Elbit Systems Ltd.
Annual Report 2012

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934for the fiscal year ended December 31, 2012Commission File No. 0-28998 ELBIT SYSTEMS LTD.(Exact name of registrant as specified in its charter and translation of registrant’s name into English) Israel(Jurisdiction of incorporation or organization) Advanced Technology Center, Haifa 31053, Israel(Address of principal executive offices) Joseph Gasparc/o Elbit Systems Ltd.P.O. Box 539Advanced Technology CenterHaifa 31053IsraelTel: 972-4-831-6404Fax: 972-4-831-6944E-mail: j.gaspar@elbitsystems.com(Name, telephone, e-mail and/or facsimile number and address of Company contact person) Securities registered or to be registered pursuant to Section 12(b) of the Act: Ordinary Shares, nominal value 1.0 New Israeli Shekels per share(Title of Class)The NASDAQ Global Select Market(Name of each Exchange on which registered)Securities registered or to be registered pursuant to Section 12(g) of the Act:Not ApplicableSecurities for which there is a reporting obligation pursuant to Section 15(d) of the Act:Not Applicable Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by theannual report: 41,881,745 Ordinary Shares  Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes xx No oo If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934. Yes oo No xx Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes xx No oo Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes xx No oo Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check One). Large accelerated filer xxAccelerated filer ooNon-accelerated filer oo Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing. U.S. GAAP xxInternational Financial Reporting ooStandards as issued by the InternationalAccounting Standards BoardOther oo If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected tofollow. Item 17 oo Item 18 No oo If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oo No xx  Table of Contents Page General Disclosure Standards2 Cautionary Statement with Respect to Forward-Looking Statements2 Item 1.Identity of Directors, Senior Management and Advisers3Item 2.Offer Statistics and Expected Timetable3Item 3.Key Information3Item 4.Information on the Company14Item 4A.Unresolved Staff Comments40Item 5.Operating and Financial Review and Prospects41Item 6.Directors, Senior Management and Employees.60Item 7.Major Shareholders and Related Party Transactions74Item 8.Financial Information.76Item 9.The Offer and Listing77Item 10.Additional Information78Item 11.Quantitative and Qualitative Disclosures About Market Risk93Item 12.Description of Securities Other than Equity Securities97Item 13.Defaults, Dividend Arrearages and Delinquencies97Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds.97Item 15.Controls and Procedures97Item 16A.Audit Committee Financial Expert98Item 16B.Code of Ethics98Item 16C.Principal Accountant Fees and Services98Item 16D.Exemptions from the Listing Standards for Audit Committees99Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers99Item 16F.Change in Registrant’s Certifying Accountant99Item 16G.Corporate Governance100Item 16H.Mine Safety Disclosure100Item 17.Financial Statements100Item 18.Financial Statements100Item 19.Exhibits101  PART I General Disclosure Standards The consolidated financial statements of Elbit Systems Ltd. (Elbit Systems) included in this annual report on Form 20-F are prepared in accordancewith United States generally accepted accounting principles (U.S. GAAP). Unless otherwise indicated, all financial information contained in this annualreport is presented in U.S. dollars. References in this annual report to the “Company”, “we”, “our”, “us” and terms of similar meaning refer to Elbit Systemsand our subsidiaries unless the context requires otherwise. Cautionary Statement with Respect to Forward-Looking Statements This annual report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our current plans, estimates, strategies, goals and beliefs andas such do not relate to historical or current fact. Forward-looking statements are made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995, as amended. Forward-looking statements contained herein generally are identified by the words “believe”, “project”, “expect”, “will likely result”, and “strategy”,“plan”, “may”, “should”, “will”, “would”, “will be”, “will continue”, “will likely result” and similar expressions. Forward-looking statements are based onmanagement’s current expectations, estimates, projections and assumptions, are not guarantees of future performance and involve certain risks anduncertainties, the outcomes of which cannot be predicted. Therefore, actual future results, performance and trends may differ materially from these forward-looking statements due to a variety of factors, including, without limitation: •the scope and length of customer contracts; •governmental regulations and approvals; •changes in governmental budgeting priorities; •general market, political and economic conditions in the countries in which we operate or sell, including Israel and the United States amongothers; •differences in anticipated and actual program performance, including the ability to perform under long-term fixed-price contracts; •the impact on our backlog from export restrictions by the Government of Israel; •inventory write-downs and possible liabilities to customers from program cancellations due to political relations between Israel and countrieswhere our customers may be located; and •the outcome of legal and/or regulatory proceedings. The factors listed above are not all-inclusive, and further information about risks and other factors that will affect our future performance iscontained in this annual report on Form 20-F. All forward-looking statements speak only as of the date of this annual report. We expressly disclaim anyobligation to update or review any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be requiredby applicable law. 2 Item 1. Identity of Directors, Senior Management and Advisers. Information not required in annual report on Form 20-F. Item 2. Offer Statistics and Expected Timetable. Information not required in annual report on Form 20-F. Item 3. Key Information. Selected Financial Data The following selected consolidated financial data of the Company as of and for the years ended December 31, 2008, 2009, 2010, 2011 and 2012 arederived from our audited consolidated financial statements, including our audited consolidated financial statements as of December 31, 2011 and 2012, andfor each of the years ended December 31, 2010, 2011 and 2012, which appear in Item 18 in this annual report on Form 20-F. You should read the auditedconsolidated financial statements appearing in Item 18 together with the selected financial data set forth below. (For non-GAAP financial data see Item 5.Operating and Financial Review and Prospects – Non-GAAP Financial Data.) Years Ended December 31, 2008 2009 2010 __ 2011 2012 (U.S. dollars in millions except for per share amounts) Income Statement Data: Revenues $2,638.3 $2,832.4 $2,670.1 $2,817.5 $2,888.6 Cost of revenues 1,870.9 1,982.9 1,872.2 2,085.5 2,072.7 Gross profit 767.4 849.5 797.9 732.0 815.9 Research and development expenses, net 185.0 216.8 234.1 241.1 233.4 Marketing and selling expenses 198.2 250.9 230.0 235.9 241.9 General and administrative expenses 134.2 119.3 131.2 139.3 137.5 Acquired in-process research and development (IPR&D) andother expenses (income) 1.0 – (4.7) – – Total operating expenses 518.4 587.0 590.6 616.3 612.8 Operating income 249.0 262.5 207.3 115.7 203.1 Financial expenses, net 36.8 15.6 21.3 13.6 26.1 Other income, net 94.3 0.4 13.3 1.9 0.1 Income before taxes on income 306.5 247.3 199.3 104.0 177.0 Taxes on income 54.3 38.1 24.0 13.6 17.1 Equity in net earnings of affiliated companies 14.4 19.3 18.8 15.4 11.2 Net income from continuing operations, net 266.6 228.5 194.1 105.8 171.1 Income (loss) from discontinued operations, net – – 0.9 (16.0) (0.6)Net income 266.6 228.5 195.0 89.8 170.5 Less: net income (loss) attributed to non-controlling interests 62.4 13.6 11.1 (0.5) 2.6 Income attributed to Elbit Systems’ shareholders 204.2* 214.9 183.5 90.3 167.9 Earnings per share: Basic net earnings (loss) per share Continuing operations $4.85* $5.08 $4.29 $2.33 $3.99 Discontinued operations – – 0.01 (0.22) (0.01)Total $4.85* $5.08 $4.30 $2.11 $3.98 Diluted net earnings (loss) per share Continuing operations 4.78* 5.00 4.24 2.31 3.98 Discontinued operations – – 0.01 (0.22) (0.01)Total $4.78* $5.00 $4.25 $2.09 $3.97 *Including $74 million in net income ($1.73 diluted net earnings per share) from the sale of Mediguide Inc. (Mediguide) shares in 2008. 3 December 31, 2008 2009 2010 2011 2012 (U.S. dollars in millions except for per share amounts) Balance Sheet Data: Cash, cash equivalents, short-term bank deposits andmarketable securities $278 $280 $215 $224 $265 Working capital 290 392 382 236 375 Long-term deposits, marketable securities and other receivables 41 44 52 12 19 Long-term trade and unbilled receivables – 17 90 163 230 Property, plant and equipment, net 384 405 504 518 501 Total assets 2,940 3,054 3,616 3,721 3,811 Long-term debt 270 389 292 302 174 Series A Notes, net of current maturities – – 273 235 409 Capital stock 300 284 294 245 249 Elbit Systems shareholders’ equity 724 833 967 898 1,017 Non-controlling interests 76 24 39 29 34 Total equity 800 857 1,005 928 1,051 Number of outstanding ordinary shares of NIS 1 par value (inthousands) 42,079 42,531 42,693 42,608 41,882 Dividends paid per ordinary share with respect to theapplicable year $1.42 $1.82 $1.44 $1.44 $1.20 4 Risk Factors General Risks Related to Our Business and Market Our revenues depend on a continued level of government business. We derive most of our revenues directly or indirectly from governmentagencies, mainly the Israeli Ministry of Defense (IMOD), the U.S. Department of Defense (DoD) and defense ministries of certain other countries, pursuant tocontracts awarded to us under defense-related programs. The funding of these programs is subject to government budgeting decisions affected by numerousfactors, including geo-political events and macro-economic conditions that are beyond our control. Government spending under such contracts may cease ormay be reduced, which would cause a negative effect on our revenues, results of operations, cash flow and financial condition. The current worldwide economic and financial situation as well as reductions in U.S. and European defense expenditures may have amaterial adverse effect on our results. Over the past few years many of the world’s economies and financial institutions have experienced a reduction ineconomic activity, a decline in asset prices, liquidity problems and limited availability of credit. Also, in recent years the U.S. and a number of Europeangovernments have reduced defense budgets, and the U.S. defense budget has been reduced by the sequestration provisions that became effective in March 2013under the U.S. Budget Control Act of 2011. Such factors may result in a reduction in demand and downward pressure on pricing in some of our markets,which could adversely affect our business, results of operations and financial condition. The general economic and financial situation may: (i) cause the valueof our investments in our pension plans to decrease, requiring us to increase our funding of those pension plans; (ii) result in a lower return and value on ourassets; (iii) increase the cost or hinder our ability to finance future projects; and (iv) negatively impact our customers, which in turn could negatively impactour ability to collect accounts receivable. Our contracts may be terminated for convenience of the customer. Our contracts with governments often contain provisions permittingtermination for convenience of the customer. Our subcontracts with non-governmental prime contractors sometimes contain similar provisions. In a minority ofthese contracts, an early termination for convenience would not entitle us to reimbursement for all of our incurred contract costs or for a proportionate share ofour fee or profit for work performed. We depend on governmental approval of our exports. Our international sales as well as our international procurement of skilled humanresources, technology and components depend largely on export license approvals from the governments of Israel, the U.S. and other countries. If we fail toobtain material approvals in the future, if material approvals previously obtained are revoked or expire and are not renewed or if government export policieschange, our ability to sell our products and services to overseas customers and our ability to obtain goods and services essential to our business could beinterrupted, resulting in a material adverse effect on our business, revenues, assets, liabilities and results of operations. (See Item 4. Information on theCompany – Governmental Regulation.) As a government contractor, we are subject to a number of procurement and anti-bribery rules and regulations. We are required to complywith specific government contracting rules and regulations, including those relating to cost accounting, anti-bribery, procurement integrity and others, whichincrease our performance and compliance costs. (See Item 4. Information on the Company – Governmental Regulation.) If these rules and regulations change,our costs of complying with them could increase and reduce our margins. In addition, failure to comply with these rules and regulations could result inreductions of the value of contracts, contract modifications or termination, and the assessment of penalties and fines, which could negatively impact ourresults of operations and financial condition. Failure to comply with these rules and regulations, for example in the area of anti-bribery, could also lead tosuspension or debarment from government contracting or subcontracting for a period of time as well as other possible sanctions, which could have a negativeimpact on our results of operations, financial condition and reputation. 5 We depend on international operations. We expect that international sales will continue to account for a significant portion of our revenues for theforeseeable future. As a result, changes in international, political, economic or geographic events could result in significant shortfalls in orders or revenues.These shortfalls could cause our business, financial condition and results of operations to be harmed. In addition to the other risks from internationaloperations set forth in these Risk Factors, some of the risks of doing business internationally include: •unexpected changes in regulatory requirements; •termination or non-renewal of export licenses; •changes in governmental defense budgets and national priorities; •imposition of tariffs and other barriers and restrictions; •burdens of complying with a variety of foreign laws; •political and economic instability; and •changes in diplomatic and trade relationships. Some of these factors, such as the ability to obtain foreign government approvals, termination of export licenses and changes in diplomaticrelationships, may be affected by Israel’s overall political situation. (See “Risks Related to Our Israeli Operations” below.) In addition, the economic andpolitical stability of the countries of our major customers and suppliers may impact our business. We have risks related to our pension plans, which could impact our liquidity. Funding obligations for certain of our pension plans are impactedby the performance of the financial markets and interest rates. When interest rates are low, or if the financial markets do not provide long-term returns asexpected, there is an increased likelihood we may be required to make additional contributions to these pension plans. Because of the volatility in the equitymarkets, our estimate of future contribution requirements can change dramatically in relatively short periods of time. (See Item 18. Financial Statements –Notes 2(S) and 17.) We face currency exchange risks. As more of our revenues are generated in currencies other than the U.S. dollar (which is the functional currencywe use for financial reporting purposes), mainly in New Israeli Shekels (NIS), Great Britain Pounds (GBP) and Euros, we are subject to increasinglysignificant foreign currency risks. For example, we could be negatively affected by exchange rate changes during the period from the date we submit a priceproposal until the date of contract award or until the date(s) of payment. Moreover, since a significant portion of our expenses is denominated in NIS, if we donot adequately hedge against exchange rate risks, our financial results could be adversely affected. Accordingly, our level of revenues and profits may beadversely affected by exchange rate fluctuations. (See below “Risks Related to Our Israeli Operations – Changes in the U.S. Dollar – NIS Exchange Rate” andItem 5. Operating and Financial Review and Prospects – Impact of Inflation and Exchange Rates.) We operate in a competitive industry. The markets in which we participate are highly competitive and characterized by technological change. If weare unable to improve existing systems and products and develop new systems and technologies in order to meet evolving customer demands, our businesscould be adversely affected. In addition, our competitors could introduce new products with innovative capabilities, which could adversely affect ourbusiness. We compete with many large and mid-tier defense contractors on the basis of system performance, cost, overall value, delivery and reputation.Many of these competitors are larger and have greater resources than us, and therefore may be better positioned to take advantage of economies of scale anddevelop new technologies. Some of these competitors are also our suppliers in some programs. Due to significant consolidation in our industry, we are more likely to compete with certain potential customers. As the number ofcompanies in the defense industry has decreased in recent years, the market share of some prime contractors has increased. Some of these companies arevertically integrated with in-house capabilities similar to ours in certain areas. Thus, at times we could be seeking business from certain of these primecontractors, while at other times we could be in competition with some of them. Failure to maintain good business relations with these major contractors couldnegatively impact our future business. 6 We face risks of changes in costs under fixed-price contracts. Most of our contracts are fixed-price contracts, as opposed to cost-plus or cost-share type contracts. Generally, a fixed-price contract price is not adjusted as long as the work performed falls within the original contract scope. Therefore,under these contracts, we generally assume the risk that increased or unexpected costs may reduce profits or generate a loss. The risk can be particularlysignificant under a fixed-price contract involving research and development for new technology, where estimated gross profit or loss from long-term projectsmay change and such changes in estimated gross profit/loss are recorded on a cumulative catch-up basis. (See Item 5. Operating and Financial Review andProspects – General – Critical Accounting Policies and Estimates – Revenue Recognition.) To the extent we underestimate the costs to be incurred in any fixed-price contract, we could experience a loss on the contract, which would have a negative effect on our results of operations, financial position and cash flow. We face fluctuations in revenues and profit margins. The level of our revenues may fluctuate over different periods due to changes in pricing orsales volume or our mix of projects during any given period. Moreover, since certain of our project revenues are recognized in connection with achievement ofspecific performance milestones, we may experience significant fluctuations in year-to-year and quarter-to-quarter financial results. Similarly, our profitmargins may vary significantly from project to project as a result of changes in estimated project gross profits that are recorded in results of operations on acumulative catch-up basis pursuant to the percentage-of-completion accounting method. (See Item 5. Operating and Financial Review and Prospects – General– Critical Accounting Policies and Estimates – Revenue Recognition.) As a result, comparisons of our financial results for prior periods may not provide areliable indicator of our future results. Moreover, our share price may be subject to significant fluctuation in response to period-to-period variations in ourfinancial results. Our backlog of projects under contract is subject to unexpected adjustments and cancellations. Our backlog includes revenue we expect torecord in the future from signed contracts and certain other commitments. Many projects may remain in our backlog for an extended period of time because ofthe size or long-term nature of the contract. In addition, from time to time, projects are delayed, scaled back, stopped or cancelled for reasons beyond ourcontrol, which may adversely affect the revenue and profit that we ultimately receive from contracts reflected in our backlog. We may experience production delays or liability if suppliers fail to make compliant or timely deliveries. The manufacturing process for someof our products largely consists of the assembly, integration and testing of purchased components. Some components are available from a small number ofsuppliers, and in a few cases we work with suppliers that are effectively our sole source. If a supplier stops delivery of such components, finding anothersource could result in added cost and manufacturing delays. Moreover, if our subcontractors fail to meet their design, delivery schedule or other obligations wecould be held liable by our customers, and we may be unable to obtain full or partial recovery from our subcontractors for those liabilities. The foregoing riskscould have a material adverse effect on our operating results. In addition, the current global economic situation could impair the ability of our suppliers to meettheir obligations to us. We may be affected by failures of our prime contractors. We often act as a subcontractor, and a failure of our prime contractor to meet itsobligations may affect our ability to receive payments under our subcontract. Undetected problems in our products could impair our financial results and give rise to potential product liability claims. If there are defectsin the design, production or testing of our or our subcontractors’ products and systems, including our products sold for public safety purposes in thehomeland security area, we could face substantial repair, replacement or service costs and potential liability and damage to our reputation. Our efforts toimplement appropriate design, testing and manufacturing processes for our products or systems may not be sufficient to prevent such occurrences, whichcould have a material adverse effect on our business, results of operations and financial condition. 7 Our future success depends on our ability to develop new offerings and technologies for our current and future markets. To achieve ourbusiness strategies and continue to grow our revenues and operating profits, we must successfully develop new, or adapt or modify our existing, offerings andtechnologies for our current core defense markets and our future markets, including adjacent and emerging markets. Accordingly, our future performancedepends on a number of factors, including our ability to: •identify emerging technological trends in our current and future markets; •identify additional uses for our existing technology to address customer needs in our current or future markets; •develop and maintain competitive products and services for our current and future markets; •enhance our offerings by adding innovative solutions that differentiate our offerings from those of our competitors; •develop, manufacture and bring solutions to the market quickly at cost-effective prices; •develop working prototypes as a condition to receiving contract awards; and •effectively structure our business, through the use of joint ventures, teaming agreements and other forms of alliances, to reflect thecompetitive environment. To remain competitive in the future, we believe we will need to invest significant financial resources to develop new, and adapt or modify ourexisting, offerings and technologies, including through internal research and development, acquisitions and joint ventures or other teaming arrangements. Inaddition, our customers more frequently require demonstration of working prototypes prior to awarding contracts for new programs. Expenditures for new,adapted or modified offerings and technologies and for production of prototypes could divert our attention and resources from other projects and may notultimately lead to the timely development of new offerings and technologies or new contracts. Due to the design complexity of our products, we may experiencedelays in completing the development and introduction of new products. Any delays could result in increased costs and development, deflect resources fromother projects or increase the risk that our competitors may develop competing technologies, which gain market acceptance in advance of our products. If wefail in our new product development efforts, or our products or services fail to achieve market acceptance more rapidly than our competitors, our ability toprocure new contracts could be negatively impacted, which would negatively impact our results of operations and financial condition. Our business depends on proprietary technology that may be infringed. Many of our systems and products depend on our proprietarytechnology for their success. Like other technology oriented companies, we rely on a combination of patents, trade secrets, copyrights and trademarks, togetherwith non-disclosure agreements, contractual confidentiality clauses, including those in employment agreements, and technical measures to establish andprotect proprietary rights in our products. Our ability to successfully protect our technology may be limited because: •some foreign countries may not protect proprietary rights as comprehensively as the laws of the United States and Israel; •detecting infringements and enforcing proprietary rights may be time consuming and costly, diverting management’s attention and companyresources; •measures such as non-disclosure agreements afford only limited protection; •unauthorized parties may copy aspects of our products or technologies to develop similar products or technologies or obtain and useinformation that we regard as proprietary; •our patents may expire, thus providing competitors access to the applicable technology; •competitors may independently develop products that are substantially equivalent or superior to our products or circumvent our intellectualproperty rights; and •competitors may register patents in technologies relevant to our business areas. 