vary from time to time. In order to hedge against certain expected NIS payments, the Company entered into forward contracts designated as hedging. As of June -16- 30, 2003, the results of the then existing derivatives are being deferred until payments are realized, which is expected to occur during 2003. On June 30, 2003, the Company had forward contracts covering NIS exposure in the amount of $29.0 million. 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 June 30, 2003 by forward contracts. On June 30, 2003, the Company had contracts for the sale and purchase of such foreign currencies totaling $17.9 million. L. DIVIDENDS --------- The Board of Directors declared on August 11, 2003 a dividend of $0.10 per share. * * * - -------------------------------------------------------------------------------- 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. EXHIBIT 2 --------- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 ------------------- (Unaudited) (In thousands of U.S. dollars) ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES C O N T E N T S --------------- P A G E ------- CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Condensed Balance Sheets 2 - 3 Consolidated Statements of Operations 4 Consolidated Statements of Changes in Shareholder's Equity 5 - 6 Consolidated Statements of Cash Flows 7 - 8 Notes to the Consolidated Financial Statements 9 - 12 # # # # # # ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. - 2 - ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars except share data)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. - 3 - ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of U.S. dollars, except per share data)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. - 4 - ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHARHOLDER'S EQUITY (In thousands of U.S. dollars)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. - 5 - ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHARHOLDER'S EQUITY (In thousands of U.S. dollars)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. - 6 - ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. - 7 - ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.) (In thousands of U.S. dollars)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. - 8 - ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (In thousands of U.S. dollars) NOTE 1 - GENERAL The accompanying financial statements have been prepared in a condensed format as of June 30, 2003, and for the six months and three months then ended in accordance with generally accepted accounting principles in the United States (U.S. GAAP) relating to the preparation of financial statements for interim periods. See Note 6 for the reconciliation from US GAAP to accounting principles generally accepted in Israel (Israeli GAAP). These statements should be read in conjunction with the Company's annual financial statements and accompanying notes as of December 31, 2002. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation. All such adjustments were of a normal recurring nature. Reclassifications have been made to comparative data in the balance sheet as of December 31, 2002, in order to conform with the current year's presentation. Operating results for the six months ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation of these statements are identical to those applied in preparation of the latest annual financial statements. The accompanying financial statements have been prepared in U.S. dollars since the functional currency of the primary economic environment in which the operations of the Group (which includes Elbit Systems Ltd. and its subsidiaries) are conducted is the U.S. dollar. - 9 - ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (In thousands of U.S. dollars) NOTE 3 - INVENTORIES, NET OF ADVANCES

NOTE 4 - COMPANY ACQUIRED On June 30, 2003, the Company (through El-Op) acquired all of the outstanding ordinary shares of Optronics Instruments & Products N.V. (O.I.P.), a company registered in Belgium, in consideration for Euro 1.6 million in cash ($1,846). The acquisition was accounted for by the purchase method of accounting. O.I.P. develops, manufactures and supports electro-optical products, mainly for the defense and space markets. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Current assets $6,896 Property and equipment 168 Deferred tax assets 1,700 ------- TOTAL ASSETS ACQUIRED 8,764 Current liabilities (6,918) ------- Net assets acquired $1,846 ======= - 10 - NOTE 5 - STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, ("APB 25") "Accounting for Stock Issued to Employees" and the FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" in accounting for its employee stock option plans. According to APB 25, compensation expense is measured under the intrinsic value method, whereby compensation expense is equal to the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the exercise price. The following pro forma information presents the effect on the Company's consolidated stock-based employee compensation expense, net income and earnings per share as if the fair value based method provided under FASB statement No. 123 had been applied to all outstanding awards in each period. Under SFAS 123, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model.

• 11 - NOTE 6 - RECONCILIATION TO ISRAELI GAAP As described in Note 1, the Company prepares its financial statements in accordance with U.S. GAAP. See Note 26 to the 2002 annual financial statements for a description of the differences between US GAAP and Israeli GAAP in respect of the Company. The effects of the differences between US GAAP and Israeli GAAP on the Company's financial statements are detailed below. 1. EFFECT ON NET INCOME AND EARNINGS PER SHARE

# # # # # # - 12 - EXHIBIT 3 --------- [LOGO OF ELBIT SYSTEMS] EARNINGS RELEASE ---------------- ELBIT SYSTEMS REPORTS SECOND QUARTER 2003 RESULTS ------------------------------------------------- Revenues Increase 13.2%; Backlog of Orders Reaches $1,695 million; Haifa, Israel, August 12, 2003 - Elbit Systems Ltd. (the "Company") (NASDAQ: ESLT), the international defense company, today reported its consolidated results for the quarter ended June 30, 2003. Consolidated revenues for the second quarter of 2003 increased 13.2% to $218.8 million from $193.2 million in the corresponding quarter in 2002. Consolidated revenues for the six months ended June 30, 2003 increased 11.1% to $420.9 million from $379.0 million in the same period in 2002. Consolidated net income for the second quarter of 2003 was $9.2 million (4.2% of revenues) as compared with $4.8 million (2.5% of revenues) in the same period in 2002. Diluted earnings per share for the second quarter of 2003 was $0.23 as compared with $0.12 for the second quarter of 2002. The Company's financial results were affected by the increase in the Company's share price during the first six months of 2003, due to a non-cash expense related to the employees "phantom" option plan. Excluding the phantom option plan non-cash expenses, net income in the second quarter of 2003 was $13.3 million (6.1% of revenues), and the diluted EPS was $0.33. Net income for the second quarter of 2002, excluding the non-recurring charge under the agreement with the Office of the Israeli Chief Scientist (OCS), as previously reported and the phantom option plan effect, was $12.4 million (6.4% of revenues), or $0.31 per share. Consolidated net income for the first six months of 2003 was $21.5 million (5.1% of revenues), compared with $16.5 million (4.3% of revenues) for the same period in 2002. Diluted EPS for the six months ended June 30, 2003 was $0.54 compared with $0.41 for the corresponding period of 2002. Excluding the phantom option plan non-cash expenses in 2003, net income for the six months ended June 30, 2003 was $26.6 million (6.3% of revenues), and the EPS was $0.66. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, net income for the six-month period ended June 30, 2002 was $23.8 million (6.3% of revenues), and the EPS was $0.60. Gross profit for the second quarter of 2003 was $57.4 million (26.2% of revenues), as compared with gross profit of $43.3 million (22.4% of revenues) in the second quarter of 2002. Excluding non-cash expense related to the Company's phantom option compensation costs, gross profit in the quarter ended June 30, 2003, was $60.4 million, or 27.6% of revenues. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, gross profit in the quarter ended June 30, 2002 was $52.9 million, or 27.4% of revenues. Gross profit for the first six months of 2003 was $114.1 million (27.1% of revenues) as compared with $95.5 million (25.2% of revenues) in the same period of 2002. Excluding non-cash expenses related to the Company's phantom option plan, gross profit for the six months ended June 30, 2003 was $117.7 million, or 28.0% of revenues. Excluding the non-recurring charge under the OCS agreement and the phantom option plan effect, gross profit for the six-month period ended June 30, 2002 was $105.0 million, or 27.7% of revenues. Backlog of orders as of June 30, 2003 reached $1,695 million, as compared with $1,689 million at the end of 2002. 61% of the backlog relates to orders outside of Israel. Approximately 71% of the Company's backlog as of June 30, 2003, is scheduled to be performed in the next two quarters of 2003 and during 2004. The relatively small increase in the Company's backlog was caused primarily by a slowdown in orders received from the Israeli Ministry of Defense. The President and CEO of Elbit Systems, Joseph Ackerman, commented: "Our results for the second quarter of 2003 reflect the continued growth of the Company. However, during the quarter we have witnessed a slowdown in orders received from the Israeli Ministry of Defense." The Board of Directors declared a dividend of $0.10 per share for the second quarter of 2003. The dividend will be paid on September 8, 2003, net of taxes and levies, at the rate of 19%. The record date of the dividend is August 26, 2003. Conference Call Elbit Systems will host a conference call today, Tuesday, August 12, 2003 at 10:30 AM ET. To take part in the conference call, please dial 1-866-500-4965 (U.S. and Canada) or 1-877-332-1104 (U.S.) or +972-3-925-5910 (International) a few minutes before the 10:30 AM ET start time. For your convenience, an instant replay will be available starting at 12:30 PM ET the same day until Thursday, August 14, 2003 at 5:00 PM ET. The replay telephone number is 1-866-500-4965 (U.S. and Canada) or +972-3-925-5945 (International). This call will also be broadcasted live on: www.elbit.co.il and an online replay will be available for 30 days. 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, in the areas of aerospace, ground and naval systems, command, control, communications, computers and intelligence (C4I) and advanced electro-optic technologies. The Company focuses on the upgrading of existing military platforms and developing new technologies for defense applications. For further information, please visit the Company web site at www.elbit.co.il. Contact Ilan Pacholder, VP Finance Marilena LaRosa Elbit Systems Ltd Investor Relations Tel: 972-4 831-6632 The Anne McBride Company Fax: 972-4 831-6659 1212-983-1702 ext. 208 pacholder@elbit.co.il mlarosa@annemcbride.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 FOLLOW) ELBIT SYSTEMS LTD. CONSOLIDATED BALANCE SHEETS (In thousand of US Dollars)

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