8 In addition, others may allege infringement claims against us. The cost of defending against infringement claims could be significant, regardless ofwhether the claims are valid. To the extent we are not successful in defending such claims, we may be prevented from the use or sale of certain of ourproducts, subject to liabilities for damages and required to obtain licenses, which may not be available on reasonable terms, any of which may have a materialadverse impact on our business, results of operation or financial condition. Systems and information technology interruptions or cyber attacks could adversely impact our ability to operate. Our operations rely oncomputer, information and communications technology and related systems. From time to time, we may experience system interruptions and delays. If we areunable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency ofand protect our systems, our operations could be interrupted or delayed. Our computer and communications systems and operations could be damaged orinterrupted by natural disasters, telecommunications failures, acts of war, terrorism or similar events or disruptions. Any of these or other events could causesystem interruption, delays and loss of critical data, or delay or stoppage of our operations, and adversely affect our operating results. In addition, we face the ongoing threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code,organized cyber attacks and other security problems and system disruptions. We have devoted and will continue to devote significant resources to the securityof our computer systems, but they may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietaryinformation or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat ofthese system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these events could have a materialadverse effect on our business, results of operations and financial condition. We sometimes have risks relating to financing for our programs. A number of our major projects require us to arrange, or to provide,guarantees in connection with the customer’s financing of the project. These include commitments by us as well as guarantees provided by financialinstitutions relating to advance payments received from customers. Customers typically have the right to drawdown against advance payment guarantees if wewere to default under the applicable contract. In addition, some customers require that the payment period under the contract be extended for a number ofyears, sometimes beyond the period of contract performance. We may face difficulties in issuing guarantees or providing financing for our programs.Moreover, if we are required to provide significant financing for our programs, this could result in increased leverage on our balance sheet. (See Item 4.Information on the Company – Financing Terms.) We are subject to buy-back obligations. A number of our international programs require us to meet “buy-back” obligations. (See Item 5. Operatingand Financial Review and Prospects – Off Balance Sheet Transactions.) Should we be unable to meet such obligations we may be subject to contractualpenalties, and our chances of receiving further business from the applicable customers could be reduced or, in certain cases, eliminated. We sometimes participate in risk-sharing contracts. We sometimes participate in “risk-sharing” type contracts, in which our non-recurring costsare only recoverable if there is a sufficient level of sales for the applicable product, which level of sales typically is not guaranteed. If sales do not occur at thelevel anticipated, we may not be able to recover our non-recurring costs under the contract. We would be adversely affected if we are unable to retain key employees. Our success depends in part on key management, scientific andtechnical personnel and our continuing ability to attract and retain highly qualified personnel. There is competition for the services of such personnel. The lossof the services of key personnel, and the failure to attract highly qualified personnel in the future, may have a negative impact on our business. Moreover, ourcompetitors may hire and gain access to the expertise of our former employees. We may face labor relations disputes or not be able to amend collective bargaining agreements in a timely manner. A number of oursubsidiaries in Israel and certain other countries are parties to collective bargaining agreements that cover a substantial number of our employees. Theseagreements contain a range of conditions that vary depending on the applicable company and are for various periods of time. Disputes with trade unions orother labor relations difficulties as well as failure to timely amend or extend collective bargaining agreements could lead to worker disputes, slow-downs,strikes and other measures, which could negatively impact our results of operations. 9 We face acquisition and integration risks. We have made in the past and plan to continue to make equity or asset acquisitions and investments incompanies and technology ventures that we believe complement our business. (See Item 4. Information on the Company – Recent Acquisitions, Mergers andDivestitures.) Acquisitions typically involve a certain amount of risks and uncertainties such as: •the difficulty in integrating newly-acquired businesses and operations in an efficient and cost-effective manner and the risk that weencounter significant unanticipated costs or other problems associated with integration; •failure to meet the challenges of achieving strategic objectives, cost savings and other benefits expected from acquisitions could lead toimpairment of intangible assets related to the acquired companies; •the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful inthose markets; •the risk that we assume significant liabilities that exceed the enforceability or other limitations of applicable indemnification provisions, ifany, or the financial resources of any indemnifying parties, including indemnity for regulatory compliance issues that may result in ourincurring successor liability; •the potential loss of key employees of the acquired businesses; •the risk of diverting the attention of senior management from our existing operations; and •the risk that certain of our newly acquired operating subsidiaries in various countries could be subject to more restrictive regulations by thelocal authorities after our acquisition. Our acquisitions are subject to governmental approvals. Most countries require local governmental approval of acquisitions of domestic defensebusinesses, which approval may be denied, or unfavorable conditions imposed, if the local government determines the acquisition is not in its nationalinterest. We may also be unable to obtain antitrust approvals for certain acquisitions as our operations expand. Failure to obtain such governmental approvalscould negatively impact our future business and prospects. Our due diligence in acquisitions may not adequately cover all risks. There may be liabilities or risks that we fail to discover in performing duediligence investigations, or that may arise following an acquisition, relating to businesses we have acquired or may acquire in the future. Examples of theseliabilities include employee benefit contribution obligations, estimated costs to complete contracts, environmental liabilities, regulatory compliance liabilities orliabilities for infringement of third party intellectual property rights for which we, as a successor owner, may be responsible. Such risks may include changesin estimated costs to complete programs and estimated future revenues. In addition, there may be additional costs relating to acquisitions including, but notlimited to, possible purchase price adjustments provided in the applicable acquisition agreement or impairment write downs, if the value of the acquiredcompany were to decrease after the acquisition, or after follow-on investments in that company. Such liabilities could have a material adverse effect on ourbusiness, financial condition, results of operations or prospects. In addition, there may be situations in which our management determines, based on marketconditions or other applicable considerations, to pursue an acquisition with limited due diligence or without performing any due diligence at all. Our share price may be volatile and may decline. Numerous factors, some of which are beyond our control and unrelated to our operatingperformance or prospects, may cause the market price of our ordinary shares to fluctuate significantly. Factors affecting market price include, but are notlimited to: (i) variations in our operating results and whether we have achieved our key business targets; (ii) sales or purchases of large blocks of stock; (iii)changes in securities analysts’ earnings estimates or recommendations; (iv) differences between reported results and those expected by investors and securitiesanalysts; and (v) changes in our business including announcements of new contracts by us or by our competitors. In the past, securities class action litigationhas been instituted against companies following periods of volatility in the market price of their securities. 10 Other general factors and market conditions that could affect our stock price include changes in: (i) the market’s perception of our business; (ii) thebusinesses, earnings estimates or market perceptions of our competitors or customers; (iii) the outlook for the defense industry; (iv) the general market oreconomic conditions unrelated to our performance; (v) the legislative or regulatory environment; (vi) government defense spending or appropriations; (vii)military or defense activities worldwide; (viii) the level of national or international hostilities; and (ix) the general geo-political environment. We have risks related to our issuance of Series A Notes under an Israeli debt offering. We face various risks relating to our issuance of SeriesA Notes (the Notes). (See Items 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Israeli Debt Offering.) The risks weface include our ability to generate sufficient cash flow to make payments on the Notes. We have risks related to the inherent limitations of internal control systems. Despite our internal control measures, we may still be subject tofinancial reporting errors or even fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurancethat the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and thebenefit of controls must be relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two ormore persons or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about thelikelihood of future events, and any design may fail to achieve its stated goals, under some or all future conditions. Over time, a control may be inadequatebecause of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost effectivecontrol system, misstatements due to error or fraud may occur and not be detected. (See Item 15. Controls and Procedures.)Risks Related to Our Israeli Operations Conditions in Israel may affect our operations. Political, economic and military conditions in Israel directly affect our operations. Since theestablishment of the State of Israel, a number of armed conflicts have taken place between Israel and its Arab neighbors. An ongoing state of hostility, varyingin degree and intensity has led to security and economic problems for Israel. For a number of years there have been continuing hostilities between Israel and thePalestinians including with the Islamic movement Hamas in the Gaza Strip, which have adversely affected the peace process and at times have negativelyinfluenced Israel’s economy as well as its relationship with several other countries. Israel also faces threats from Hezbollah militants in Lebanon, from thegovernment of Iran and other potential threats from neighboring countries, some of whom have recently undergone or are undergoing significant politicalchanges, such as Egypt and Syria. In recent years there has also been a change in the relations between Israel and Turkey. These political, economic andmilitary conditions in Israel could have a material adverse effect on our business, financial condition, results of operations and future growth. Political relations could limit our ability to sell or buy internationally. We could be adversely affected by the interruption or reduction of tradebetween Israel and its trading partners. Some countries, companies and organizations continue to participate in a boycott of Israeli firms and others doingbusiness with Israel or with Israeli companies. Foreign government defense export policies towards Israel could also make it more difficult for us to obtain theexport authorizations necessary for our activities. Also, over the past several years there have been calls in Europe and elsewhere to reduce trade with Israel. Inaddition, the Israeli defense budget may be adversely affected by reductions in U.S. foreign military assistance due to the sequestration process in theU.S. See above “General Risks Related to Our Business and Market.” There can be no assurance that restrictive laws, policies or practices directed towardsIsrael or Israeli businesses will not have an adverse impact on our business. Reduction in Israeli government spending or changes in priorities for defense products may adversely affect our earnings. The Israeligovernment may reduce its expenditures for defense items or change its defense priorities in the coming years. In addition, the Israeli defense budget may beadversely affected by reductions in U.S. foreign military assistance due to the sequestration process in the U.S. See above "General Risks Related to OurBusiness and Market." There is no assurance that our programs will not be affected in the future if there is a reduction in Israeli government defense spendingfor our programs or a change in priorities to products other than ours. Israel’s economy may become unstable. Over the years, Israel’s economy has been subject to periods of inflation, low foreign exchange reserves,fluctuations in world commodity prices, military conflicts and civil unrest. For these and other reasons, the government of Israel has intervened in theeconomy employing fiscal and monetary policies, import duties, foreign currency restrictions, controls of wages, prices and foreign currency exchange ratesand regulations regarding the lending limits of Israeli banks to companies considered to be in an affiliated group. The Israeli government has periodicallychanged its policies in these areas. Reoccurrence of previous destabilizing factors could make it more difficult for us to operate our business as we have in thepast and could adversely affect our business. 11 Changes in the U.S. dollar – NIS exchange rate. The exchange rate between the NIS and the U.S. dollar has fluctuated in recent years. Forexample, at the end of 2010, 2011 and 2012, the NIS/U.S. dollar exchange rate was 3.549, 3.821 and 3.733, respectively. This represented a devaluation ofthe NIS against the U.S. dollar of approximately 8% in 2011 and a strengthening of the NIS against the U.S. dollar of approximately 2% in 2012. During2012, the NIS/U.S. dollar exchange rate fluctuated. For example, at the end of each of the fiscal quarters of 2012, the exchange rate of the NIS against the U.S.dollar was 3.715, 3.923, 3.912 and 3.733, respectively. During the first two months of 2013, the NIS strengthened against the U.S. dollar by approximately0.7%, and the NIS/U.S. dollar exchange rate as of February 28, 2013 was 3.708. While most of our sales and expenses are denominated in U.S. dollars, asignificant portion of our expenses is paid in NIS, and most of our sales to customers in Israel are in NIS. Our primary expenses paid in NIS that are notlinked to the dollar are employee expenses in Israel and lease payments on some of our Israeli facilities. As a result, if we do not hedge our position in NIS, achange in the value of the NIS compared to the dollar, which over the past year has undergone numerous fluctuations, could affect our research anddevelopment expenses, manufacturing labor costs and general and administrative expenses. (See Item 5. Operating and Financial Review and Prospects –Impact of Inflation and Exchange Rates – Inflation and Currency Exchange Rates.)Israeli government programs and tax benefits may be terminated or reduced in the future. Elbit Systems and some of our Israeli subsidiariesparticipate in programs of the Israeli Office of the Chief Scientist (OCS) and the Israel Investment Center, for which we receive tax and other benefits as well asfunding for the development of technologies and products. The benefits available under these programs depend on meeting specified conditions. (See Item 4.Information on the Company – Conditions in Israel – Chief Scientist (OCS) and Investment Center Funding.) If we fail to comply with these conditions, wemay be required to pay additional taxes and penalties, make refunds and may be denied future benefits. From time to time, the government of Israel hasdiscussed reducing or eliminating the benefits available under these programs, and therefore these benefits may not be available in the future at their currentlevels or at all. Israeli law regulates acquisition of a controlling interest in Israeli defense industries. Israeli legislation regarding the domestic defenseindustry requires Israeli government approval of an acquisition of a 25% or more equity interest (or a smaller percentage that constitutes a “controllinginterest”) in companies such as Elbit Systems. Moreover, the Israeli government may issue specific orders to a domestic defense industry under thislegislation that could impose additional conditions relating to transfers of ownership. This could limit the ability of a potential purchaser to acquire asignificant interest in our shares. (See Item 4. Information on the Company – Governmental Regulation – Approval of Israeli Defense Acquisitions.) Israel has stringent export control regulations. In recent years the Israeli government adopted laws and regulations regarding enhanced defenseexport controls and the export of “dual use” items (items that are typically sold in the commercial market but that may also be used in the defense market). Ifgovernment approvals required under these laws and regulations are not obtained, including revocation of or failure to renew authorizations previouslygranted, our ability to export our products from Israel could be negatively impacted, thus causing a reduction in our revenues and a potential material negativeimpact on our financial results. (See Item 4. Information on the Company – Governmental Regulation – Israeli Export Regulations.) We may rely on certain Israel “home country” corporate governance practices which may not afford stockholders the same protectionafforded to shareholders of U.S. companies. As a foreign private issuer for purposes of U.S. securities laws, Nasdaq rules allow us to follow certainIsraeli “home country” corporate governance practices in lieu of the corresponding Nasdaq corporate governance rules. Such home country practices may notafford shareholders the same level of rights or protections in certain matters as those of shareholders of U.S. domestic companies. In 2011, we notifiedNasdaq of our intent to follow Israeli home country practice in connection with an amendment to our 2007 Stock Option Plan, which was approved by ourboard of directors as permitted by Israeli law without approval by our shareholders. To the extent we are entitled to elect to follow Israeli law and practice ratherthan corresponding U.S. law or practice, such as with regard to the requirement for shareholder approval of changes to stock option plans, our shareholdersmay not be afforded the same level of rights they would have under U.S. practice. (See Item 16.G. Corporate Governance.) 12 Many of our employees and some of our officers are obligated to perform military reserve duty in Israel. Generally, Israeli adult malecitizens and permanent residents are obligated to perform annual military reserve duty up to a specified age. They also may be called to active duty at any timeunder emergency circumstances, which could have a disruptive impact on our workforce. It may be difficult to enforce a non-Israeli judgment against us, our officers and directors. We are incorporated in Israel. Our executiveofficers and directors are not residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside theUnited States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce against us or any of those persons in an Israeli court aU.S. court judgment based on the civil liability provisions of the U.S. federal securities laws. It may also be difficult to effect service of process on thesepersons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to enforce civil liabilities under U.S. federalsecurities laws in original actions filed in Israel. (See below – Item 4. Information on the Company – Conditions in Israel – Enforcement of Judgments.) 13 Item 4. Information on the Company. Business Overview Principal Activities We are an international defense electronics company engaged in a wide range of programs throughout the world. The Company, operates in the areasof aerospace, land and naval systems, command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), unmannedaircraft systems, advanced electro-optics, electro-optic space systems, electronic warfare (EW) suites, airborne warning systems, electronic intelligencesystems, data links, artillery systems, military communications systems and radios. We also focus on the upgrading of existing military platforms anddeveloping new technologies for defense, homeland security and commercial aviation applications. In addition, we provide a range of support services. Our major activities include: •military aircraft and helicopter systems; •helmet mounted systems; •commercial aviation systems and aerostructures; •unmanned aircraft systems; •land vehicle systems; •command, control, communications, computer and intelligence (C4I) and cyber systems; •electro-optic and countermeasures systems; •homeland security systems; •EW and signal intelligence systems; and •various commercial activities. Many of these major activities have a number of common and related elements. Therefore, we often jointly conduct marketing, research anddevelopment, manufacturing, performance of programs, sales and after sales support among these areas of activities. Principal Market Environment We operate primarily in the defense and homeland security arenas. The nature of military actions in recent years, including low intensity conflictsand ongoing terrorist activities, as well as budgetary pressures to focus on leaner but more cutting-edge defense forces, has caused a shift in the defensepriorities for many of our major customers. As a result we believe there is a greater demand in the areas of C4I, as well as intelligence, surveillance andreconnaissance (ISR), including network centric information systems, intelligence gathering systems, border and perimeter security systems, airbornesystems, unmanned aircraft systems (UAS), unmanned surface vessels (USVs), remote controlled systems, cyber-based systems, space and satellite baseddefense capabilities and homeland security applications. There is also a growing demand for cost effective logistic support and training and simulationservices. We believe our synergistic “one-company” approach of finding solutions that combine elements of our various activities positions us to meet evolvingcustomer requirements in several of these areas. We tailor and adapt our technologies, integration skills, market knowledge and battle-proven systems to each customer’s individual requirements inboth existing and new platforms. By upgrading existing platforms with advanced electronic and electro-optic technologies, we provide customers with cost-effective solutions, and our customers are able to improve their technological and operational capabilities within limited defense budgets. We are experienced inproviding “systems of systems”, which enables us to provide overall solutions in a range of areas to meet our customers’ comprehensive defense and securityneeds. 14 The worldwide defense market has been characterized in recent years by significant consolidation and merger and acquisition activities. Part of ourgrowth strategy includes our continued activity in mergers and acquisitions both in Israel and internationally. We operate as a multi-domestic, “global – local(GloCal)” organization in order to meet the needs of our customers around the world. The Company’s structure enables us to benefit from the synergy of ouroverall capabilities while at the same time focus on local requirements. Company History We have many decades of operational experience. Our predecessor Elbit Ltd. was incorporated in Israel in 1966 as Elbit Computers Ltd. We wereformed in 1996, as part of the Elbit Ltd. corporate demerger, under which Elbit Ltd.’s defense related assets and business were spun-off to us. From itsfounding in 1966 until the demerger, Elbit Ltd. was involved in a wide range of defense-related airborne, land, naval and C4I programs throughout the world.We continue these activities today, together with the activities of companies we have acquired and activities relating to newly developed areas, as the largestnon-government-owned defense company in Israel. Several of our subsidiaries in Israel and around the world have decades of experience in their respectivemarkets. Our companies have collectively been awarded the Israel Defense Prize ten times, recognizing extraordinary contributions to defense technologicalinnovations. Elbit Systems Ltd. is a corporation domiciled and incorporated in Israel where we operate in accordance with the provisions of the Israeli CompaniesLaw – 1999 (the Companies Law). Trading Symbols and Address Our shares are traded on the Nasdaq National Market (Nasdaq), as part of the Nasdaq Global Select Market, under the symbol “ESLT” and on theTel-Aviv Stock Exchange (TASE). Our main offices are in the Advanced Technology Center, Haifa 31053, Israel, and our main telephone number at that address is (972-4) 8315315.Our website home page is www.elbitsystems.com. We make our website content available for informational purposes only. It should not be relied upon forinvestment purposes, nor is it incorporated by reference in this annual report on Form 20-F. Our principal offices in the United States are the headquarters of Elbit Systems of America, LLC at 4700 Marine Creek Parkway, Fort Worth, Texas76179-6969, and the main telephone number at that address is 817-234-6799. Revenues The table below shows our consolidated revenues by major areas of operations for the years ended December 31, 2010, 2011 and 2012: 2010 2011 2012 Airborne systems: $791 $970 $1,054 Land systems: 363 405 375 C4ISR systems: 1,019 996 1,018 Electro-optic systems: 369 300 324 Other (mainly non-defense engineering and productionservices): 128 146 118 Total: $2,670 $2,817 $2,889 The following table provides our consolidated revenues by geographic region, expressed as a percentage of total revenues for the years endedDecember 31, 2010, 2011 and 2012: 15 2010 2011 2012 Israel 18% 25% 24% North America (U.S. and Canada) 31% 31% 32% Europe 20% 20% 20% Latin America 9% 6% 6% Asia-Pacific 20% 16% 17% Others 2% 2% 1% Subsidiary Organizational Structure Our beneficial ownership interest in our primary subsidiaries and investees is set forth below. Our equity and voting interests in these entities are thesame as our beneficial ownership interests. The following is a general description of our principal subsidiaries. (*) As of February 28, 2013, Tor was owned 100% by the Company, but we are in process of transferring 50% of the ownership interest to IsraelAerospace Industries Ltd. 16 U.S. Subsidiaries Elbit Systems of America We conduct most of our U.S. business through Elbit Systems of America, LLC (Elbit Systems of America), a Delaware limited liability company,and its major wholly-owned subsidiaries including: EFW Inc. (EFW), Kollsman, Inc. (Kollsman), KMC Systems, Inc. (KMC), International Enterprises,Inc. (IEI), Innovative Concepts, Inc. (ICI), M7 Aerospace LLC (M7) and Real-Time Laboratories, LLC (RTL). We hold our 100% interest in Elbit Systems ofAmerica through intermediate Delaware holding companies. Elbit Systems of America provides products and system solutions focusing on U.S. military,commercial aviation, homeland security and medical instrumentation customers. Elbit Systems of America is organized along a number of main businesslines operating out of several primary operational facilities. The major business lines include Airborne Solutions, Land and C4I Solutions, Sensor and Electro-Optics Solutions, Unmanned Aircraft Systems, Services and Support Solutions, Commercial Aviation – Kollsman and Medical Instruments – KMCSystems. Elbit Systems of America’s main operation centers include its facilities in Fort Worth, Texas; San Antonio, Texas; Merrimack, NewHampshire; Boca Raton, Florida; Talladega, Alabama; and McLean, Virginia. Elbit Systems of America acts as a contractor for U.S. Foreign Military Financing (FMF) and Foreign Military Sales (FMS) programs. (See below“Governmental Regulations – Foreign Military Financing.”) Each of Elbit Systems of America’s major operational facilities has engineering and manufacturingcapabilities. Elbit Systems of America’s facilities in Alabama and Texas have significant maintenance and repair capabilities. (See below “Manufacturing” and“Customer Satisfaction and Quality Assurance.”) Elbit Systems of America, Elbit Systems and intermediate Delaware holding company subsidiaries are parties to a Special Security Agreement (SSA)with the DoD. The SSA provides the framework for controls and procedures to protect classified information and export controlled data. The SSA allows theElbit Systems of America companies to participate in classified U.S. government programs even though, due to their ownership by Elbit Systems, the ElbitSystems of America companies are considered under the control of a non-U.S. interest. Under the SSA, a Government Security Committee of Elbit Systems ofAmerica’s board of directors was permanently established to supervise and monitor compliance with Elbit Systems of America’s export control and nationalsecurity requirements. The SSA also requires Elbit Systems of America’s board of directors to include outside directors who have no other affiliation with theCompany. Elbit Systems of America’s board of directors also contains officers of Elbit Systems of America and up to two inside directors, who have otheraffiliations with the Company. The SSA requires outside directors and officers of the Elbit Systems of America companies who are directors, and certain othersenior officers, to be U.S. resident citizens and eligible for DoD personal security clearances. VSI/RCEVS. Elbit Systems of America and Rockwell Collins Inc. (Rockwell Collins) each own 50% of Vision Systems International LLC (VSI)and Rockwell Collins ESA Vision Systems LLC (RCVES), joint venture companies with operations in Fort Worth, Texas and Cedar Rapids, Iowa. VSI wasestablished in 1996, and RCVES was established in November 2012. VSI and RCEVS act on a world-wide basis on behalf of Rockwell Collins and ElbitSystems/ Elbit Systems of America in the area of helmet mounted display systems for fixed-wing military and paramilitary aircraft. Elbit Systems, ElbitSystems of America and Rockwell Collins each have provided VSI and RCEVS with licenses to use their helmet mounted display technologies. In general,VSI and RCEVS subcontract product development and production to its owners on an approximately equal basis. Each owner has equal representation inVSI and RCEVES management. Israeli Subsidiaries Elop. Based in Rehovot, Israel, our wholly-owned subsidiary Elbit Systems Electro-Optics Elop Ltd. (Elop) (formerly Elop Electro-Optics IndustriesLtd.) designs, engineers, manufactures and supports a wide range of electro-optic systems and products mainly for defense, space and homeland securityapplications. With more than 75 years of operational experience, Elop has a broad customer base, both in Israel and internationally. ESLC. Elbit Systems Land and C4I Ltd. (ESLC) is a wholly-owned Israeli subsidiary, with headquarters in Netanya, Israel. ESLC is engaged inthe worldwide market for land-based systems and products for military vehicles, artillery and mortar systems, C4I systems and communications systemsand equipment. 17 Elisra. Elbit Systems EW and SIGINT – Elisra Ltd. (Elisra) (formerly Elisra Electronic Systems Ltd.) is a wholly-owned Israeli subsidiarylocated in Bnei Brak and Holon, Israel. Elisra and its subsidiaries provide a wide range of EW systems, signal intelligence (SIGINT) systems and C4ISRtechnological solutions for the worldwide market. Cyclone. Elbit Systems – Cyclone Ltd. (Cyclone) is a wholly-owned Israeli subsidiary of Elbit Systems. Located near Karmiel, Israel, that designsand produces composite and metal aerostructure parts for civil and military aircraft and performs maintenance, integration and installation engineering foraircraft and helicopters. Cyclone also manufactures weapons pylons and external fuel tanks for fighter aircraft. Both directly and through our wholly-ownedsubsidiary Snunit Aviation Services Ltd., Cyclone supplies maintenance and operation services for fixed-wing aircraft and helicopter fleets. ELSEC. Elbit Security Systems Ltd. (ELSEC) is a wholly-owned Israeli subsidiary of Elbit Systems. Located in Sderot, Israel, ELSEC operatesmainly in the fields of homeland security, electro-optic surveillance systems, E-fences, border and coastal integrated security systems, airport securitysystems, other transportation security systems and strategic perimeter sites security. ELSEC also manufactures a range of electro-optic products. Kinetics. Kinetics Ltd. (Kinetics), based in Airport City, Israel, is a wholly-owned Israeli subsidiary. Kinetics develops technologies, systems andproducts in the field of advanced life support and environmental controls, such as climate control systems and nuclear, biological and chemical protectionsystems for combat vehicles. Also, Kinetics develops and manufactures other products for land vehicles, such as hydraulic, fuel, braking and suspensionsystems, an auxiliary power unit for land vehicle power pack systems and hydraulic systems for aircraft. ITL Optronics. ITL Optronics Ltd. (ITL Optronics) is a wholly-owned Israeli subsidiary located in Rehovot, Israel, engaged in the area of soldier-oriented optronic systems. SCD. Semi-Conductor Devices (SCD) is an Israeli registered partnership equally owned by Elbit Systems and Rafael Advanced Defense SystemsLtd. (Rafael). Located in Leshem, Israel, SCD develops and manufactures cooled and uncooled IR detectors for thermal imaging equipment and laser diodesused in defense and commercial applications. Opgal. Opgal – Optronics Industries Ltd. (Opgal) is an Israeli company owned 50.1% by Elbit Systems and 49.9% by Rafael. Located in Karmiel,Israel, Opgal provides commercial applications of thermal imaging and electro-optic technologies, including an enhanced vision sensor designed to assist inlanding aircraft under limited visibility and harsh weather conditions and thermal imaging cameras and systems for surveillance, industrial, medical and firefighting applications. Opgal also produces IR subassemblies for forward-looking infrared (FLIR) sensors for defense applications. Tor. Tor - Advanced Flight Training Limited Partnership (Tor) is an Israeli limited partnership based in Tel-Aviv, Israel, established to perform theIsraeli Air Force’s future trainer aircraft program. See below “Current Business Operations – Military Aircraft and Helicopter Systems – Programs.” TOR iscurrently wholly-owned by Elbit Systems, but is in the process of having 50% of its ownership interest transferred to Israel Aerospace Industries Ltd. (IAI)pursuant to a limited partnership agreement. Subsidiaries in Other Countries Ferranti. Ferranti Technologies (Group) Limited (Ferranti), is a wholly-owned U.K. subsidiary. Located in Oldham, U.K, Ferranti’s principalactivities include engineering, manufacturing and logistic support to aerospace and defense industries in the U.K. and internationally. U-TacS. UAV Tactical Systems Ltd. (U-TacS) is a U.K. subsidiary located in Leicester, U.K., held 51% by Elbit Systems (through a wholly-owned U.K. holding company – Elbit Systems UK Limited), with the remaining 49% owned by Thales UK Limited, a subsidiary of Thales S.A. U-TacS’main business is to perform a major part of the Watchkeeper Program and other related programs. See below “Current Business Operations – UAS–Programs.” European Subsidiary (Belgium). The European Subsidiary (Belgium) is a wholly-owned Belgium subsidiary located near Ghent, Belgium. Itdevelops, manufactures and supports electro-optical products, mainly for the defense and space markets. 18 European Subsidiary (Austria). The European Subsidiary (Austria) is a wholly-owned Austrian subsidiary located near Vienna, Austria. It isengaged in programs relating to airborne, land and C4I systems. Elbit Systeme. Elbit Systems S.A. (Elbit Systeme) is a wholly-owned Romanian subsidiary located in Bucharest, Romania. Elbit Systeme serves asthe base for our various defense and commercial operations and holdings in Romania. Telefunken RACOMS. Telefunken Radio Communications Systems GmbH (Telefunken RACOMS) is a wholly-owned German subsidiary locatedin Ulm, Germany. Telefunken RACOMS is active in both military and civilian communications projects in Germany and internationally. AEL. AEL Sistemas S.A. (AEL) is a 75%-owned Brazilian subsidiary, with the 25% balance of its shares owned by Embraer Defesa e SegurancaParticipacoes S.A. (Embraer Defesa). Located in Porto Alegre, Brazil, AEL performs engineering, manufacturing and logistic support activities for defense andcommercial applications. Ares. Ares Aeroespacial e Defesa S.A. (Ares) is a wholly-owned Brazilian subsidiary located near Rio de Janeiro and is engaged in the area of defenseelectronic systems for the Brazilian military and other customers. Harpia. Harpia Sistemas S.A. (Harpia) is a Brazilian subsidiary, 49% owned by AEL and 51% owned by Embraer Defesa. Based in Brasilia,Brazil, Harpia is engaged in the areas of UAS, avionics and simulation systems. In January 2013, an agreement was signed under which AEL will sell 9% ofthe ownership interest in Harpia to Avibras Divisao Aerea e Naval S.A. (See below “Recent Acquisitions, Mergers and Divestitures – Mergers.”) Elbit Systems of Australia. Elbit Systems of Australia Pty Ltd. (Elbit Systems of Australia) is a wholly-owned subsidiary. Located in Melbourne,Australia. it is engaged in defense electronic systems for the Australian armed forces and other customers. HALBIT. HALBIT Avionics Private Limited (HALBIT) is an Indian company owned 26% by Elbit Systems, with the largest shareholder beingHindustan Aerospace Limited. Located in Bangalore, India, HALBIT is engaged in avionics programs for the Indian defense market. Others. We have several other relatively small subsidiaries and investee companies in Israel and other countries that conduct marketing,manufacturing, logistic support and other activities principally in the subsidiary’s local market. Recent Acquisitions, Mergers and Divestitures During 2012 and the beginning of 2013, we continued to focus our capabilities through the enhancement of joint ventures in Israel, the U.S. andBrazil as well as the initiation of operations in technology-based investment companies in Israel. We also divested certain non-core assets, and are in theprocess of divesting other non-core assets, in Israel and abroad. Enhancement of Joint Ventures and Technology-based Investment Companies During 2012, we began operational activities in Tor (see above “Israeli Subsidiaries”). Tor was established to perform the new aircraft trainerprogram for the Israeli Air Force, and in September 2012, it received its initial contract under that program. (See below “Military Aircraft and HelicopterSystems – Programs”.) In November 2012, we established Rockwell Collins - ESA Vision Systems LLC, an additional joint venture in the U.S. with Rockwell Collins Inc.,to pursue helmet mounted systems for fixed-wind military aircraft. (See above “U.S. Subsidiaries – VSI/RCEVS”.) In January 2013, we enhanced our Brazilian joint venture Harpia Sistemas S.A. (Harpia), by entering into agreements with Embraer Defesa andAvibras Divisão Aerea e Naval S.A. (Avibras), pursuant to which Avibras will acquire a 9% interest in Harpia from AEL. Avibras will provide Harpia theright to use Avibras’ UAS related assets. Following completion of this transaction, Harpia will be owned 51% by Embraer Defesa, 40% by AEL and 9% byAvibras. During 2012, we launched activities in Incubit Technology Ventures Ltd., a wholly-owned Israeli subsidiary located in the High Technology Centerin Beersheva, Israel, that will pursue investments in high technology startup companies. 19 Divestitures. During 2012 and the beginning of 2013, we divested and signed agreements to divest certain non-core assets. These divestmenttransactions included an agreement to sell our approximately 59% ownership interest in Fraser-Volpe, LLC, a U.S. company engaged in certain optic-basedproducts for military and commercial applications. We also sold our approximately 19% interest in Chip PC Ltd., an Israeli company involved in “thinclient” solutions related to server-based computer technologies. We sold our ownership in a brand name relating to Soltam for houseware product uses. Wealso sold the assets relating to AEL’s commercial fleet navigation business in Brazil. The consideration received from the sales of these ownership interests andassets was not material. Current Business Operations We generally operate and manage the major activities described below in an interrelated manner and on a project-oriented basis. This means thatcontracts are frequently performed by more than one operating subsidiary or division within the Company, on the basis of the multiple skills and availableresources that may be needed or appropriate for the contract. Thus, the involvement of an operating subsidiary or division in the performance of a contract isnot a function of management’s review for purposes of allocation of resources within the Company. Military Aircraft and Helicopter Systems Overview We supply a comprehensive portfolio of advanced airborne electronic and electro-optic systems and products to leading military aircraftmanufacturers and end users designed to enhance operational capabilities and extend aircraft life cycles. Our military airborne systems are compatible withemerging net-centric concepts supporting enhanced situational awareness, faster decision making and optimal response. Our airborne C4ISR solutions providepilots with data, communications and real-time situation pictures, as well as the ability to share mission-critical data with ground and naval platforms, thusenhancing joint, effective operations between air to air, air to ground, manned and unmanned platforms via common avionics and C4I solutions. Ourmultidisciplinary approach extends to designing training and simulation systems that accommodate evolving missions and combine air and ground systemsin a single architecture. Our airborne systems provide a range of solutions from a single sensor to an entire cockpit avionics suite. We integrate our systems on fixed androtary-wing, eastern and western, new and mature aircraft. Under our aircraft and helicopter upgrade programs, we integrate advanced weapon,communication, navigation, electro-optic and EW systems, providing advanced net-centric capabilities for fast, precise missions. We support life cycleextension of our customers’ fleets and supply logistic support services for airborne platforms, including repair and maintenance centers, training and spareparts. Systems Portfolio Our systems and products for military fixed-wing aircraft and helicopters include a range of advanced avionics systems, electro-optic and aerialreconnaissance systems, precision guidance systems, fighter aircraft structural components, data links, training systems and simulators. This is in additionto our helmet mounted systems and EW airborne systems described below. Avionics Systems. Our avionics systems include integrated flight deck systems (glass cockpits), mission and aircraft management computers,weapon delivery and navigation systems, large display systems, airborne C4I systems, digital map systems, enhanced vision systems, stores managementsystems and digital recording devices. Electro-Optic Systems. Our airborne electro-optic systems include direct infrared countermeasures (DIRCM) systems, head-up displays, laserrange-finders and laser designators, FLIR systems, payloads such as the CoMPASS™ family, countermeasures systems and aerial reconnaissance systemssuch as the CONDOR™ long-range oblique photography system. Precision Guidance Systems. We supply a range of precision guidance systems for airborne applications including the Whizzard family (LIZARDand GAL) of laser-based precision guidance kits, semi-active laser (SAL) seekers, the STAR (smart tactical advance rocket) and the GATR (guided advancedtactical rocket). Fighter Aircraft and Helicopter Structural Components. We supply external fuel tanks, pylons and structural parts for fighter aircraft such as theF-15, F-16 and F-18, and we supply structural parts for helicopters such as the UH-60 and CH-53. 20 Trainers and Simulators. Our training and simulation products and solutions for all military branches and homeland security include a variety ofsimulators, complete training centers for tactical, virtual, appended and embedded training, full mission trainers, partial task trainers and computer-basedtrainers. We also supply air defense simulators, naval embedded and tactical trainers and ACMI (air combat maneuvering instrumentation) pods. Programs Our programs for military fixed-wing aircraft and helicopters encompass full scale aircraft upgrades, system upgrades, system and product supply,training, simulators and logistic support. The customers and end users for our military fixed-wing aircraft and helicopters programs include the Israeli AirForce (IAF), the U.S. Air Force (USAF), the U.S. Navy (USN), the U.S. Army, the U.S. Marine Corps (USMC), the U.S. Coast Guard, air forces and otherbranches of the armed forces of the North American Treaty Organization (NATO) member governments and/or European Union (EU) member governments,Brazil, Korea as well as of other governments around the world. Our customers also include major fixed-wing aircraft and helicopter manufacturers such asLockheed Martin Inc. (Lockheed Martin), the Boeing Company (Boeing), Raytheon Company (Raytheon), BAE Systems Inc. (BAE Systems), Embraer S.A.(Embraer), European Aerospace Defence and Space Company N.V. (EADS), EADS – CASA, Alenia Aermacchi S.p.A. (Aermacchi), Dassault AviationS.A. (Dassault), Eurocopter S.A. (Eurocopter), Hindustan Aeronautics Limited (HAL), Bell Helicopters Textron Inc. (Bell Helicopters), Sikorsky AircraftCompany (Sikorsky) and Agusta S.p.A. (Agusta), among others. We perform upgrade programs for numerous fixed-wing fighter, trainer and transport aircraft, as well as a wide range of helicopter platforms. In2012, our contract awards for aircraft upgrade programs included contracts for the upgrade of C-130H transport aircraft for the IAF and for the Republic ofKorea’s Air Force. We also supply on a stand-alone basis advanced avionics systems such as mission computers, displays, moving maps, digital videorecorders, tactical data links and operational flight protocol software for many fixed-wing and rotary-wing aircraft. This includes, among others, numeroussystems for Lockheed Martin’s F-16 aircraft. Other contracts awarded in 2012 include a contract for the redesign and upgrade of the Apache Longbowmission processor, as well as contracts for battle management systems and avionics for IAF helicopters. We were selected by Boeing to develop the AdvancedCockpit system consisting of a Large Area Display and a Low Profile Heads-Up Display for future F-15 and F/A-18 fighter aircraft. During 2012, Cyclonewas awarded orders by Boeing for the supply of several structural components for military aircraft. We also supply a range of airborne electro-optic systems for fixed-wing fighter and trainer aircraft, including head-up display systems for aircraftsuch as the C-17, F-16 Block 50, F-15, F/A-18 and the KC-390, as well as airborne reconnaissance systems and combined airborne imagery intelligence(IMINT) systems for fighter aircraft. In addition, we supply various types of precision guidance systems to several air forces and missile manufacturers. Our airborne, training and simulators programs include aircraft flight training solutions and operation of training aircraft for both fixed-wing trainersand helicopters under private financing initiative (PFI) and “power by the hour” (PBH) arrangements. In 2012, we were awarded a contract to integrate F-15training capabilities into the IAF’s Mission Training Center. We also supply several customers with EHUD ACMI systems for real-time autonomous air-to-airand air-to-ground combat training and debriefing. We supply simulation systems including the IAF’s F-16I aircrew flight and system trainer and a missiontraining center as well as a B-200 simulator for the IAF. We will also supply the training system for the IAF’s future trainer aircraft program. We are supplyingBoeing with the Virtual Mission Training system for the USN’s T-45 Goshhawk aircraft and numerous other fixed and rotary wing aircraft. We also supplyIsrael Defense Forces (IDF) ground forces with a tactical battle group trainer as well as tank appended trainers, and the IDF’s Home Front Command with acrises management simulator. Our naval training simulators are used by the Israeli Navy and several other navies world-wide. Our logistic support services programs for fixed-wing aircraft and helicopters include repair and maintenance services and supply of spare parts fora range of air forces. Part of these services are performed as contractor logistic support (CLS) projects and performance based logistics (PBL). In 2012, Tor,our joint venture with IAI, was awarded a contract by the IMOD in the amount of approximately $603 million, to perform the IAF’s future trainer aircraftprogram. Our share of this contract is in the amount of approximately $420 million, of which approximately $110 million is to be performed in theestablishment phase of the program over the next three years, and approximately $310 million during the operational phase of the program over a 20-yearperiod. The program calls for establishment of an enhanced logistic support and maintenance structure for the new trainer aircraft as well as an advancedground array. We operate and maintain the IAF’s Effroni trainer aircraft and the Israeli Police Force’s helicopter fleet. We also perform maintenance supportactivities for numerous products such as jammers, radar, 20 mm cannon and others. We provide on a turn-key basis aircraft procurement, operation andmaintenance services to the IMOD for airborne fire fighting services. 21 Through AEL, we provide CLS services for several aircraft of the Brazilian Air Force. Through ESA’s subsidiary, M7, we provide aircraft levelCLS to the U.S. Army, USAF and USN for a range of aircraft on a worldwide basis, including a recent award by BAE Systems to M7 to provide logisticssupport for USN T-34, T-44 and T-6 aircraft.Helmet Mounted Systems Overview. We design and supply a range of advanced helmet mounted systems (HMS), including helmet mounted displays (HMDs) for fixed-wingaircraft and rotary aircraft pilots. These include tracking and display systems, both for day and night flying. Our systems measure the pilot’s line of sight,slave weapons and sensors to the target, identify target location and bring displays to the pilot’s eye level. We supply our HMS as part of our upgradeprograms as well as on a stand-alone basis. Through our jointly-owned companies with Rockwell Collins, (see above “Principal Subsidiaries –VSI/RCEVS”), we are a leader in HMS for fighter aircraft. Systems Portfolio Fixed-Wing HMS. Examples of our fixed-wing HMS currently in operational use include the Display and Sight Helmet (DASH) family, the JointHelmet Mounted Cueing System (JHMCS), the Night Vision Cueing Display (NVCD) system and the HMS for the F-35 Joint Strike Fighter (JSF). Thesesystems enable slaving of various aircraft systems to the pilot’s line of sight, target location and identification and display of information. We have alsodeveloped TARGO®, a HMA (helmet mounted avionics) solution for fixed-wing trainer aircraft, and we supply the FACT® (fast action cockpit mapping tool)for electro-magnetic mapping of cockpits. Helicopter HMS. For helicopters, our operational HMS include the Aviator Night Vision Imaging System Head-Up Display (ANVIS/HUD®) family,the Integrated Helmet and Display Sight System (IHADSS), Jedeye® and the Panoramic Night Vision Goggle (PNVG) based on our QuadEye® system. Wealso supply low visibility landing (LVL) solutions. These systems facilitate safety for night flights, weapon slaving, increased operational capabilities andperformance of “head-out” missions. Programs We are engaged in a range of programs for HMS for fighter aircraft and helicopters. Customers and end users for our HMS include the IAF, USAF,U.S. Army, USN, USMC, U.S. Coast Guard, air forces of EU and NATO member governments and other governments’ air forces. Our customers alsoinclude aircraft and helicopter manufacturers such as Boeing, Lockheed Martin, Bell Helicopters, Sikorsky, Agusta and Aermacchi. In the fighter aircraft area we supply various versions of our DASH systems for the IAF’s F-15I and F-16 (C, D and I) aircraft as well as for otherair forces around the world. We supply the JHMCS through VSI for Boeing’s F-15 and F/A-18 aircraft and for Lockheed Martin's F-16 aircraft. Thousandsof JHMCS production systems have been delivered and are in operational use by the USAF, the USN, the U.S. Air National Guard (ANG) and the air forcesof more than 25 other countries including orders for additional lots received during 2012. Through VSI and RCEVS we are developing and supplying theHMS to Lockheed Martin for the U.S. F-35 Joint Strike Fighter (JSF) Program. VSI is also supplying the NVCD to the USN. The NVCD includes thePNVG, based on our QuadEye® system. In the trainer aircraft area we are supplying TARGO® for the M-346 Advanced Trainer. In the helicopter area we havesupplied thousands of operational ANVIS/HUD® systems for numerous customers. We also supply IHADSS to various users of Apache and Agusta 129helicopters, as well as the Helmet Display and Tracking System for the weapon system of the USMC AH-1W helicopters, and the color helmet mountedsystem for the CV-22. Commercial Aviation Systems and Aerostructures Overview. Leveraging our core competencies in airborne defense systems, as well as our legacy strengths in commercial aviation, we provide a rangeof systems and products for the commercial and business aviation market. These activities mainly include vision-based cockpit concept systems, otheravionics systems, electrical systems, pressurization systems and aerostructure products. Our commercial avionics systems are employed on numerous fixed-wing aircraft, as well as on commercial helicopters. Our aerostructure products are installed on a number of commercial aircraft. 22 Systems Portfolio Vision-based Cockpit Systems. Our commercial aviation product line includes the Vision Based Cockpit concept, incorporating our Clear Vision™multi-spectral enhanced vision system (EVS), our EVS II and EVS-XP systems and our General Aviation – Vision System (GAViS®) ,which improve anaircraft’s capability to safely land in bad weather and reduced visibility conditions. We also supply the Landing® system that enhances landing safely under avariety of conditions. Our commercial aviation products provide critical information to pilots including a family of commercial advanced head-up displaysand unique synthetic vision and image-based applications. Avionics, Electronic and Legacy Systems. We supply cabin pressurization control systems, air data test equipment, air data processor/sensorsystems and flight instruments for the general aviation market. Our legacy products for commercial aircraft include altimeters, pressure meters, cockpitindicators and avionics test equipment. Commercial Helicopter Systems. We produce full avionic suites, including displays, moving maps, electronic flight instrumentation systems andflight management systems for commercial helicopters. Aerostructure Products. Our aerostructure parts include pressurized and non-pressurized doors, composite beams and composite landing geardoors, thrust reverse blocker doors, fan cowl doors and winglets for commercial aircraft manufactured by Boeing, Airbus, King Air and others, as well asaerostructures for UAS. Hydraulic Components. We supply hydraulic and pneumatic components for aerial refueling, jet engines and missiles and rockets. Programs Customers for our commercial and business aviation systems and products include General Dynamics – Gulfstream Aerospace Corporation(Gulfstream), Boeing, Airbus S.A.S. (Airbus), Hawker Beechcraft Corporation, Eurocopter, Dassault, Air Macchi, FedEx Express Inc. (FedEx Express),Embraer, Honeywell, Sikorsky, Piaggio America Inc. and Jetcraft Aviation Ltd. (Jetcraft). Customers for our aerostructure products for commercial aircraftinclude Spirit Aerosystems Inc. (Spirit Aero Systems), Airbus, Boeing, IAI and others. Our programs in the area of commercial avionics and enhanced vision systems include a number of U.S. Federal Aviation Administration (FAA)certifications for installation of our EVS on a range of Gulfstream business jets and FedEx Express MD11 aircraft. EVS II also has received EuropeanAviation Safety Agency (EASA) approval, and our GAViS® system has been FAA certified. Elbit Systems of America maintains an FAA certified repair facilities for commercial avionics repairs. As the original manufacturer of the FairchildMetro/Merlin aircraft, ESA’s subsidiary M7 provides ongoing spares and engineering support for over 700 aircraft around the world. Cyclone performsmaintenance for commercial helicopters. UAS (Unmanned Aircraft Systems) and USVs (Unmanned Surface Vessels) Overview. We design and supply integrated UAS for a range of applications. We design and manufacture a variety of UAS platforms, including theHermes® and Skylark® families of UAS. We supply UAS training systems with capabilities to simulate payload performance, malfunctions and groundcontrol station operation. We design and supply command and control ground station elements, engines, data links, stabilized electro-optic payloads andelectronic intelligence (ELINT) and communications intelligence (COMINT) payloads that can be adapted for various types of UAS. Our UAS technologyhas also been applied to our unmanned ground vehicle and USV activities. We also are developing USVs for a range of naval applications. Systems Portfolio Hermes® UAS Family. As part of our intelligence, surveillance, target acquisition and reconnaissance (ISTAR) solutions, we developed our Hermes®family of tactical UAS including Hermes® 450 (in various configurations) a tactical long-endurance UAS supporting ISTAR missions, Hermes® 900, atactical medium altitude long-endurance (MALE) UAS, and Hermes® 90, a tactical short-range UAS designed for long-endurance point-launch ISR missions. 23 Skylark® UAS Family. Our Skylark® family of mini-UAS includes electrically propelled and covert short-range UAS with ISR capabilities forcompany-brigade-level tactical echelons. The family is based on Skylark® I, a man-packed UAS for close-range surveillance and observation, Skylark® ILE, which provides longer endurance of the Skylark® I capabilities. Ground Stations. Our UAS ground stations include mission command and control, payload operation and exploitation capabilities. Engines. Our UAS engines include a family of Wankel rotary technology based engines providing UAS with the capability to carry multiplepayloads with extended endurance. Training Systems. Our UAS training systems include full air vehicle and payload high end operators and mission commanders training. Data Links and Payloads. We develop and manufacture data links and payloads for our UAS as well as tactical data links and networkingsolutions for UAS. USVs. We are developing USVs, such as the Silver Marlin and Stingray, for various maritime applications that adopt the capabilities of our UAS tosea-based applications. Programs We perform a broad range of development, supply, lease, support services and training activities relating to UAS. The principal customers for ourUAS include the IDF, the U.K. Armed Forces through Thales U.K., the Brazilian Air Force and other customers (mainly governmental organizations) aroundthe world. We are performing under the U.K. Ministry of Defence’s (UK MOD) Watchkeeper and Lydian programs. U-TacS was awarded a contract byThales U.K., the prime contractor to the UK MOD for the program. U-TacS is supplying the Watchkeeper subsystem comprised of the dual payload WK450 UAS (based on the Hermes® 450). U-TacS is also under contract for the UK MOD Lydian Program to supply service-based support to an ISR capabilityin an overseas theatre, including Hermes® 450 UAS, training and contractor logistics support and is performing an urgent operating capability (UOR)contract to provide the U.K. Armed Forces ISTAR support capability. Our first large UAS program was providing Hermes® 450 to the IDF, which has been fully operational for more than a decade, providing thebackbone of the IDF’s tactical UAS. Under this program the Hermes® 450 has accumulated over 200,000 flight hours. We also supply the IDF Hermes® 900systems and Skylark® systems. During 2012, we were awarded a number of UAS-related contracts including for the following programs. We were awarded an approximately $160million contract to supply UAS to a European customer over the next two years. In addition, we were awarded a contract to supply Hermes® 900 and 450UAS to a Latin American customer. In January 2013, we were awarded contracts by the IMOD to supply the IDF with additional Hermes® 900 UAS, UAS maintenance services and todevelop advanced UAS features. In February 2013, the U.S. Army selected five companies, including Elbit Systems of America, as potential suppliers for the Army’s SmallUnmanned Aircraft Systems (SUAS) program. If awarded a contract under the SUAS program, Elbit Systems of America will supply Skylark® I-LE BlockII UAS. Land Vehicle Systems Overview. We upgrade and modernize tanks, other combat vehicles and artillery platforms both as a prime contractor and as a systems supplier toleading platform manufacturers. Our land vehicle and platform solutions cover the entire combat vehicle spectrum, from complete modernization, to systemsupply to maintenance depots and life cycle support services. Utilizing our experience from advanced avionics systems, electro-optic thermal imaging and C4Isystems, we adapt and develop “tankionics” for land vehicles that shorten the “sensor to shooter” loop. Our systems are operational on a full range of trackedand wheeled combat vehicles including main battle tanks, medium and light tanks, light armored vehicles, armored personnel carriers, wheeled vehicles andartillery platforms. We offer a comprehensive range of fully integrated, modular artillery and mortar solutions, incorporating C4I and fire control systems andplatform upgrades, as well as a complete range of artillery and mortar ammunition. We also develop and supply unmanned ground vehicles and roboticdevices for a variety of land based missions. In addition, we supply training systems for tanks and fighting vehicles. 24 Systems Portfolio Fire Control Systems. We supply fire control systems using day and night vision systems and displays for target identification, acquisition andengagement, incorporating thermal imaging, laser range-finders, day TV, digital ballistic computers and sensors. Electric Gun and Turret Drive Systems. We supply electric gun and turret drive and stabilization systems for controlling electrically driven turretsand guns using advanced brushless technology and digital/software based servo systems. Laser Warning and Threat Detection Systems. We provide a wide range of combat proven computer and display hardware products and situationawareness peripheral vision systems, including laser warning systems for identifying and pinpointing the angular direction of laser sources generated by laserrange-finders and laser guided and laser beamrider missiles. Unmanned Turrets and Remote Controlled Weapon Stations. We supply advanced unmanned turrets and overhead remote controlled weaponstations, including the UT30 configurable unmanned turret and the Overhead Remote Controlled Weapon Station (ORCWS) family of products, that enhanceground vehicle capabilities for urban warfare scenarios and convert armored personnel carriers to armored fighting vehicles with no penetration of the vehicle’sdeck. Unmanned Systems. We supply various unmanned ground vehicle (UGVs) platforms, including our small-size UGV – the Elbit Viper™ (VersatileIntelligent Portable Elbit Robot), a man-packed robot designated for urban combat support missions and mini-robotic devices used by land forces for tacticalmissions. Through G-NIUS, our jointly-owned company with IAI, we developed and supply a number of UGVs for combat mission support. Smart All-Terrain Networked Detectors (SAND). We develop and supply SAND, an advanced, stand-alone, long-life, wireless security systemthat remotely monitors wide areas and detects and tracks both the movements of people as well as the movements of all types of vehicles. C4I Systems. Our C4I systems for combat vehicles include battle management systems that process data and enhance situational awareness of landvehicle crews and commanders and include electro-optic-based laser range-finders, TOW night targeting sights, thermal imaging systems, flat paneled colordisplays, threat detection systems, gunner’ and commander’s sights, laser warning systems, reconnaissance systems and our “See-through Armor” systemproviding 360° panoramic observation for 360º location and identification and gun-turret direction, using day and night vision systems. Surveillance, Reconnaissance and Targeting Systems and Sensors. We supply fully-customizable ground and mobile solutions for intelligencecollection and dissemination comprised of a broad array of lightweight network-ready sensors and C4I systems, providing day and night observation, targetdetection and recognition, radar and identification of friendly forces. The sensors are fully controlled from the commander terminal, with digital maps fornavigation and orientation. We also develop unattended ground sensors that detect human and vehicle activity. Artillery Guns and Mortar Systems. We develop and supply a range of howitzers and artillery field guns. We also develop and supply a range ofmortar systems for special forces, commando units and infantry forces. We develop and supply a range of mortar ammunition, white phosphorus (WP) andsmoke mortars and illuminating bombs Counter-IED Measures. We develop and supply deployed vehicle mounted counter remote controlled improvised explosive devices (IEDs) electronicwarfare systems, which protect vehicle crews from IEDs. Driver Thermal Vision Systems. We develop and supply uncooled thermal imaging kits, fully ruggedized and suitable for a wide range of vehicle-mounted applications. 25 Auxiliary Power Units (APUs). We develop and supply APUs that improve the vehicle crew’s performance and safety by reducing fatigue andminimizing exposure to noise, heat and vibrations. Life Support and Hydraulic Systems. We supply life support systems for land vehicles for environmental, climate and chemical, biological,radiological and nuclear (CBRN) protection and control. The systems include heating, ventilation and air conditioning (HVAC), water generation and firesuppression systems. We also supply hydraulic systems for vehicle fueling, braking, suspension and power pack operation. Programs We are engaged in a wide range of land vehicle systems programs, from comprehensive vehicle modernization programs, to stand-alone systemsupply to vehicle manufacturers to life cycle support programs. Customers for our land vehicle systems include the IDF, the U.S. Army, the USMC, thearmed forces of numerous NATO and EU members, the Brazilian Army and armed forces of other countries, as well as major military vehicle manufacturerssuch as General Dynamics Corporation (General Dynamics), BAE Systems Inc. (BAE Systems), Lockheed Martin, Patria Oyj (Patria), Mowag GmbH(Mowag), Steyr GmbH (Steyr) and Iveco S.p.A. (Iveco). We supply a range of systems for all models of the IDF’s main battle tank, the Merkava. We also aresupplying systems to BAE Systems for the U.S. Army’s Bradley A-3 fighting vehicle and to Lockheed Martin for the U.S. Army Multiple Launch RocketSystem (MLRS) as well as for the U.S. Army’s and USMC’s High Mobility Artillery Rocket System (HMARS) and Light Armored Vehicle (LAV). We aresupplying unmanned turrets for the Brazilian Army Land Forces’ Guarani Project and are performing numerous land vehicle modernization programs forEuropean and Asian customers. We supply a range of thermal imaging systems and generic commander sights for various tanks and armored personnelcarriers. During 2012, we were awarded several contracts in the land vehicle and artillery platform areas, including for the following programs. We received acontract from the IMOD to supply Cardom electronic and artillery systems to the IDF. We also received an order to supply artillery systems to a Far Easterncountry. Our Brazilian subsidiary AEL was awarded a production order to supply unmanned turrets for the Brazilian Army’s Guarani program, and ourBrazilian subsidiary Ares was awarded a contract to supply REMAX remote controlled weapon stations to the Brazilian Army. We also supply tank gunnery training systems, and ground forces trainers to other customers worldwide. We supply the U.S. Army and othercustomers, advanced life support systems, such as environmental and climate control and NBC protection systems, hydraulic, fuel, braking and suspensionsystems as well as an auxiliary power unit for a number of combat vehicles. Through G-NIUS, we are developing and supplying UGVs, which perform avariety of missions in support of infantry forces’ combat operations. C4I and Cyber Systems Overview. Building on in-house capabilities and core technologies, we provide net-centric compatible solutions for land-based C4I systems rangingfrom target acquisition, to battle management to communication systems. We supply our advanced land-based C4I systems as part of turn-key solutions aswell as on a stand-alone basis. Our solutions cater to all types of land combatant forces and can be integrated into military vehicles. Providing comprehensivenet-centric solutions for low intensity conflicts (LIC) and counter-terror activities, our systems connect intelligence data to combat forces via C4I networks andmobile command and control posts and support “terrain dominance”. Our integrated infantry systems provide infantry units with C4ISR, field intelligence,urban warfare and peacekeeping capabilities. We also design and supply military information technology (IT) systems and IT and integrated informationgathering systems to various governmental agencies for border control and management systems, crime prevention and other governmental applications,including a range of cyber-based C4I solutions. We also have access to a full range of radio and military communications solutions. Systems Portfolio Digital Army’s “Systems of Systems.” We supply “systems of systems” such as the Digital Army Program (see below “Programs”), thatincorporate advanced combat concepts geared to increase net-centric operational effectiveness and connectivity throughout all land forces echelons, in allcombat situations. This includes TORC2H®, an integrated operational command control headquarters system, that closes the sensor to shooter loop andfacilitates data collection and border patrol operations. It also includes our Tactical Intranet Geographic dissemination in Real-Time (Elbit TIGER®) advancedcommunication system and enhanced tactical computers. 26 Battle Management Systems (BMS). We supply a range of battle management systems that comprise advanced electro-optical sensors, multi-functional displays, command and control software, information and dissemination systems and advanced mission computers, for enabling coordinationamong fighting vehicles and combat forces. Integrated Infantry Combat Systems. We supply systems that provide real-time net-centric information to infantry forces, including ourDOMINATOR® system that enables infantry units to send and receive real-time data, view-up-to the-minute common operational pictures on personal displaysand live video from either our external electro-optic payload advanced stabilized system (CoMPASS™) and our multi-sensor stabilized integrated system(MSIS), or from body sensors, as well as transmit images and positions back to the command post. Artillery C4I Systems. We supply a range of systems for C4I applications among field artillery units, such as our Combat NG system, which aredeployed from the platform to brigade levels, managing all aspects of artillery operations and fire control, including for theater missile defense applications. MapCore®. We supply MapCore®, a software design kit providing mapping capabilities for application programmers, capable of manipulating 2Dmaps, 2.5D maps (2D maps with elevation) and 3D maps (terrain visualization) in the application’s user window and serving as an infrastructure fordeveloping moving maps, mission planning and debriefing, C4ISR and simulator systems. Observation and Ground Reconnaissance Systems. We supply electro-optic-based thermal imaging, day-night observation systems and tacticalreconnaissance systems for border control and ground reconnaissance. Enhanced Tactical Computers and RPDAs. We supply ruggedized enhanced tactical computers and ruggedized personal data assistants (RPDAs)that bring the versatility of advanced personal computers and data assistants to the operational battlefield, including . the Tacter®-31D tactical computer in atablet configuration supporting both vehicle mounted and dismounted applications and the Tacter®-31M computer on a Windows-based platform. Ground Smart Display Unit (GSDU). We supply GSDU, a multi-function high brushless C4I display unit with supporting multiple videoformats. Tactical Multi-media Router (TMR). We supply TMR, a building block for execution of multi-media routing on a dynamic basis for commandposts as well as combat vehicles. Radio and Communications Systems and Products. Based in part on the Tadiran product line, we supply a range of tactical radio systems,software data radio systems, multi-channel radio systems, integrated radio communications systems, power HF communications systems, broadnetcommunications systems based on WiMAX technology, mobile net communications systems and tactical data communications systems and military wirelessLAN systems for wide band data transmission. These systems are used for voice, data and video (multi-media) applications in a broad range of frequencies,starting at the VLF band though HF, VHF, UHF to the C-band and further on in the mm wave band, facilitating secured and ECCM immuned voice andbroadband data communications. Our military communications product line also includes short and medium-range VHF radio systems, long-range HF radiosystems, multi-band VHF-UHF handheld/man-pack radios, hand-held radios, soldier radios, line-of-sight multi-channel radio systems, ruggedizedcomputers/communication terminals, integrated communications systems combining wireless (radio) and wired (telephony), IP/LAN/WAN networks situationawareness systems and radio network management systems. Integrated Radio Communication System (IRCS). Our field proven IRCS enables all echelons, from high-ranking commanders down to theindividual soldier in the field, to directly communicate throughout the military network. BRO@DNET. We develop and supply the BRO@DNET battle-proven broadband wireless communication infrastructure solution that enables secure broadband communication, integrating all echelons of military hierarchyinto a unified communication solutions. Satellite on the Move (SOTM). We supply SOTM solutions and antennas for combat platforms for continuous satellite communication. 27 Communications Support Products and Services. We supply a range of tactical radio power amplifiers for the AN/PRC-117F, AN/PSC-5 andSingle Channel Ground and Airborne Radio Systems (SINCGARS). Military IT Systems. We deliver and supply military IT systems such as the Integrated Component-based Exploitation (ICE) system that providesISR centers with an end-to-end system for the entire operational cycle of multi-sensor imagery exploitation. We also supply a multi-satellite mission planningsystem for planning satellite operational missions. Government IT Systems. We supply operational IT solutions to governmental agencies for border-control, anti-money laundering and intelligenceapplications, including intelligence knowledge management systems. This includes Wise Intelligence Technology (WiT™), a technology solution supportingorganizational doctrine and improving the intelligence process, that addresses all phases of the intelligence process including the reception, adaption andconversion of intelligence data from multiple sources as well as processing and disseminating intelligence reports. Tactical Battle Company Training Systems. We supply trainers for commanders and staff from the company-level to battalion battle company andbrigade-level operations. Cyber-based C4I systems. We supply a range of C4-based cyber solutions. Programs We perform a broad range of C4I battle management systems, soldier mounted systems and radio and communications programs with land-basedapplications. Our customers include the IDF, the U.S. Army, the USMC, the Australian Army and ground forces and governmental agencies of a wide rangeof NATO and EU member nations as well as those of other countries. In 2012, we received several contract awards in these areas, including a contract by theFinnish Army to supply advanced dismounted soldier systems, a contract by the Royal Australian Navy to supply battle management systems for landingcraft and a contract by a Far Eastern country to supply personal radio systems. We are performing a contract for the Department of Defence of the Commonwealth of Australia for the supply, integration, installation and support ofa Battle Group and Below Command, Control and Communications (BGC3) system for the Australian Army’s Land 75/125 program. We are the prime contractor to the IMOD for the Israel Digital Army Program (DAP). Under the DAP, we are supplying the IDF with computerizedsystems down to the single soldier level. The systems facilitate transmission of integrated, real-time situation pictures to and from all battlefield and commandechelons. The DAP includes a significant portion being performed under U.S. FMF funding. We also are performing a contract for IMOD for the supply,upgrade and maintenance of communication equipment over a 20-year period. Electro-Optic and Countermeasures Systems Overview. We design and manufacture a full range of electro-optic-based solutions for air, land, sea and space applications, covering the completespectrum of electro-optic-based solutions with products ranging from laser and thermal imaging systems to head-up displays, countermeasure systems,through ISR systems – including payloads for space, airborne, naval and land-based missions – to ground integrated sights, electro-optic countermeasuresand homeland security solutions. We are one of the few companies in the world that has engineering capability and facilities in-house in all major areas ofelectro-optics. In the space area, we also maintain in-house Israel’s national space electro-optics infrastructure. Systems Portfolio Thermal Imaging and NVG-based Systems and Products. We produce a range of FLIR systems for night observation for air, land and seaplatforms, including stabilized payloads as well as hand-held and man-portable solutions. This includes, among others, the CORAL family of thermalimagers, the LVCR family of long-range man-portable reconnaissance systems and the Mini-Coral S uncooled thermal imager and target acquisition system.These systems are integrated into north finding solutions, such as the Atlas family of goniometers. 28 Laser-Based Systems. We develop and supply a range of laser designators, laser range-finders and laser radars for air, land and naval platformsbased on solid state flash lamp or diode pumped technologies, both in the eye-safe and non-eye safe band. Stabilized Payloads. We design and supply a number of payloads for air, land and sea-based observation, target acquisition, target engagement,training and fire control, using stabilized line-of-sight systems and incorporating laser range-finders or designators and thermal and HD/TV cameras,including our very long-range Advanced Multi-Sensor Payload System (AMPS) and our Compact Multi-Purpose Advanced Stabilized System (CoMPASS™)family. Our payloads for naval applications provide a wide portfolio of solutions from the small Micro-CoMPASS 8”, through the 15th generation D-CoMPASS payload, up to the large high end AMPS system that is used for very long-range stand-off observation. Countermeasures Systems. Our electro-optic-based countermeasure systems (DIRCM – Directional IR Countermeasures) include our Multi-SpectralInfrared Countermeasures System (MUSIC®) for installation on commercial (C-MUSIC™) aircraft and military helicopters and transport aircraft for detectionand jamming of anti-aircraft shoulder-launched missiles. We have also developed EO SHIELD, a soft kill countermeasures solution for armored vehicles. ISR Systems. Our electro-optic-based ISR systems include aerial reconnaissance systems, such as the CONDOR™ 2- EO/IR LOROP – visible andIR long-range oblique photography systems. Our long-range day and night surveillance systems include LORROS® (Long-Range Reconnaissance andObservation System) for border protection and surveillance posts. Space Cameras and Telescopes. We supply advanced panchromatic and multi-spectral cameras for high resolution, remote sensing satellites forcommercial and military space IMINT, supplying high resolution ground images, and for scientific research. Hyperspectral. We develop cutting edge hyperspectral sensors and systems for various airborne platforms, including UAS. Infrared Sensors. SCD develops and manufactures infrared detectors and laser diodes for electro-optical applications. Opgal develops electro-optics“engines” (camera cores) that combine detectors with proprietary electronics, as well as IR solutions for commercial and defense applications. Programs We perform a range of programs in the electro-optic and countermeasures systems area. Our customers include the IDF, the Israel Space Agency, theUSMC, the USN, armed forces of many other governments as well as major defense contractors such as Lockheed Martin and Boeing. We supply a range ofhand-held thermal imaging and binocular systems for long-range observation and reconnaissance devices to the IDF and the armed forces of the U.S., Canada,Germany, Spain and other countries. We supply AN/AVS-7 head-up display components to the U.S. armed forces and also are under contract with the USNfor the repair and maintenance of various Night Targeting systems components for USMC AH-IW helicopters, as well as the upgrade of the AH-1W NightTargeting System to the NTSU configuration. We supply the USMC with the JTAC compact hand-held designator, and we were selected by the USMC tosupply a Common Laser Ranger-Finder - Integrated Capability. We also supply laser designators and range-finders for air and ground applications tonumerous customers such as the German Armed Forces, the USMC and Lockheed Martin. In 2012, contract awards in this area included a contract tosupply advanced observation and long-range target acquisition systems to the IDF. In addition, we supply long-range FLIR systems to the IDF for day andnight observation. Our electro-optic shipboard payloads are in use by several navy and maritime forces for both coastal surveillance and observation as well as firecontrol applications. In the countermeasures area we are developing C-MUSIC™, a laser-based countermeasure system for use on commercial passenger aircraft as well asmilitary helicopters, transport aircraft and other commercial aircraft to protect against missiles using IR seekers. We are developing for implementation our C-MUSIC™ commercial DIRCM (direct infrared countermeasures) system for Israeli commercial aircraft, and in 2012 we began test flights on an IAF platform.We supply a variety of high resolution cameras and telescopes for space applications. This includes cameras for the various versions of the IDF’s Ofeksatellites, satellites of the Israel Space Agency and other countries’ space agencies and EROS satellites operated by ImageSat International N.V. In 2012, wewere awarded a contract to supply the space camera for the Italian OPTSAT 3000 Observation Satellite. 29 Homeland Security Systems Overview. We design, manufacture and integrate a wide range of comprehensive homeland security and para-government systems and productscovering diverse scenarios and applications. These include integrated land, maritime and coastal control and surveillance systems, airport and seaport securitysystems, border control systems, “safe city” systems, large venue security systems, access and border registration control systems, pilot identificationsystems, transportation security systems, C4I homeland security applications, facility perimeter security products, electronic fences, electro-optic surveillancesystems, tactical mini-UAS and communications systems for defense, police, airport, border patrol and coast guard applications, training and simulationsolutions, energy and critical infrastructure protection and other homeland security uses. Systems Portfolio Border Surveillance Systems. We supply a range of systems and products for border, surveillance, including day/night observation systems, smartfences, mini-UAS, surveillance land vehicles and C4I-based systems combining some or all of the above-mentioned systems. We also supply border controland management IT systems. Safe City Systems. We offer “safe city” crime and terror detection and crisis management solutions combining fully integrated C4I systems withadvanced electro-optic surveillance, UAS, communication solutions and other systems to provide city-wide event detection and operations coordination,management and control to municipal security forces. Airport Security Systems. We supply a variety of solutions to secure airports and related aviation security facilities from undesired intrusions,supporting secure airport operations and facilitating pilot identification, while complying with the range of regulations that govern airport security. Seaport and Coastal Surveillance Systems. We supply comprehensive surveillance systems for monitoring maritime traffic, prevention ofsmuggling, illegal shipments, customs violations and illegal immigration, controlling fishing activities and coordination of search and rescue. Perimeter Security and Intrusion Detection Systems. We supply electronic alarm fences and virtual fences, combined with electro-optic pointing,verification and tracking to detect and deter attempts by intruders to breach secured facilities and critical infrastructures. Transportation Security and Safety Systems. We provide security and safety solutions for railroad authorities, including railway security systemsand anti-collision alert systems for crossing junctions. Communications Systems. We supply MICOM HF radio communications systems for land and maritime-based security forces. Training and Simulation Solutions. We supply training and simulation solutions for first responders, FEMA (Federal Emergency ManagementAdministration) activities, crime prevention and counter-terrorism. Programs. We perform a range of homeland security-related programs for national, regional and municipal security authorities, including airport,border guard and coastal control authorities. Customers for our homeland security systems include the Israeli Ministry of Transportation, the IMOD, variouscommercial airports in Europe and Africa, border and security forces in Europe and Asia and security organizations of several other governments. We areengaged in several “smart” electronic deterrence projects for the Israeli government. We have developed and supplied the Israel Police with Israel’s BorderControl Management System. We are performing programs relating to border security projects, coastal surveillance systems and integrated airport securitysystems for European and other governments. We provide the emergency response training system for the IDF’s Homeland Security Command. We alsoprovide a system level security solution to the Israeli Railroad Authority for protecting many of its nationally deployed sites. We are also supplying a perimetersecurity system, with advanced command and control, for protection of the Port of Haifa in Israel. 30 EW and SIGINT Systems Overview. We supply a range of multi-spectral self-protection suites and systems for airborne, ground and naval platforms including advanced EWand electronic countermeasures (ECM) systems, communications jammer solutions, missile warning systems, laser warning systems and radar warningreceivers. We also furnish SIGINT systems, including ELINT, COMINT and direction finding (DF) systems, designed for air, ground and naval platformsand applications.Systems Portfolio EW Suites including ECMs. Our EW suites provide advanced self protection integrated capabilities for various types of combat aircraft, naval andground platforms, combining defense aid suites (DAS) with ESM in a single unit, that cover multi-spectral bands and include radar warning receivers(RWR), passive IR missile warning systems, laser warning receivers, ECM systems and other measures. As part of our IR missile warning systems wesupply additional operational capabilities such as our Situation Awareness Panoramic IR (SAPIR) system with collision avoidance for increased missionsafety. We also supply a range of systems for self protection and electronic attack for airborne, naval and ground platforms including the SPJ (Self ProtectionJammer) and the COMJAM (Communication Jammer) as well as electronic support measurements for threat identification and electro-magnetic analysis forsurface ships and submarines. SIGINT Systems. We develop and supply full electromagnetic spectrum SIGINT (ELINT and COMINT) systems for tactical and strategicintelligence gathering for airborne, ground and naval applications. Our SIGINT systems incorporate advanced receiving, signal processing and DFtechnologies, including different times of arrival (DTOA) and interferometer technologies. Counter Improvised Explosive Devices (CIED). We develop and supply a range of electronic jammer anti-bomb products, including cellularselective jammer and protection systems against IEDs, such as the Electronic Jamming Anti-Bomb (EJAB) family of products. Data Links and Video Dissemination Systems. We develop and supply smart data link solutions for unmanned platforms, guided weapons andsatellites and video dissemination for airborne (including UAS), ground and naval applications. Search and Rescue Systems. We develop and supply advanced solutions for pilots and rescue teams for the combat arena as well as personal searchand rescue systems for non-combat situations. Anti-Tactical Ballistic Missile Defense Systems. We are the developer of the command and control system for the Arrow missile program. We alsoare the developer of the core of the Israel Test Bed (ITB), a real-time simulator for tactical ballistic missile defense systems. Radars. We provide radar solutions for various applications. Programs. We supply a range of EW, SIGNIT, data links and search and rescue systems to defense forces around the world for airborne, groundand sea-based applications. Customers for these systems include the IDF, the armed forces of several other governments as well as major defense contractors.This includes supplying our airborne platform self-protection suites to the IAF and several other air forces around the world. It also includes the supplyof data links for airborne platforms including UAS and the supply of airborne search and rescue systems to various customers. In 2012, our contractawards in this area included contracts to supply EW systems for IAF F-15 and F-16 aircraft and EW systems for Israeli Navy missile vessels. Various Commercial Activities We are engaged in applications of our defense technologies to commercial applications as well as other commercial activities. Our current commercialactivities, in addition to the activities described under “Commercial Aviation Systems and Aerostructures” and elsewhere above, include medical equipment,commercial communications and mobile and wireless telephone network encryptions, SATCOM equipment, microwave technologies and components andspectrum monitoring and control systems, commercial automotive night vision enhancement equipment, super capacitor energy sources, smart grids forrailroad transportation, manufacture of lasers for the cinematography industry and general manufacturing and machinery services. 31 We own an approximately 89% interest in Brightway Vision Ltd., an Israeli company involved in developing night vision enhancement equipmentfor commercial automotive applications. We also own a minority interest in certain companies that are engaged in activities primarily for the commercialmarket. This includes an approximately 22% interest in DIR Technologies (Detection IR) Ltd., an Israeli company, spun off from SCD, that is engaged inidentification through thermal imaging technologies of counterfeit pharmaceuticals. We also own an approximately 14% equity interest in ImageSat InternationalN.V., a company incorporated in Netherlands Antilles, involved in the operation of satellites for commercial and other applications and providing satelliteimagery. (Also see Item 8. Financial Information – Legal Proceedings – ImageSat.) We own an approximately 15% interest in Capital Nature Ltd., an Israelicompany involved in investments in renewable energy ventures. In addition, our wholly-owned subsidiary Incubit Technology Ventures Ltd. recently beganoperations in investing in start-up ventures engaged in a range of high-tech commercial activities in Israel. During 2012 and the beginning of 2013, we sold certain ownership interests and assets relating to some non-core commercial activities. See above“Recent Acquisitions, Mergers and Divestitures – Divestitures.” Property, Plant and Equipment Facilities Owned or Leased by the Company Israel(1) U.S.(2) Other Countries(3) Owned 2,158,000 square feet 710,000 square feet 891,000 square feetLeased 1,896,000 square feet 631,000 square feet 303,000 square feet(1)Includes offices, development and engineering facilities, manufacturing facilities, maintenance facilities, hangar facilities and a landing strip invarious locations in Israel used by Elbit Systems and our various majority-owned Israeli subsidiaries. (2)Includes offices, development and engineering facilities, manufacturing facilities and maintenance facilities of Elbit Systems of America primarily inTexas, New Hampshire, Florida, Alabama and Virginia. Elbit Systems of America’s facilities in Texas, New Hampshire and Alabama are located ona total of approximately 153 acres of land owned by Elbit Systems of America. This does not include properties not held by Elbit Systems ofAmerica, including approximately 6,000 square feet leased by our wholly-owned subsidiary Elmec Inc. in Massachusetts. (3)Includes offices, design and engineering facilities and manufacturing facilities in Europe, Latin America, Australia and Asia. Recent Investment in Facilities. Over the last two years the average annual net investment in our facilities, including building projects, equipment,machinery and vehicles, amounted to approximately $102 million. Each of our manufacturing facilities generally operates at or near full capacity.Accordingly, we believe that our current facilities are adequate for our operations as now conducted. Governmental Regulation Government Contracting Regulations. We operate under laws, regulations and administrative rules governing defense contracts, mainly in Israeland the United States. Some of these carry major penalty provisions for non-compliance, including disqualification from participating in future contracts. Inaddition, our participation in governmental procurement processes in Israel, the United States and other countries is subject to specific regulations governingthe conduct of the process of procuring defense contracts. Israeli Export Regulations. Israel’s defense export policy regulates the sale of a number of our systems and products. Current Israeli policyencourages exports to approved customers of defense systems and products such as ours, as long as the export is consistent with Israeli government policy. Alicense is required to initiate marketing activities. We also must receive a specific export license for defense related hardware, software and technologyeventually exported from Israel. Israeli law also regulates export of “dual use” items (items that are typically sold in the commercial market but that also may beused in the defense market). In 2012, more than 50% of our revenue was derived from exports subject to Israeli export regulations. 32 U.S. and Other Export Regulations. Elbit Systems of America’s export of defense products, military technical data and technical services to Israeland other countries is subject to applicable approvals of the U.S. government. Such approvals are typically in the form of an export license or a technicalassistance agreement (TAA). Other U.S. companies wishing to export defense products or military related services and technology to our Israeli and other non-U.S. entities are also required to obtain such export licenses and TAAs. This applies to data required by our non-U.S. entities to perform work for U.S.programs. Licenses are also required for Israeli nationals assigned to work in defense-related technical areas at our U.S. affiliated companies. An applicationfor an export license or a TAA requires disclosure of the intended sales of the product and the use of the technology. The U.S. government may deny an exportauthorization if it determines that a transaction is counter to U.S. policy or national security. Other governments’ export regulations also affect our businessfrom time to time, particularly with respect to end user restrictions of our suppliers’ governments. Approval of Israeli Defense Acquisitions The Israeli Defense Entities Law (Protection of Defense Interests) establishes conditions for the approval of an acquisition or transfer of control of anentity that is determined to be an Israeli “defense entity” under the terms of the law. Designation as a “defense entity” is to occur through an order to be issuedjointly by the Israeli Prime Minister, Defense Minister and Trade, Industry and Labor Minister. Although no such orders have been issued as of the date ofthis annual report on Form 20-F, it is assumed that Elbit Systems and most of our Israeli subsidiaries will be designated as “defense entities” under the lawand that the Israeli Government will issue such an order regarding our applicable Israeli companies. Under separate regulations, Elbit Systems and our majorIsraeli subsidiaries have been designated as “defense entities” by the Defense Minister with respect to Israeli law governing various aspects of defense securityarrangements. Orders to be issued under the Israeli Defense Entities Law will also establish other conditions and restrictions. It is anticipated that in the case of apublicly traded company such as Elbit Systems, Israeli government approval will be required for acquisition of 25% or more of the voting securities or asmaller percentage of shares that grant “means of control.” Means of control for purposes of the law include the right to control the vote at a shareholders’meeting or to appoint a director. Orders relating to defense entities are also anticipated to, among other matters: (1) impose restrictions on the ability of non-Israeli resident citizens to hold “means of control” or to be able to “substantially influence” defense entities; (2) require that senior officers of defense entitieshave appropriate Israeli security clearances; (3) require that a defense entity’s headquarters be in Israel; and (4) subject a defense entity’s international jointventures and various technology transfers to the approval of the IMOD. Approval of U.S. and Other Defense Acquisitions. Many other countries also require governmental approval of acquisitions of local defensecompanies or assets by foreign entities. Mergers and acquisitions of defense related businesses in the U.S. are subject to the Foreign Investment and NationalSecurity Act (FINSA). Under FINSA, our acquisitions of defense related businesses in the U.S. require review, and in some cases approval, by theCommittee on Foreign Investment in the United States (CFIUS). “Buy American” Laws. The U.S. “Buy American” laws impose price differentials or prohibitions on procurement of products purchased underU.S. government programs. The price differentials or prohibitions apply to products that are not made in the United States or that do not contain U.S.components making up at least 50% of the total cost of all components in the product. However, a Memorandum of Agreement between the United States andIsraeli governments waives the Buy American laws for specified products, including almost all the products currently sold in the United States by ElbitSystems and our Israeli subsidiaries. Foreign Military Financing (FMF). Elbit Systems of America participates in United States FMF programs. These programs require countries,including Israel, receiving military aid from the United States to use the funds to purchase products containing mainly U.S. origin components. In mostcases, subcontracting under FMF contracts to non-U.S. entities is not permitted. As a consequence, Elbit Systems of America generally either performs FMFcontracts itself or subcontracts with U.S. suppliers. The U.S. government may authorize the IMOD to utilize a portion of the FMF budget under the UnitedStates Subcontracting Procurement (USSP) channel. In such cases, companies such as Elbit Systems or our Israeli subsidiaries, who are acting as the Israeliprime contractor to the IMOD under the NIS funded portion of an IMOD program, are authorized to negotiate and enter into a subcontract directly with a U.S.supplier. However, payment of the funds under a USSP channel subcontract is administered by the IMOD Purchasing Mission to the U.S. Elbit Systems ofAmerica also participates in U.S. Foreign Military Sales (FMS) programs. 33 Procurement Regulations. Solicitations for procurements by governmental purchasing agencies in Israel, the United States and other countries aregoverned by laws, regulations and procedures relating to procurement integrity, including avoiding conflicts of interest and corruption in the procurementprocess. Anti-Bribery Regulations. Laws such as the Israel Penal Code, the Organization for Economic Cooperation and Development (OECD) Conventionon Combating Bribery of Foreign Public Officials in International Business Transactions, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act andcorresponding legislation in other countries, prohibit providing personal benefits or bribes to government officials in connection with the governmentalprocurement process. Israeli defense exporters, such as Elbit Systems, are required to maintain an anti-bribery compliance program, including specificprocedures, record keeping and training. Audit Regulations. The IMOD audits our books and records relating to its contracts with us. Our books and records and other aspects of projectsrelated to U.S. defense contracts are subject to audit by the U.S. Defense Contract Audit Agency. Such audits review compliance with government contractingcost accounting and other applicable standards. If discrepancies are found this could result in a downward adjustment of the applicable contract’s price. Someother customers have similar rights under specific contract provisions. Antitrust Laws. Antitrust laws and regulations in Israel, the United States and other countries often require governmental approvals for transactionsthat are considered to limit competition. Such transactions may include cooperative agreements for specific programs or areas, as well as mergers andacquisitions. Civil Aviation Regulations. Several of the products sold by Company entities for commercial aviation applications are subject to flight safety andairworthiness standards of the U.S. Federal Aviation Administration (FAA) and similar civil aviation authorities in Israel, Europe and other countries. Federal Drug Administration Regulations. Medical products designed and manufactured by Elbit Systems of America’s Medical Instruments –KMC Systems business unit are subject to U.S. Federal Drug Administration (FDA) regulations. Buy-Back As part of their standard contractual requirements for defense programs, several of our customers include “buy-back” or “offset” provisions. Theseprovisions are typically obligations to make, or to facilitate third parties to make, various specified transactions in the customer’s country, such asprocurement of defense and commercial related products, investment in the local economy and transfer of know-how. (For a description of these provisions,see Item 5. Operating and Financial Review and Prospects – Off-Balance Sheet Transactions.) Financing Terms Types of Financing. There are several types of financing terms applicable to our defense contracts. In some cases, we receive progress paymentsaccording to a percentage of the cost incurred in performing the contract. Sometimes we receive advances from the customer at the beginning, or during thecourse, of the project, and sometimes we also receive milestone payments for achievement of specific milestones. In some programs we extend credit to thecustomer, sometimes based on receipt of guarantees or other security. In other situations work is performed before receipt of the payment, which means that wefinance all or part of the project’s costs for various periods of time. Financing arrangements may extend beyond the term of the contract’s performance. Whenwe believe it is necessary, we seek to protect all or part of our financial exposure by letters of credit, insurance or other measures, although in some cases suchmeasures may not be available. Advance Payment Guarantees. In some cases where we receive advances prior to incurring contract costs or making deliveries, the customer mayrequire guarantees against advances paid. These guarantees are issued either by financial institutions or by us. We have received substantial advances fromcustomers under some of our contracts. In certain circumstances, such as if a contract is canceled for default and there has been an advance or progresspayment, we may be required to return payments to the customer as provided in the specific guarantee. As part of the guarantees we provide to receive progresspayments or advance payments, some of our customers require us to transfer to them title in inventory acquired with such payments. (See Item 5. Operatingand Financial Review and Prospects – General – Long-Term Arrangements and Commitments – Bank Guarantees.) 34 Performance Guarantees. A number of projects require us to provide performance guarantees in an amount equal to a percentage of the contractprice. In certain cases we also provide guarantees related to the performance of buy-back obligations. Some of our contracts contain clauses that imposepenalties or reduce the amount payable to us if there is a delay or failure in performing in accordance with the contract or the completion of a phase of work,including in some cases during the warranty period. These types of guarantees may remain in effect for a period of time after completion of deliveries under thecontract. Such guarantees are customary in defense transactions, and we provide them in the normal course of our business. (See Item 5. Operating andFinancial Review and Prospects – General – Long-Term Arrangements and Commitments – Bank Guarantees.) Private Finance Initiatives (PFI). Some of our projects operate under PFI financing arrangements where we provide long-term financingarrangements or facilities, with the repayment generally made based on the project’s cash flow. PFI projects can be structured in several ways. PFI projectsmay require us to pledge equity and enter into relatively complex financial and other agreements. Such financing may be raised either through banks orinstitutional lenders and carries various financial risks and exposures. In addition, PFI projects may require us to draw upon our equity base and borrowingcapacities. In recent years we were involved in several PFI-type projects in Israel, and we expect to participate in future PFI contracts both in Israel and othercountries. Financial Risks Relating to Our Projects. The nature of our projects and contracts creates some potential financial risks, including risks relatingto dependence on governmental budgets, fixed-price contracts for development effort and production, schedule extensions beyond our control, termination forthe customer’s convenience, potential for monetary penalties for late deliveries or failure to perform in accordance with the contract requirements and liabilityfor subcontractors. In addition, we receive payments for some of our projects in currencies other than U.S. dollars. In such cases, we sometimes elect to adoptmeasures to reduce the risk of exchange rate fluctuations. (See Item 3. Key Information – Risk Factors – General Risks Related to Our Business and Market.) Intellectual Property Patents, Trademarks and Trade Secrets. We own hundreds of living patent families including patents and applications registered or filed in Israel,the United States, the European Patent Office and other countries. We also hold dozens of living trademark families relating to specific products. A significantpart of our intellectual property assets relates to unique applications of advanced software-based technologies, development processes and productiontechnologies. These applications are often not easily patentable, but are considered as our trade secrets and proprietary information. We take a number ofmeasures to safeguard our intellectual property against infringement as well as to avoid infringement of other parties’ intellectual property. (For risks related toour intellectual property see Item 3. Key Information – Risk Factors – General Risks Related to Our Business and Market.) Governmental Customers’ Rights in Data. The IMOD usually retains specific rights to technologies and inventions resulting from ourperformance under Israeli government contracts. This generally includes the right to disclose the information to third parties, including other defensecontractors that may be our competitors. Consistent with common practice in the defense industry, approximately 35% of our revenues in 2012 was dependenton products incorporating technology that a government customer may disclose to third parties. When the Israeli government funds research and development,it usually acquires rights to data and inventions. We often may retain a non-exclusive license for such inventions. The Israeli government usually is entitled toreceive royalties on export sales in relation to sales resulting from government financed development. However, if only the end product is purchased, wenormally retain the principal rights to the technology. Sales of our products to the U.S. government and some other customers are subject to similar conditions.Subject to applicable law, regulations and contract requirements, we attempt to maintain our intellectual property rights and provide customers with the right touse the technology only for the specific project under contract. Licensing. There are relatively few cases where we manufacture under license. Such licenses typically apply to the use of technologies that are theresult of collaboration with academic institutions or where we are manufacturing another company’s product in accordance with that company’sspecifications. In such cases, the licensor typically is entitled to royalties or other types of compensation. In some cases where we have acquired business lineswe obtain a royalty free license to use the applicable technology for specified applications. Occasionally, we license parts of our intellectual property tocustomers as part of the requirements of a particular contract. We also sometimes license technology to other companies for specific purposes or markets, suchas the right to use certain of our intellectual property relating to our training and simulation systems. 35 Research and Development We invest in research and development (R&D) according to a long-term plan based on estimated market needs. Our R&D efforts focus onanticipating operational needs of our customers, achieving reduced time to market and increasing affordability. We emphasize improving existing systems andproducts and developing new ones using emerging or existing technologies.We perform R&D projects to produce new systems for the IMOD and other customers. These projects give us the opportunity to develop and testemerging technologies. We developed new tools for fast prototyping for both the design and development process. This permits the operational team members toeffectively specify requirements and to automatically transfer them into software code. Examples of our ongoing defense-related R&D projects include those fornight operation capabilities, laser systems, display systems, helmet mounted systems, other avionics systems, aerial, land and sea-based unmanned vehiclesand robotics, space based cameras, ISR systems, C4I systems, electric tank and turret drive systems, unmanned turret systems, communication systemsand homeland security systems. Examples of our R&D in commercial areas include projects relating to commercial aviation and commercial night visionproducts for automobiles. We employ thousands of software, hardware and systems engineers engaged in advance programs for airborne, ground and navaldefense, homeland security and space applications. In addition, most of our program and business line managers have engineering backgrounds. More than50% of our total workforce is engaged in research, development and engineering. Our customers, the Office of the Israeli Chief Scientist (OCS) and other R&D granting authorities sometimes participate in our R&D funding. Wealso invest in our research and development activities. This investment is in accordance with our strategy and plan of operations. The table below showsamounts we invested in R&D activities for the years ended December 31, 2010, 2011 and 2012: 2010 2011 2012 (U.S. dollars in millions) Total Investment $268.6 $288.7 $276.5 Less Participation* 34.5 47.6 43.1 Net Investment $234.1 $241.1 $233.4 (Also see Item 5. Operating and Financial Review and Prospects – Summary of Operating Results – 2012 Compared to 2011 – Research and Development.) *See above – “Government Rights in Data” and see below – “Conditions in Israel – Chief Scientist (OCS) and Investment Center Funding.” Manufacturing We manufacture and assemble our systems and products at our operational facilities in Israel, the U.S., Europe, Brazil and at certain of oursubsidiaries in other countries. These facilities contain warehouses, electronic manufacturing areas, mechanical workshops, final assembly and test stationswith test equipment. We also have supporting infrastructure including fully automated surface mount technology lines and clean rooms for electro-opticcomponents, solid state components integration, environmental testing and final testing, including space simulation and thermal chambers. We also havecomputerized logistics systems for managing manufacturing and material supply. A number of our manufacturing activities are provided on a shared servicesbasis by various of our in-house centers of excellence. We also manufacture and assemble composite materials, metal parts and machinery. One of our Israeli subsidiaries has a high technologysemiconductor manufacturing facility where it performs electronic integration and assembly of thermal imaging detectors and laser diodes. We alsomanufacture and repair test equipment. We manufacture commercial avionics and aircraft components, as well as perform maintenance, repair and overhaul at our U.S. FAA registeredfacilities in the U.S., Europe and Israel. We also manufacture medical equipment at U.S. FDA registered facilities in the U.S. 36 Environmental Compliance As part of overall Company policy, we are committed to environmental, health and safety standards in all aspects of our operations. This includesall regulatory requirements as well as ISO 14001 compliance. We also conduct a number of measures on an ongoing basis to promote environmentally friendlyoperational practices, including measures to reduce electrical, fuel and water consumption. There are no material environmental issues that affect theCompany’s use of our facilities.Seasonality Although revenues may sometimes increase towards the end of a fiscal year, no material portion of the Company’s business is considered to beseasonal. The timing of revenue recognition is based on several factors. (See Item 5. Operating and Financial Review and Prospects – General – CriticalAccounting Policies and Estimates – Revenue Recognition.) Purchasing and Raw Materials We conduct purchasing activities at most of our operational facilities. A number of purchasing and related support and logistic services areperformed on a shared services basis by central service providers in the Company for various Company units and entities. We generally are not dependent onsingle sources of supply. We manage our inventory according to project requirements. In some projects, specific major subcontractors are designated by thecustomer. Raw materials used by us are generally available from a range of suppliers internationally, and the prices of such materials are generally not subjectto significant volatility. We monitor the on-time delivery and the quality of our contractors and encourage them to continuously improve their performance. Customer Satisfaction and Quality Assurance We invest in continuous improvement of processes, with emphasis on prevention of deficiencies, to ensure customer satisfaction throughout allstages of our operations. This includes development, design, integration, manufacturing and services for software and hardware, for the range of our systemsand products. Our quality teams are involved in assuring compliance with processes and administrating quality plans. These activities begin at the pre-contract stage and continue through the customer’s acceptance of the product or services. We use a project management method under the guidelines of Theory of Constraints (TOC) in many of our development projects. Using advancedsoftware, work plans are continuously updated and are available to all integrated product team members. This method makes management more efficient andimproves our ability to meet schedule demands of complex projects. Another TOC methodology is used to manage our manufacturing lines at various facilitiesin Israel. We also use methods such as Kaizen and Lean. Our processes are based on a cutting edge tool case and CAD-CAM tools. This infrastructure,together with well defined development methodology and management tools, assists us in providing high quality and on-time implementation of projects. All Israeli operational sites are certified for one or more of the following: ISO-9001, ISO-90003 for software, AS9100 (for which we are certified forrevision C), AS9006 for software ISO-14001, OSHAS 18001 and European Aviation Safety Agency (EASA) part 145 for maintaining civil products and part21 G for production of civil products. We also comply with Capability Maturity Model Integration (CMMI) Level 3 of the U.S. Software Engineering Institute(SEI) and NATO AQAP. Representatives of our customers generally test our products before acceptance. Branches of the IDF and other customers haveauthorized us to conduct acceptance testing of our products on their behalf. Quality certifications applicable to defense products of Elbit Systems of America’s operating units include certifications for CMMI Level 3 of theSEI, ISO-9001, AS9100 and compliance with NATO AQAP requirements. In the area of commercial aviation Elbit Systems of America’s operating units holdEASA certification as well as a variety of FAA certifications including FAA Part 21 approval and FAA Part 145 approved repair stations. In the medicalequipment area, Elbit Systems of America is certified for ISO 13485:2003, is registered with the FDA as a GMP manufacturer and is FDA compliant withQuality Systems Regulations 21 CFR Parts 820, 803 and 806. 37 Service and Warranty We instruct our customers on the proper maintenance of our systems and products. In addition, we often offer training and provide equipment toassist our customers in performing their own maintenance. When required, support may be provided by a local support team or by experts sent from ourfacilities. We also provide performance based logistics services. We generally offer a one or two-year warranty for our systems and products following delivery to, or installation by, the customer. In some cases weoffer longer warranty periods. We accrue for warranty obligations specifically determined for each project based on our experience and engineering estimates.These accruals are intended to cover post-delivery functionality and operating issues for which we are responsible under the applicable contract. Marketing and Sales We actively take the initiative in identifying the individual defense needs of our customers throughout the world. We then focus our research anddevelopment activities on systems designed to provide tailored solutions to those needs. We often provide demonstrations of prototypes and existing systems topotential customers. We market our systems and products either as a prime contractor or as a subcontractor to various governments and defense contractors worldwide.In Israel, we sell our military systems and products mainly to the IMOD, which procures all equipment for the IDF. A number of marketing related supportservices are provided on a central shared services basis to various units in the Company. We are assisted in marketing our systems, products and services inother parts of the world through subsidiaries, joint ventures and representatives. In the U.S., Elbit Systems of America leads our sales and marketing activities, from its facilities throughout the U.S. Elbit Systems of Americaoperates under a Special Security Agreement that allows it and its subsidiaries to work on certain classified U.S. government programs. See above “PrincipalSubsidiaries – Elbit Systems of America.” Our subsidiaries in other countries typically lead the marketing activities in their home countries, often assisted bymarketing and business development personnel based in Israel. Over the past several years, a number of the major entities in the Company have entered into cooperation agreements with major defense contractorsin Israel, the United States, Europe, Brazil and certain other key markets. These agreements provide for joint participation in marketing and performance of arange of projects. In other countries, we actively pursue business opportunities as either a prime contractor or a subcontractor, usually together with localcompanies. Often we enter into cooperation agreements with other companies for such opportunities. Competition We operate in a competitive environment for most of our projects, systems and products. Competition is based on product and program performance,price, reputation, reliability, life cycle costs and responsiveness to customer requirements. This includes the ability to respond to rapid changes in technology.In addition, our competitive position sometimes is affected by specific requirements in particular markets. In recent years consolidation in the defense industry has affected competition. This has decreased the number but increased the relative size andresources of our competitors. We adapt to market conditions by adjusting our business strategy to changing defense market conditions. We also anticipatecontinued competition in defense markets due to declining defense budgets in many countries. Competitors in the sale of some of our products to the government of Israel include IAI and Rafael among others. From time to time we also cooperatewith some of our competitors on specific projects. Outside of Israel, we compete in a number of areas with major international defense contractors principallyfrom the United States, Europe and Israel. Our main competitors include divisions and subsidiaries of Northrop Grumman Corporation, BAE Systems,Rockwell Collins, L-3 Communications Corporation, Thales S.A., EADS, Finmeccanica S.p.A., Harris Corporation, AAI Corporation, FLIR Systems, Inc.,Rhode and Schwartz GmbH, Rheinmetall AG, Kongsberg Defense and Aerospace A.S. and Safran Group – Sagem Defense Securite S.A. Many of thesecompetitors have greater financial, marketing and other resources than ours. We also compete in the worldwide defense market with numerous smallercompanies. In addition, we compete with a range of companies in the commercial avionics market. In certain cases we also engage in strategic cooperativeactivities with some of our competitors. 38 Overall, we believe we are able to compete on the basis of our systems development and technological expertise, our systems’ combat-provenperformance and our policy of offering customers overall solutions to technological, operational and financial needs. Major Customers Sometimes, our revenues from an individual customer account for more than 10% of our revenues in a specific year. Our only such customer duringthe last three years was the IMOD, which accounted for 23% in 2010, 23% in 2011 and 15% in 2012. Ethics We conduct our business activities and develop Company policies based on a firm commitment to ethical practices. In addition to our Code ofConduct (see Item 16.B) and compliance with applicable laws and regulations, we have an active Company-wide ethics compliance program, incorporatingpolicies and procedures, including for anti-bribery compliance. Our compliance program also includes ongoing training and enforcement. We also expect oursupply chain to follow ethical practices. We are active in a number of international organizations relating to ethics and compliance. Social Responsibility and Sustainability We place importance on social responsibility to the communities in which we live and work. This is consistent with our policy of emphasizing ethicsin our business practices. Our policy encourages the voluntary efforts of our Company entities and employees who donate their time and efforts in the supportof members of our communities who are in need. In this regard, we place priority on initiatives to promote educational advancement, particularly in thetechnology sectors. A major activity resulting from our social responsibility policy is facilitating the placement of our employees as tutors in peripheralcommunities and less developed neighborhoods, providing technology-related knowledge as well as other educational resources generally lacking in those areas.We also promote numerous other community support activities, including involvement on a national level basis in major charitable organizations in Israel andthe U.S. We place emphasis on best practices in corporate governance, ethical conduct and fair employment practices. We also pursue continuousimprovement of our operations from an environmental perspective. Our commitment to social responsibility and sustainability initiatives has been reflected inour ongoing ranking among the top Israeli companies in the “Maala” social responsibility index. We periodically publish a Sustainability Report detailing ouractivities in the areas of corporate responsibility, ethics, environmental initiatives and community-related activities. Conditions in Israel Political, Military and Economic Risks. Our operations in Israel are subject to several potential political, military and economic risks. (See Item 3.Key Information – Risk Factors – Risks Related to Our Israeli Operations.) Trade Agreements Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and theInternational Finance Corporation. Israel also is a party to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriersamong its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from several countries. These preferencesallow Israel to export products covered by such programs either duty-free or at reduced tariffs. Israel and the European Community are parties to a Free Trade Agreement that provides some advantages for Israeli exports to most Europeancountries and requires Israel to lower its tariffs on imports from these countries over a number of years. Israel and the United States entered into an agreementto establish a Free Trade Area that eliminates tariff and some non-tariff barriers on most trade between the two countries. An agreement between Israel and theEuropean Free Trade Association (EFTA), established a free-trade zone between Israel and the EFTA member nations. 39 Chief Scientist (OCS) and Investment Center Funding The government of Israel, through the OCS and the Israel Investment Center (the Investment Center), encourages research and development projectsoriented towards export products and participates in the funding of such projects as well as company investments in manufacturing infrastructures. Our Israeli companies receiving OCS funding for development of products usually pay the Israeli government a royalty at various rates and aresubject to a number of conditions. (See Item 5. Operating and Financial Review and Prospects – Long-Term Arrangements and Commitments – GovernmentFunding of Development.) Separate Israeli government consent is required to transfer to third parties technologies developed through projects in which thegovernment participates in the funding of the development effort. The Investment Center promotes Israeli export products and increased industrialization of peripheral areas through investment in industrialinfrastructure. The Investment Center either provides grants for qualified projects or provides tax benefits for qualified industrial investments by Israelicompanies. Israeli Labor Laws. Our employees in Israel are subject to Israeli labor laws. Some employees are also affected by some provisions of collectivebargaining agreements between the Histadrut – General Federation of Labor in Israel and the Coordination Bureau of Economic Organizations, which includesthe Industrialists’ Association. These labor laws and collective bargaining provisions mainly concern the length of the work day, minimum daily wages forprofessional workers, insurance for work-related accidents, procedures for dismissing certain employees, determination of severance pay, employment of“manpower” employees and other conditions of employment. Severance Pay. Under Israeli law, our Israeli companies are required to make severance payments to terminated Israeli employees, other than insome cases of termination for cause. The severance reserve is calculated based on the employee’s last salary and period of employment. A portion of theseverance pay and pension obligation is covered by payment of premiums to insurance companies under approved plans and to pension funds. The depositspresented in the balance sheet include profits accumulated to the balance sheet date. The amounts deposited may be withdrawn only after fulfillment of theobligations under the Israeli laws relating to severance pay. However, Elbit Systems and our Israeli subsidiaries have entered into agreements with some of ouremployees implementing Section 14 of the Severance Payment Law, which agreements relate to the treatment of severance pay. (See Item 18. FinancialStatements – Note 2(R).) National Insurance Institute. Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, whichis similar to the U.S. Social Security Administration. These amounts also include payments for national health insurance. As of December 31, 2012, thepayments to the National Insurance Institute were equal to approximately 17.9% of wages, subject to a cap if an employee’s monthly wages exceed a specifiedamount. The employee contributes approximately 67%, and the employer contributes approximately 33%. Enforcement of Judgments Israeli courts may enforce U.S. and other foreign jurisdiction final executory judgments for liquidated amounts in civil matters, obtained after dueprocess before a court of competent jurisdiction. This enforcement is made according to the private international law rules currently applicable in Israel, whichrecognize and enforce similar Israeli judgments, provided that: •adequate service of process has been made and the defendant has had a reasonable opportunity to be heard; •the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel; •the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; •an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreigncourt; and •the judgment is no longer subject to a right of appeal. Foreign judgments enforced by Israeli courts generally will be payable in Israeli currency. The usual practice in Israel in an action to recover anamount in a non-Israeli currency is for the Israeli court to provide for payment of the equivalent amount in Israeli currency at the exchange rate in effect on thejudgment date. Under existing Israeli law, a foreign judgment payable in foreign currency may be paid in Israeli currency at the foreign currency’s exchangerate on the payment date or in foreign currency. Until collection, an Israeli court judgment stated in Israeli currency will ordinarily be linked to the IsraeliConsumer Price Index (CPI) plus interest at the annual rate (set by Israeli regulations) in effect at that time. Judgment creditors must bear the risk ofunfavorable exchange rates. Item 4A. Unresolved Staff Comments. None. 40 Item 5. Operating and Financial Review and Prospects. The following discussion and analysis should be read together with our audited consolidated financial statements and notes appearing inItem 18 below. General Critical Accounting Policies and Estimates Our significant accounting policies are described in Item 18. Financial Statements – Note 2. Our results of operations and financial condition are based on our consolidated financial statements, which are presented in conformity with UnitedStates generally accepted accounting principles (U.S. GAAP). The preparation of the consolidated financial statements requires management to selectaccounting policies as well as estimates and assumptions and to make judgments that involve the accounting policies described below that affect the amountsreported in the consolidated financial statements. Significant changes in assumptions and/or conditions and changes in our critical accounting policies couldmaterially impact our operating results and financial condition. We believe our most critical accounting policies relate to: •Revenue Recognition. •Business Combinations. •Impairment of Long-Lived Assets and Goodwill. •Other-Than-Temporary Decline in Value of Investments in Investee. •Useful Lives of Long-Lived Assets. •Taxes on Income. •Stock-Based Compensation Expense. Revenue Recognition We generate revenues principally from fixed-price long-term contracts involving the design, development, manufacture and integration of defenseelectronic systems and products. In addition, to a minor extent, we provide support and services for such systems and products. Revenues from long-term contracts are recognized primarily using the Financial Accounting Standards Board (FASB), Accounting StandardsCodification (ASC) ASC 605-35 “Construction-Type and Production-Type Contracts” (ASC 605-35) according to which we recognize revenues on thepercentage-of-completion basis. 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 andoriginal estimated forecasts. Such changes in estimated gross profit are recorded in results of operations when they are reasonably determinable bymanagement, on a cumulative catch-up basis. Anticipated losses on contracts are charged to earnings when determined to be probable. We believe that the use of the percentage of completion method is appropriate as we have the ability to make reasonably dependable estimates of theextent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify theenforceable rights regarding products and services to be provided and received by the parties to the contracts, the consideration to be exchanged and the mannerand terms of settlement. In all cases, revenue is recognized when we expect to perform our contractual obligations, and our customers are expected to satisfytheir obligations under the contract. 41 Management periodically reviews the estimates of progress towards completion and project costs. These estimates are determined based on engineeringestimates and past experience, by personnel having the appropriate authority and expertise to make reasonable estimates of the related costs. Such engineeringestimates are reviewed periodically for each specific contract by professional personnel from various disciplines within the organization. These estimates takeinto consideration the probability of achievement of certain milestones, as well as other factors that might impact the contract’s completion. A number of internal and external factors affect our cost estimates, including labor rates, estimated future prices of materials, revised estimates ofuncompleted work, efficiency variances, linkage to indices and exchange rates, customer specifications and testing requirement changes. If any of the abovefactors were to change, or if different assumptions were used in estimating project cost and measuring progress towards completion, it is likely that materiallydifferent amounts would be reported in our consolidated financial statements. In certain circumstances, sales under short-term fixed-price production type contracts or sale of products are accounted for in accordance with theSecurities and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements” (SAB 104), and recognizedwhen all the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price to the buyer is fixed ordeterminable, no further obligation exists and collectability is reasonably assured. In cases where the contract involves the delivery of products and performance of services, or other obligations, we follow the guidelines specified inASC 605-25. “Multiple-Element Arrangements”, in order to allocate the contract consideration between the identified different elements using the relativeselling price method to allocate the entire arrangement consideration. The selling price of each element would be allocated by using a hierarchy of: (i) VendorSpecific Objective Evidence (VSOE); (ii) third-party evidence of the selling price for that element; or (iii) estimated selling price for individual elements of anarrangement when VSOE or third-party evidence of the selling price is unavailable. Service revenues include contracts primarily for the provision of supplies or services other than associated with design, development ormanufacturing and production activities. It may be a stand-alone service contract or a service element, which was separated from the design, development orproduction contract according to the criteria established in ASC 605-25. Our service contracts primarily include operation and maintenance contracts,outsourcing-type arrangements, return and repair contracts, training, installation service, etc. Revenue from services were less than 10% of consolidatedrevenues in each of the fiscal years 2010, 2011and 2012. Business Combinations In accordance with ASC 805 “Business Combinations”, we allocate the purchase price of acquired companies to the tangible and intangible assetsacquired and liabilities assumed, as well as to IPR&D and contingent consideration, and non-controlling interest, based on their estimated fair values. Suchvaluations require management to make significant estimates and assumptions, especially with respect to intangible assets. We engage third-party appraisal firms to assist management in determining the fair values of certain assets acquired and liabilities assumed.Estimating the fair value of certain assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates andassumptions, mainly with respect to intangible assets. Management makes estimates of fair value based upon market participants’ assumptions believed to bereasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies, and although theyare deemed to be consistent with market participants’ highest and best use of the assets in the principal or most advantageous market, they are inherentlyuncertain. While there are a number of different methods for estimating the value of intangible assets acquired, the primary method used is the discounted cashflow approach. Some of the more significant estimates and assumptions inherent in the discounted cash flow approach include projected future cash flows,including their timing, a discount rate reflecting the risk inherent in the future cash flows and a terminal growth rate. We also estimate the expected useful livesof the intangible assets, which requires judgment and can impact our results of operations. Unanticipated events and circumstances may occur that may affectthe accuracy or validity of such assumptions, estimates or actual results. To the extent intangible assets are assigned longer useful lives, there may be less amortization expense recorded in a given period. Because we operatein industries which are extremely competitive, the value of our intangible assets and their respective useful lives are exposed to future adverse changes, whichcan result in an impairment charge to our results of operations. 42 Impairment of Long-Lived Assets and Goodwill Our long-lived assets, including identifiable intangible assets, are reviewed for impairment in accordance with ASC 360-10-35 “Property, Plant andEquipment Subsequent Measurement” 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 tobe 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 amountof the asset exceeds its fair value. Fair value of non-financial assets is determined based on market participant assumptions. For each of the years endedDecember 31, 2010, 2011 and 2012, no material impairment was identified. Goodwill represents the excess of the cost of acquired businesses over the fair values of the assets acquired and net of liabilities assumed. Goodwill isnot amortized, but is instead tested for impairment at least annually (or more frequently if impairment indicators arise). We review goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate the carrying value of goodwill maynot be recoverable. Such events or circumstances could include significant changes in the business climate of our industry, operating performance indicators,competition or sale or disposal of a portion of a reporting unit. The assessment is performed at the reporting unit level. Our annual testing date for all reportingunits is December 31. Performing the goodwill impairment test requires judgment, including how we define reporting units and determine their fair value. We consider acomponent of our business to be a reporting unit if it constitutes a business for which discrete financial information is available and management regularlyreviews the operating results of that component. We estimate the fair value of each reporting unit using a discounted cash flow methodology that requiressignificant judgment. Forecasts of future cash flows are based on our best estimate of future sales and operating costs, based primarily on existing backlog,expected future contracts, contracts with suppliers, labor agreements and general market conditions. We base cash flow projections for each reporting unitusing a five-year forecast of cash flows and a terminal value based on the Perpetuity Growth Model. The five-year forecast and related assumptions werederived from the most recent annual financial forecast for which the planning process commenced in our fourth quarter. The discount rate applied to ourforecasts of future cash flows is based on our estimated weighted average cost of capital and includes factors such as the risk-free rate of return and the returnan outside investor would expect to earn based on the overall level of inherent risk. The determination of expected returns includes consideration of the beta (ameasure of risk) of traded securities of comparable companies. Changes in these estimates and assumptions could materially affect the determination of fairvalue and/or goodwill impairment for each reporting unit. We evaluate goodwill for impairment by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If thecarrying value exceeds the estimated fair value, we measure impairment by comparing the derived fair value of goodwill to its carrying value, and anyimpairment determined is recorded in the current period. For each of the three years in the period ended December 31, 2012, no material impairment was identified. Other-Than-Temporary Decline in Value of Investments in Investee Management evaluates investments in affiliates and other companies for evidence of other-than-temporary declines in value. When relevant factorsindicate a decline in value that is other-than-temporary we recognize an impairment loss for the decline in value. We use our judgment in determining whetheran other-than-temporary decline in the value of an 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 subsequentrounds of financings at an amount below the cost basis of the investment. This list is not all-inclusive, and management weighs many quantitative andqualitative factors in determining if an other-than-temporary decline in value of an investment has occurred. 43 During 2012 no material impairment was recognized. During 2011, an impairment loss was recorded in the amount of $9.5 million relating to ourinvestment in Fraser-Volpe LLC, a subsidiary that is classified as held-for-sale. During 2010, no material impairment was recognized. Useful Lives of Long-Lived Assets Identifiable intangible assets and property, plant and equipment are amortized over their estimated useful lives. Determining the useful lives of suchassets involves the use of estimates and judgments. In determining the useful lives we take into account various factors such as the expected use of the assets,effects of obsolescence, including technological developments, competition, demand, and changes in business, acquisitions and other economic factors. If weestimate changes and the useful lives of such assets increase or decrease, it will affect our results of operations. (See above “Impairment of Long-Lived Assetsand Goodwill” for further discussion of the effects of changes in useful lives.) Taxes on Income We record income taxes using the asset and liability approach, whereby deferred tax assets and liability account balances are determined based ondifferences between financial reporting and tax bases of assets and liabilities and of operating losses and credit carry-forwards, and are measured using theenacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance, if necessary, to reduce deferredtax assets to amounts that are more likely than not to be realized. We have considered future taxable income on a jurisdiction by jurisdiction basis, prudent andfeasible tax planning strategies and other available evidence in determining the need for a valuation allowance. In the event we were to determine that we wouldbe able to realize these deferred income tax assets in the future, we would adjust the valuation allowance, which would reduce the provision for income taxes. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reservesare established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable taxlaws. As part of the determination of our tax liability, management exercises considerable judgment in evaluating tax positions taken by us in determining theincome tax provision and establishes reserves for tax contingencies in accordance with ASC 740 "Income Taxes" guidelines. We adjust these reserves in light ofchanging facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate based on new information. To the extentthat the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period inwhich such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are consideredappropriate, as well as the related interest and penalties. Management’s judgment is required in determining our provision for income taxes in each of the jurisdictions in which we operate. The provision forincome tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which weoperate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we believe that ourestimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, thereis no assurance that the final tax outcomes will not be different than those which are reflected in our historical income tax provisions and accruals. Suchdifferences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made. Stock-Based Compensation Expense We apply ASC 718 “Compensation – Stock Based Compensation” (ASC 718), which requires the measurement and recognition of compensationexpense for all share-based payment awards made to our employees and directors including employee stock options based on estimated fair values and cash-based awards linked to the share price. Stock-based compensation expense in 2012 was $3.3 million, in 2011 was $2.0 million and in 2010 was $5.2million. (See Item 18. Financial Statements – Notes 2(Z) and 21 for additional information.) Under ASC 718, we estimate the value of employee stock options on the date of grant using a lattice-based option valuation model. The determinationof fair value of stock option awards on the date of grant is affected by several factors including our stock price, our stock price volatility, risk-free interestrate, expected dividends and employee stock option exercise behaviors. If such factors change and we employ different assumptions for future grants, ourcompensation expense may differ significantly from what we have recorded in the current period. 44 In addition, our compensation expense is affected by our estimate of the number of awards that will ultimately vest. In the future, if the number ofequity awards that are forfeited by employees are lower than expected, the expenses recognized in such future periods will be higher. (See Item 18. FinancialStatements – Notes 2(Z) and 21 for further description of our assumptions used for calculation of stock-based compensation expense.) Governmental Policies Governmental policies and regulations applicable to defense contractors, such as cost accounting and audit, export control, procurement solicitationand anti-bribery rules and regulations, could have a material impact on our operations. (See Item 3. Risk Factors – General Risks Related to Our Business andMarket and Item 4. Information on the Company – Governmental Regulation.) According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, we arerequired to include in our annual report on Form 20-F an assessment, as of the end of the fiscal year, of the effectiveness of our internal controls over financialreporting. (See Item 15. Controls and Procedures – Management’s Annual Report on Internal Control Over Financial Reporting.) Recent Accounting Pronouncements See Item 18. Financial Statements – Notes 2(AD). Long-Term Arrangements and Commitments Government Funding of Development. Elbit Systems and certain Israeli subsidiaries partially finance our research and development expendituresunder programs sponsored by the Government of Israel Office of the Chief Scientist (OCS) for the support of research and development activities conducted inIsrael. At the time the funds are received, successful development of the funded projects is not assured. In exchange for the funds, Elbit Systems and thesubsidiaries pay 2% – 5% of total sales of the products developed under these programs. The obligation to pay these royalties is contingent on actual futuresales of the products. Elbit Systems and some of our subsidiaries may also be obligated to pay certain amounts to the IMOD and others on certain salesincluding sales resulting from the development of some of the technologies developed with such respective entity’s funds. (See Item 4. Information on theCompany – Conditions in Israel – Chief Scientist (OCS) and Investment Center Funding.) Lease Commitments. The future minimum lease commitments of the Company under various non-cancelable operating lease agreements forproperty, motor vehicles and office equipment as of December 31, 2012 were as follows: $34.1million for 2013, $29.2 million for 2014, $21.0 million for2015, $18.7 million for 2016, $13.8 million for 2017 and $93.1 million for 2018 and thereafter. (See below “Contractual Obligations”.) Bank Covenants. In connection with bank credits and loans, including performance guarantees issued by banks and bank guarantees in order tosecure certain advances from customers, Elbit Systems and certain subsidiaries are obligated to meet certain financial covenants. (See below – “Liquidity andCapital Resources – Financial Resources”). Such covenants include requirements for shareholders’ equity, current ratio, operating profit margin, tangible networth, EBITDA, interest coverage ratio and total leverage. (See Item 18. Financial Statements – Note 20(F).) As a result of recognition of the expense due to thecessation of a program with a foreign customer in December 2011 (see Item 18. Financial Statements - Notes 1(C) and 20(F)), as of December 31, 2011, wedid not meet one of our covenants. During the first quarter of 2012, the banks waived such covenant through March 31, 2013, and accordingly, as ofDecember 31, 2011, our bank credits and loans were not negatively affected. As of December 31, 2012, the Company met all financial covenants. Bank Guarantees. As of December 31, 2012 and 2011, guarantees in the aggregate amount of approximately $1,070 million and $1,040 million,respectively, were issued by banks on behalf of several Company entities primarily in order to secure certain advances from customers and performancebonds. Purchase Commitments. As of December 31, 2012 and 2011, we had purchase commitments of approximately $949 million and $1,026million, respectively. These purchase orders and subcontracts are typically in standard formats proposed by us. These subcontracts and purchase orders alsoreflect provisions from the applicable prime contract that apply to subcontractors and vendors. The terms typically included in these purchase orders andsubcontracts are consistent with Uniform Commercial Code provisions in the United States for sales of goods, as well as with specific terms requested by ourcustomers in international contracts. These terms include our right to terminate the purchase order or subcontract in the event of the vendor’s orsubcontractor’s default, as well as our right to terminate the order or subcontract for our convenience (or if our prime contractor has so terminated the primecontract). Such purchase orders and subcontracts typically are not subject to variable price provisions. 45 Acquisitions During 2012 See Item 4. Information on the Company – Recent Acquisitions, Mergers and Divestitures. Backlog of Orders Our backlog includes firm commitments received from customers for systems, products and projects that have yet to be completed. Our policy is toinclude orders in our backlog only when specific conditions are met. Examples of these conditions may include, among others, receipt of a letter ofcommitment, program funding, advances, letters of credit, guarantees and/or other commitments from customers. As a result, from time to time we could haveunrecorded orders in excess of the level of backlog. We reduce backlog when revenues for a specific contract are recognized. We reduce backlog as delivery or acceptance occurs or when contractmilestones or engineering progress under the long-term contracts are recognized as achieved. In some cases we reduce backlog when costs are incurred. In theunusual event of a contract cancellation, we would also be required to reduce our backlog accordingly. The method of backlog recognition used may differdepending on the particular contract. Orders in currencies other than U.S. dollars are translated periodically into U.S. dollars and recorded accordingly. Our backlog of orders as of December 31, 2012 was $5,683 million, of which 67%was for orders outside Israel. Our backlog as of December 31,2011 was $5,528 million, of which 75% was for orders outside Israel. Approximately 68% of our backlog as of December 31, 2012 is scheduled to beperformed during 2013 and 2014. The majority of the 32% balance is scheduled to be performed in 2015 and 2016. Backlog information and any comparisonof backlog as of different dates may not necessarily represent an indication of future sales. Trends Trends in the defense electronics and homeland security markets in which we operate have been impacted by the nature of recent conflicts andterrorism activities throughout the world, increasing the focus of defense forces on low intensity conflicts, homeland security and cyber warfare. The defensemarket has also been impacted by the withdrawal of most of the allied forces from Iraq and a reduction of allied forces in Afghanistan. In the defense electronics market, there is an increasing demand for products and systems in the areas of C4ISR and unmanned vehicles.Accordingly, while we continue to perform platform upgrades, in recent years more emphasis is being placed on C4ISR, including information systems,intelligence gathering, situational awareness, precision guidance, all weather and day/night operations, border and perimeter security, UAS, other unmannedvehicles, cyber-based systems, training and simulation, space and satellite based defense capabilities and homeland security systems. We believe that our coretechnologies and abilities will enable us to take advantage of many of these emerging trends, as well as to continue to participate in the “Current Force” legacyoperations of our customers. In recent years consolidation in the defense industry has affected competition. This consolidation has decreased the number but increased the relativesize and resources of our competitors. We adapt to evolving market conditions by adjusting our business strategy. Our business strategy also anticipatesincreased competition in defense markets due to declining defense budgets in certain countries. As a result of recent worldwide financial developments, currentindications are that overall defense spending is unlikely to increase in the coming years, and many governments recently have reduced their defense budgets.However, we believe in our ability to compete on the basis of our systems development, technological expertise, combat-proven performance and policy ofoffering customers overall solutions to technological, operational and financial needs and at the same time enhancing the industrial capabilities in certain of ourcustomers’ countries. Our future success is dependent on our ability to meet our customers’ expectations and anticipate emerging customer needs. We must continue tosuccessfully perform on existing programs, as past performance is an important selection criteria for new competitive awards. We also must anticipatecustomer needs so as to be able to develop working prototypes in advance of program solicitations. Such working prototypes are becoming an increasinglystandard part of our competitive environment. This requires us to anticipate future technological and operational trends in our marketplace and efficientlyengage in relevant research and development efforts. 46 Summary of Operating Results The following table sets forth our consolidated statements of operations for each of the three years ended December 31, 2012. Year ended December 31, 2012 2011 2010 $ % $ % $ % (in thousands of U.S. dollars except per share data) Total revenues $2,888,607 100.0 $2,817,465 100.0 2,670,133 100.0 Cost of revenues 2,072,742 71.8 2,085,451 74.0 1,872,263 70.1 Gross profit 815,865 28.2 732,014 26.0 797,870 29.9 Research and development (R&D) expenses 276,458 9.6 288,668 10.2 268,578 10.0 Less – participation (43,071) (1.5) (47,576) (1.6) (34,447) (1.29)R&D expenses, net 233,387 8.1 241,092 8.6 234,131 8.8 Marketing and selling expenses 241,911 8.4 235,909 8.4 229,942 8.6 General and administrative expenses 137,517 4.8 139,349 4.9 131,200 4.9 Acquired IPR&D and other expenses – – – – (4,756) (0.2) 612,815 21.2 616,350 21.9 590,517 22.1 Operating income 203,050 7.0 115,664 4.1 207,353 7.8 Financial expenses, net (26,086) (0.9) (13,569) (0.5) (21,251) (0.8)Other income, net 78 0.0 1,909 0.1 13,259 0.5 Income before taxes on income 177,042 6.1 104,004 3.7 199,361 7.5 Taxes on income 17,099 0.6 13,624 0.5 24,037 0.9 159,943 5.5 90,380 3.2 175,324 6.6 Equity in net earnings of affiliatedcompanies and partnerships 11,160 0.4 15,377 0.6 18,796 0.7 Income from continuing operations $171,103 5.9 $105,757 3.8 194,120 7.3 Income (loss) from discontinued operations,net (616) (0.0) (15,977) (0.6) 921 – Net income 170,487 5.9 89,780 3.2 195,041 7.3 Less – net loss (income) attributable to non-controlling interests $(2,608) (0.1) $508 (11,543) (0.4)Net income attributable to the Company’sshareholders $167,879 5.8 $90,288 3.2 183,498 6.9 Diluted net earnings (loss) per share: Continuing operations $3.98 $2.31 4.24 Discontinued operations (0.01) (0.22) 0.01 Total $3.97 $2.09 $4.25 2012 Compared to 2011 Revenues Our sales are primarily to governmental entities and prime contractors under government defense programs. Accordingly, the level of our revenues issubject to governmental budgetary constraints. The following table sets forth our revenue distribution by areas of operation: Year ended December 31, 2012 December 31, 2011 $ millions % $ millions % Airborne systems 1,054.5 36.5 969.4 34.4 Land systems 374.5 13.0 405.3 14.4 C4ISR systems 1,017.6 35.2 996.4 35.4 Electro-optic systems 324.1 11.2 300.2 10.6 Other (mainly non-defense engineering and production services) 117.9 4.1 146.2 5.2 Total 2,888.6 100.0 2,817.5 100.0 47 Our consolidated revenues increased by 2.5% from $2,817.5 million in 2011 to $2,888.6 million in 2012. The leading contributors to our revenues were the airborne systems and C4ISR systems areas of operations. The major increase was in the airbornesystems area of operations, primarily due to increased revenues in North America for avionic systems, aerostructures and maintenance services. The decreasein the land systems area of operations was mainly due to a decline in revenues for fire control and life support systems in Israel and North America. The following table sets forth our distribution of revenues by geographical regions: Year ended December 31, 2012 December 31, 2011 $ millions % $ millions % Israel 519.9 18.0 697.2 24.8 North America 909.4 31.5 890.7 31.6 Europe 561.1 19.4 552.4 19.6 Latin America 258.8 9.0 165.5 5.9 Asia-Pacific 568.4 19.7 460.0 16.3 Other 71.0 2.4 51.7 1.8 Total 2,888.6 100 2,817.5 100.0 The distribution of revenues by geographical regions has been modified in certain respects from our reports in prior years. The regions of " Israel"and "Europe" remain unchanged. The "U.S." region has been changed to "North America", which includes the U.S. and Canada. We now also include twonew regions: "Latin America" and "Asia-Pacific" (east of the Caspian Sea.) The remaining markets are included in "Other". The decline in revenues in Israel was mainly a result of reduced revenues relating to fire control and command and control systems. The increasedrevenues in Asia-Pacific was mainly related to electro-optics and communication equipment. The increased revenues in Latin America was mainly due to UASand command and control systems. Cost of Revenues and Gross Profit Cost of revenues in 2012 was $2,072.7 million (with a gross profit margin of 28.2%) as compared to $2,085.5 million (with a gross profit marginof 26.0%) in 2011. Cost of revenues in 2011 included an expense of $72.8 million related to the cessation of a program with a foreign customer (See Item 18.Financial Statements – Note 1(C).) Gross profit for the year ended December 31, 2012 was $815.9 million (28.2% of revenues), as compared with gross profit of $732.0 million(26.0% of revenues) in the year ended December 31, 2011. The gross profit margin in 2012 increased mainly as a result of the mix of programs sold in theyear. The gross profit in 2011 was reduced by an expense of $72.8 million related to the cessation of a program with a foreign customer. Research and Development (R&D) We continually invest in R&D in order to maintain and further advance our technologies, in accordance with our long-term plans, based on ourestimate of future market needs. Our R&D costs, net of participation grants, include costs incurred for independent research and development and bid andproposal (B&P) efforts and are expensed as incurred. Gross R&D expenses in 2012 totaled $276.5 million (9.6% of revenues) as compared with $288.7 million (10.2% of revenues) in 2011. Net R&D expenses (after deduction of third party participation) in 2012 totaled $233.4 million (8.1% of revenues), as compared to $241.1 million(8.6% of revenues) in 2011. Marketing and Selling Expenses We are active in developing new markets and pursue at any given time various business opportunities according to our plans. Marketing and selling expenses in 2012 were $241.9 million (8.4% of revenues), as compared to $235.9 million (8.4% of revenues) in 2011. 48 General and Administration (G&A) Expenses G&A expenses in 2012 were $137.5 million (4.8% of revenues), as compared to $139.3 million (4.9% of revenues) in 2011. Operating Income Our operating income in 2012 was $203.1 million (7.0% of revenues), as compared to $115.7 million (4.1% of revenues) in 2011. The lower amountand margin of operating income in 2011 was mainly a result of the cessation of the program mentioned above. Financial Expense (Net) Net financing expenses in 2012 were $26.1 million, as compared to $13.6 million in 2011. The increase in 2012 is related to interest onthe additional issued Series A Notes. The financial expenses in 2011 were lower as a result of income primarily from currency hedging activities and thesettlement of the ImageSat transaction. Other Income (Net) Other income, net in 2012 was a $0.1 million gain, as compared to a gain of $1.9 in 2011. Taxes on Income Our tax rate represents a weighted average of the tax rates to which our various entities are subject. Income taxes in 2012 were $17.1 million (effective tax rate of 9.7%) as compared to an income taxes of $13.6 million (effective tax rate of 13.1%) in2011. The effective tax rate was affected by prior years adjustments of $5.5 million. The change in the effective tax rate was also affected by the mix of thetax rates in the various jurisdictions in which the Company’s entities generate taxable income. We continue to enjoy a lower effective Israeli tax rate and thebenefits of an “Approved and Privileged Enterprise”, which resulted in savings of $26.1 million and $11.5 million, respectively, in 2012 and 2011,significantly influencing our effective tax rates. Company’s Share in Earnings of Affiliated Entities The entities, in which we hold 50% or less in shares or voting rights (affiliates), and are therefore not consolidated in our financial statements,operate in complementary areas to our core business activities, including electro-optics and airborne systems. In 2012, we had income of $11.2 million from our share in earnings of affiliates, as compared to income of $15.4 million in 2011. Loss from Discontinued Operations, Net Loss from discontinued operations for the year ended December 31, 2012, amounted to $0.6 million. The net loss from discontinued operations(after deducting the minority interest) amounted to $0.4 million. Net Income and Earnings Per Share (EPS) Net income in 2012 was $167.9 million (5.8% of revenues), as compared to net income of $90.3 million (3.2% of revenues) in 2011. The netincome in 2011 included the net effect of the cessation of a program which amounted to $62.2 million. (See Item 18. Financial Statements – Note1(C).) Diluted EPS was $3.97 in 2012, as compared to $2.09 in 2011. The number of shares used for computation of diluted EPS in the year ended December 31, 2012 was 42,277,000 shares, as compared to43,131,000 shares in the year ended December 31, 2011. 49 2011 Compared to 2010 Revenues The following table sets forth our revenue distribution by areas of operation: Year ended December 31, 2011 December 31, 2010 $ millions % $ millions % Airborne systems 969.4 34.4 791.1 29.6 Land systems 405.3 14.4 363.2 13.6 C4ISR systems 996.4 35.4 1,019.1 38.2 Electro-optic systems 300.2 10.6 368.8 13.8 Other (mainly non-defense engineering and production services) 146.2 5.2 127.9 4.8 Total 2,817.5 100.0 2,670.1 100.0 Our consolidated revenues increased by 5.5% from $2,670.1 million in 2010 to $2,817.5 million in 2011. The leading contributors to our revenues were the C4ISR and airborne areas of operations. The major increase was in the airborne area of operations,which included in 2011 revenues resulting from M7’s operations acquired in the fourth quarter of 2010 and which contributed to the revenue growth in2011. The decrease in the electro-optic systems area of operations was mainly due to reduced revenues in reconnaissance systems and night vision products. The following table sets forth our distribution of revenues by geographical regions: Year ended December 31, 2011 December 31, 2010 $ millions % $ millions % Israel 697.2 24.8 651.0 24.4 North America 890.7 31.6 844.0 31.6 Europe 552.4 19.6 541.7 20.3 Latin America 165.5 5.9 152.1 5.7 Asia-Pacific 460.0 16.3 459.6 17.2 Other countries 51.7 1.8 21.7 0.8 Total 2,817.5 100.0 2,670.1 100.0 Cost of Revenues and Gross Profit Cost of revenues in 2011 was $2,085.5 million (with a gross profit margin of 26%), as compared to $1,872.3 million (with a gross profit margin of29.9%) in 2010. Cost of revenues in 2011 included an expense of $72.8 million related to the cessation of a program with a foreign customer. Gross profit forthe year ended December 31, 2011 was $732.0 million (26.0% of revenues), as compared with gross profit of $797.9 million (29.9% of revenues) in the yearended December 31, 2010. The decrease in the amount of gross profit in 2011 resulted primarily from the above-mentioned expense as well as reduced grossprofit in the mix of programs underlying our revenues in 2011. Research and Development (R&D) Gross R&D expenses in 2011 totaled $288.7 million (10.2% of revenues) as compared with $268.6 million (10.0% of revenues) in 2010. Net R&D expenses (after deduction of third party participation) in 2011 totaled $241.1 million (8.6% of revenues), as compared to $234.1 million(8.8% of revenues) in 2010. 50 Marketing and Selling Expenses Marketing and selling expenses in 2011 were $235.9 million (8.4% of revenues), as compared to $229.9 million (8.6% of revenues) in 2010. General and Administration (G&A) Expenses G&A expenses in 2011 were $139.3 million (4.9% of revenues), as compared to $131.2 million (4.9% of revenues) in 2010. The increase in G&A expenses in 2011 compared to 2010 was due to higher expenses related to our subsidiaries acquired in the last quarter of 2010. Other operational income for the year ended December 31, 2010 amounted to $4.8 million. The amount reflects a net gain of $4.8 million in thesecond quarter of 2010, related to the revaluation of the previously held Azimuth shares at the acquisition date, due to its accounting treatment as a businesscombination achieved in stages. There was no other operational income in 2011. Operating Income Our operating income in 2011 was $115.7 million (4.1% of revenues), as compared to $207.4 million (7.8% of revenues) in 2010. The change in theamount of operating income was a result of the expense of $72.8 million mentioned above as well as the increases in operating expenses discussed above. Financial Expense (Net) Net financing expenses in 2011 were $13.6 million, as compared to $21.3 million in 2010. The financial expenses in 2011 decreased as a result of income primarily from currency hedging activities and interest on the settlement of theImageSat debt transaction. Other Income (Net) Other income, net in 2011 was a $1.9 million gain, as compared to a gain of $13.3 in 2010. The amount in 2010 included a gain of $12.8 millionrelated to the sale of Mediguide shares in the first quarter of 2010. Taxes on Income Income taxes in 2011 were $13.6 million (effective tax rate of 13.1%) as compared to an income taxes of $24.0 million (effective tax rate of 12.1%) in2010. Taxes on income in 2010 included an amount of approximately $10 million related to the first recognition of deferred tax assets for prior years’ losses inone of our subsidiaries. The change in the effective tax rate was also affected by the mix of the tax rates in the various jurisdictions in which the Company’sentities generate taxable income. We continued to enjoy a lower effective Israeli tax rate and the benefits of an “Approved and Privileged Enterprise”, whichresulted in savings of $11.5 million and $20.5 million, respectively, in 2011 and 2010, significantly influencing our effective tax rates. Company’s Shares in Earnings of Affiliated Entities In 2011, we had income of $15.4 million from our share in earnings of affiliates, as compared to income of $18.8 million in 2010. Loss from Discontinued Operations, Net Loss from discontinued operations for the year ended December 31, 2011, amounted to $16 million. The amount reflects a net loss related to animpairment of held-for-sale investments acquired during 2010, as part of the acquisition of the Mikal group of companies. The net loss from discontinuedoperations (after deducting the minority interest) amounted to $9.5 million. 51 Net Income and Earnings Per Share (EPS) Net income in 2011 was $90.3 million (3.2% of revenues), as compared to net income of $183.5 million (6.9% of revenues) in 2010. The net incomein 2011 included the net effect of the cessation of the above-mentioned program which amounted to $62.2 million. Diluted EPS was $2.09 in 2011, ascompared to $4.25 in 2010. The number of shares used for computation of diluted EPS in the year ended December 31, 2011 was 43,131,000 shares, as compared to 43,217,000shares in the year ended December 31, 2010. Israeli Debt Offering In June 2010, Elbit Systems completed a public offering in Israel on the TASE of NIS 1.1 billion (approximately $283 million) Series A Notes (theSeries A Notes). The Series A Notes were offered and sold pursuant to a shelf prospectus filed in May 2010 with the Israeli Securities Authority and theTASE. The shelf prospectus allowed us, during a period of 24 months following its publication, to raise capital from the public in Israel, from time to time,by issuing notes or warrants that are exercisable into notes subject to the terms of the shelf prospectus and to the publication of a supplemental shelf offeringreport describing the terms of the securities offered and the details of the specific offering. In March and May 2012, respectively, under the framework of the shelf prospectus, Elbit Systems completed both an additional public offering onthe TASE and a private placement in Israel to Israeli institutional investors, of new Series A Notes, for an aggregate consideration of approximately NIS 926million (approximately $249 million). All Series A Notes form a single series. We account for the outstanding principal amount of our Series A Notes as long-term liability, in accordance with ASC 470, “Debt”, with currentmaturities classified as short-term liabilities. Debt issuance costs are capitalized and reported as deferred financing costs, which are amortized over the life ofthe Series A Notes using the effective interest rate method. As of December 31, 2012, the value of the Series A Notes was $450,727 million, less $58,275million in current maturities and a fair value adjustment of $16,158 million from cross-currency interest rate swaps. The Series A Notes are payable in ten equal annual installments on June 30 of each of the years 2011 through 2020. The Series A Notes bear a fixedinterest rate of 4.84% per annum, payable on June 30 and December 30 of each of the years through 2020 (the first interest payment was made on December 30,2010, and the last interest payment will be made on June 30, 2020). (See Item 8. Financial Statements – Note 16.) The Series A Notes (principal and interest) are in NIS and are not linked to any currency or index. The Series A Notes are unsecured, non-convertible and do not restrict our ability to issue additional notes of any class or distribute dividends in the future. There are no covenants on the Series ANotes. The Series A Notes are listed for trading on the TASE. However, the Series A Notes are not registered under the U.S. Securities Act of 1933,as amended (the Securities Act), and may not be offered or sold in the United States or to U.S. Persons (as defined in Regulation “S” promulgatedunder the Securities Act) without registration under the Securities Act or an exemption from the registration requirements of the Securities Act. We also entered into ten-year cross currency interest rate swap transactions in order to effectively hedge the effect of interest and exchange ratedifferences resulting from the NIS Series A Notes that were issued in 2010 and the additional Series A Notes that were issued in 2012. Under the crosscurrency interest rate swaps, we receive fixed NIS at a rate of 4.84% on NIS 2 billion and pay floating six-month USD LIBOR plus an average spread of1.84% on $450 million, which reflects the U.S. dollar value of the Series A Notes on the specific dates the transactions were entered. Both the debt and theswap instruments pay semi-annual coupons on June 30 and December 31. The purpose of these transactions was to convert the NIS fixed rate Series A Notesinto USD LIBOR (6 months) floating rate obligations. As a result of these agreements, we are currently paying an effective interest rate of six-month LIBOR(0.45% at December 31, 2012) plus an average of 1.84% on the principal amount, as compared to the original 4.84% fixed rate. The above transactions qualifyfor fair value hedge accounting. (See also Item 11. Quantitative and Qualitative Disclosures about Market Risk.) 52 Cash Flows Our operating cash flow is affected by the cumulative cash flow generated from our various projects in the reported periods. Project cash flows areaffected by the timing of the receipt of advances and the collection of accounts receivable from customers, as well as the timing of payments made by us inconnection with the performance of the project. The receipt of payments usually relates to specific events during the project, while expenses are ongoing. As aresult, our cash flow may vary from one period to another. Our policy is to invest our cash surplus mainly in interest bearing deposits, in accordance with ourprojected needs. In general, subsidiaries are able to freely transfer cash dividends, loans or advances to Elbit Systems, subject to tax considerations in theirapplicable jurisdiction and subject to management commitment not to distribute tax exempt earnings. Such tax considerations have not had in the past, and arenot anticipated to have, a material impact on our ability to meet our obligations. 2012 Our net cash flow generated from operating activities in 2012 was approximately $198.4 million, resulting mainly from our net income and theincrease in advances received from customers. Net cash flow used in investment activities in 2012 was approximately $117.6 million, which was used mainly to purchase property, plant andequipment and investment in available-for-sale marketable securities. Net cash flow used for financing activities in 2012 was approximately $84.1 million, which was used mainly for purchase of treasury shares,repayment of Series A Notes and payment of dividends to shareholders. 2011 Our net cash flow generated from operating activities in 2011 was approximately $190.9 million, resulting mainly from our net income and theincrease in advances received from customers. Net cash flow used in investment activities in 2011 was approximately $55.1 million, which was used mainly to purchase property, plant andequipment and acquisitions of subsidiaries and business operations. Net cash flow used for financing activities in 2011 was approximately $84.3 million, which was used mainly for purchase of the non-controllinginterest in Elisra, repayment of Series A Notes and payment of dividends to shareholders. 2010 Our net cash flow generated from operating activities in 2010 was approximately $186.0 million, resulting mainly from net income and increases intrade and other payables, which were partially offset, mainly by an increase in short and long-term trade receivables and prepaid expenses, increase ininventories net and a decrease in advances received from customers, which was a result of lower advances received in new projects in 2010. Net cash flow used in investment activities in 2010 was approximately $255.5 million, which was used mainly to purchase property, plant andequipment, investments in short-term deposits and acquisitions of subsidiaries and business operations. Net cash flow provided by financing activities in 2010 was approximately $79.9 million, resulting mainly from the issuance of Series A Notes, partof which was used for repayment of long-term loans and payment of dividends to shareholders. Financial Resources The financial resources available to us include profits, collection of accounts receivable, advances from customers and government of Israel andother third parties’ programs such as the OCS and development grants. In addition, we have access to bank credit lines and financing in Israel and abroadbased on our capital, assets and activities. 53 Elbit Systems and some subsidiaries are obligated to meet various financial covenants set forth in our respective loan and credit agreements. Suchcovenants include requirements for shareholders’ equity, current ratio, operating profit margin, tangible net worth, EBITDA, interest coverage ratio and totalleverage. As a result of recognition of the expense due to the cessation of a program with a foreign customer in December 2011 (see Item 18. FinancialStatements - Note 1(C)), as of December 31, 2011, we did not meet one of our covenants. Subsequent to our balance sheet date (December 31, 2011), inMarch 2012 the banks waived such covenant through March 31, 2013, and accordingly our bank credits and loans as of December 31, 2011, were notnegatively affected. As of December 31, 2012, the Company met all financial covenants. On December 31, 2012, we had total borrowings from banks and public institutes in the amount of $206 million, including $174 million in long-term loans, of which most of the loans mature in 2014 and $1,070 million in guarantees issued on our behalf by banks, mainly in respect of advancepayment and performance guarantees provided in the regular course of business. In addition, at December 31, 2012, we had $467 million in outstandingdebt under our Series A Notes, including $58 million maturing in 2013. On December 31, 2012, we had a cash balance amounting to $199 million. We alsohave the ability to raise funds on the capital market and through expansion of our credit lines. (See above “Israeli Debt Offering.”) As of December 31, 2012, we had working capital of $375 million and a current ratio of 1.25. We believe that our working capital and cash flowfrom operations will be sufficient to support our current requirements and financial covenants. We believe that our current cash balances, cash generated from operations, lines of credit and financing arrangements will provide sufficientresources to meet our operational needs for at least the next fiscal year. However, our ability to borrow funds from the banking system may be impacted by theongoing global financial and liquidity situation. See Item 3. Risk Factors – General Risk Related to Our Business and Market. For further information on the level, maturity and terms of our borrowings, see Item 18. Financial Statements – Notes 12 and 15. We believe our ability to access external capital resources should be sufficient to satisfy existing short-term and long-term commitments and plans,and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year. Pensions and Other Post-Retirement Benefits We account for pensions and other post-employment arrangements in accordance with ASC 715 “Compensation – Retirement Benefits”. Accountingfor pensions and other post-retirement benefits involves judgment about uncertain events, including estimated retirement dates, salary levels at retirement,mortality rates, rates of return on plan assets, determination of discount rates for measuring plan obligations, healthcare cost trend rates and rates of utilizationof healthcare services by retirees. These assumptions are based on the environment in each country. (For our pension and other post-retirement benefitassumptions at December 31, 2012 and 2011, see Item 18 – Financial Statements – Note 17.) At December 31, 2012 our termination obligations were $407.7 million, of which we had severance funds of $302.7 million set aside to satisfypotential obligations. Auction Rate Securities. As of December 31, 2010, we had approximately $31.6 million (before cumulative impairment losses of $28.6 million) ofprincipal invested in ARS. The estimated market value of our ARS holdings at December 31, 2010 was $7.2 million. In the fourth quarter of 2011 we sold ourinvestment in the ARS for a consideration of $9.4 million. Material Commitments for Capital Expenditures. We believe that we have adequate sources of funds to meet our material commitments for capitalexpenditures for the fiscal year ending December 31, 2013 and the subsequent fiscal year. (See above “Financial Resources.”) We believe our anticipated capitalexpenditures (which include mainly the purchase of equipment, vehicles and buildings) as of December 31, 2012 were at a similar level to those as ofDecember 31, 2011. We plan to pay for such anticipated expenditures using cash from operations. (See also Item 18. Financial Statements – ConsolidatedStatements of Cash Flows and Note 10.) 54 Impact of Inflation and Exchange Rates Functional Currency. Our reporting currency is the U.S. dollar, which is also the functional currency for most of our consolidated operations. A majorityof our sales are made outside of Israel in non-Israeli currency, mainly U.S. dollars, as well as a majority of our purchases of materials and components. Asignificant portion of our expenses, mainly labor costs, are in NIS. Some of our subsidiaries have functional currencies in Euro, GBP and other currencies.Transactions and balances originally denominated in U.S. dollars are presented in their original amounts. Transactions and balances in currencies other thanthe U.S. dollar are remeasured in U.S. dollars according to the principles set forth in ASC 830 “Foreign Currency Matters”. Exchange gains and losses arisingfrom remeasurement are reflected in financial expenses, net, in the consolidated statements of income. Market Risks and Variable Interest Rates Market risks relating to our operations result mainly from changes in interest rates and exchange rates. We use derivative instruments to limitexposure to changes in exchange rates in certain cases. We also typically enter into forward contracts in connection with transactions where long-term contractshave been signed and that are denominated in currencies other than U.S. dollars or NIS. We also enter from time to time into forward contracts and otherhedging instruments related to NIS based on market conditions. We use financial instruments and derivatives in order to limit our exposure to risks arising from changes in exchange rates. The use of suchinstruments does not expose us to additional exchange rate risks since the derivatives are held against an asset (for example, excess assets in Euros). Ourpolicy in utilizing these financial instruments is to protect the dollar value of our cash and cash equivalent assets rather than to serve as a source of income. In the context of our overall treasury policy specific objectives apply to the management of financial risks. These objectives are disclosed under theheadings below “NIS/U.S. Dollar Exchange Rates”, “Inflation and Currency Exchange Rates” and “Foreign Currency Derivatives and Hedging”. On December 31, 2012, our liquid assets were comprised of bank deposits, and short and long-term investments. Our deposits and investments arebased on variable interest rates, and their value as of December 31, 2012 was therefore exposed to changes in interest rates. Should interest rates either increaseor decrease, such change may affect our results of operations due to changes in the cost of the liabilities and the return on the assets that are based on variablerates. NIS/U.S. Dollar Exchange Rates. We attempt to manage our financial activities in order to reduce material financial losses in U.S. dollars resulting fromthe impact of inflation and exchange rate fluctuations on our non-U.S. dollar assets and liabilities. Our income and expenses in Israeli currency are translatedinto U.S. dollars at the prevailing exchange rates as of the date of the transaction. Consequently, we are affected by changes in the NIS/U.S. dollar exchangerates. We entered into other derivative instruments to limit our exposure to exchange rate fluctuations, related mainly to payroll expenses incurred in NIS. (SeeItem 11. Quantitative and Qualitative Disclosure of Market Risks.) The amount of our exposure to the changes in the NIS/U.S. dollar exchange rate may varyfrom time to time. (See Item 3. Key Information – Risk Factors – Risks Relating to Our Israeli Operations.) Inflation and Currency Exchange Rates The U.S. dollar cost of our operations in Israel is influenced by any increase in the rate of inflation in Israel that is not fully offset by the devaluationof the NIS in relation to the U.S. dollar. Unless inflation in Israel is offset by a devaluation of the NIS, such inflation may have a negative effect on theprofitability of contracts where Elbit Systems or any of our Israeli subsidiaries receives payment in U.S. dollars, NIS linked to U.S. dollars or other foreigncurrencies, but incurs expenses in NIS linked to the CPI. Inflation in Israel and currency fluctuations may also have a negative effect on the profitability offixed-price contracts where we receive payments in NIS. In the past, our profitability was negatively affected when inflation in Israel (measured by the change in the CPI from the beginning to the end of thecalendar year) exceeded the devaluation of the NIS against the U.S. dollar and at the same time we experienced corresponding increases in the U.S. dollar costof our operations in Israel. For example, in 2010, the inflation rate was approximately 2.7%, and the NIS strengthened against the U.S. dollar byapproximately 6%. In 2011, the inflation rate was approximately 2%, and the NIS devalued against the U.S. dollar by approximately 8%. In 2012, theinflation rate was approximately 1.6%, and the NIS strengthened against the U.S. dollar by approximately 2%. There can be no assurance that we will not bematerially adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluationlags behind increases in inflation in Israel. 55 A devaluation of the NIS in relation to the U.S. dollar also has the effect of decreasing the dollar value of any of our assets that consist of NIS oraccounts receivable denominated in NIS, unless such assets or accounts receivable are linked to the U.S. dollar. Such a devaluation also has the effect ofreducing the U.S. dollar amount of any of our liabilities that are payable in NIS, unless such payables are linked to the U.S. dollar. On the other hand, anyincrease in the value of the NIS in relation to the U.S. dollar will have the effect of increasing the U.S. dollar value of any unlinked NIS assets as well as theU.S. dollar amount of any unlinked NIS liabilities and expenses. Foreign Currency, Derivatives and Hedging While our functional currency is the U.S. dollar, we also have some non-U.S. dollar or non-U.S. dollar linked exposure to currencies other thanNIS. These are mainly non-U.S. dollar customer debts, payments to suppliers and subcontractors, obligations in other currencies, assets or undertakings.Some subcontractors are paid in local currency under prime contracts where we are paid in U.S. dollars. The exposure on these transactions has not been inamounts that are material to us. However, when we view it necessary, due to anticipated uncertainty in the applicable foreign exchange rates, we seek tominimize our foreign currency exposure by entering into hedging arrangements, obtaining periodic payments upon the completion of milestones, obtainingguarantees and security from customers and sharing currency risks with subcontractors. Most of our future cash flows that will be denominated in currencies other than the NIS and the U.S. dollar were covered as of December 31, 2012by forward contracts. On December 31, 2012, we had forward contracts for the sale and purchase of Euro, GBP and various other currencies. On December31, 2012, we had forward contracts for the sale and purchase of such foreign currencies totaling approximately $285 million ($192 million in Euros, $74million in GBP and the balance of $19 million in other currencies). We also use forward exchange hedging contracts and options strategies in order to limit our exposure to exchange rate fluctuation associated withpayroll expenses, mainly incurred in NIS. These include forward contracts with notional amount of $386 million in NIS maturing in 2013. (See also Item 11.Quantitative and Qualitative Disclosure of Market Risks.) As of December 31, 2012, an unrealized net gain of approximately $16.2 million was included inaccumulated other comprehensive income. As of December 31, 2012, all of the forward contracts are expected to mature during the years 2013 – 2018. Regarding the measures taken to reduce the foreign currency exchange rate impact on our Series A Notes see above “Liquidity and Capital Resources– Israeli Debt Offering.” The table below presents the balance of the derivative instruments held in order to limit the exposure to exchange rate fluctuations as of December 31,2012 and is presented in millions of U.S. dollar equivalent terms: Notional Unrealized Forward Amount* Gain (Loss) Buy US$ and Sell: Euro 131.7 2.2 GBP 28.3 (0.1)NIS – – Other various currencies 14.8 (1.3) Notional Unrealized Forward Amount* Gain (Loss) Sell US$ and Buy: Euro 60.7 (0.9)GBP 45.3 1.2 NIS 386.1 17.2 Other various currencies 4.3 1.4 ____________________* Notional amount information is based on the foreign exchange rate at year end. 56 Contractual Obligations Less than More than 1 year 2-3 years 4-5 years 5 years (U.S. dollars in millions) 1. Long-Term Debt Obligations 32 174 2 – 2. Series A Notes 58 117 117 175 3. Operating Lease Obligations* 34 50 33 93 4. Purchase Obligations* 741 172 32 4 5. Other Long-Term Liabilities Reflected on the Company’s Balance Sheet underU.S. GAAP** – – – – 6. Other Long-Term Liabilities*** – – – – Total 865 513 182 272 ____________________ *For further description of the Purchase Obligations see above “Long-Term Arrangements and Commitments – Purchase Commitments” and See Item18. Financial Statements – Notes 20(D) and 20(H). **The obligation amount does not include an amount of $408 million of pension and employee termination liabilities. See Item 18. Financial Statements– Notes 2(R) and 17. The obligation amount also does not include an amount of $53 million of tax reserve related to uncertain tax positions. See Item18. Financial Statements – Note 18. ***See below “Off-Balance Sheet Transactions.” Off-Balance Sheet Transactions Buy-Back In connection with projects in certain countries, Elbit Systems and some of our subsidiaries have entered and may enter in the future into “buy-back” or “offset” agreements, required by a number of our customers as a condition to our obtaining orders for our products and services. These agreementsare customary in our industry and are designed to facilitate economic flow back (buy-back) and/or technology transfer to businesses or government agencies inthe applicable country. These commitments may be satisfied by our placement of direct work or vendor orders for supplies and/or services, transfer of technology,investments or other forms of assistance in the applicable country. The buy-back rules and regulations, as well as the underlying contracts, may differ fromone country to another. The ability to fulfill the buy-back obligations may depend, among other things, on the availability of local suppliers with sufficientcapability to meet our requirements and which are competitive in cost, quality and schedule. In certain cases, our commitments may also be satisfied throughtransactions conducted by other parties. We do not commit to buy-back agreements until orders for our products or services are definitive, but in some cases the orders for our products orservices may become effective only after our corresponding buy-back commitments enter into effect. Buy-back programs generally extend at least over therelevant commercial contract period and may provide for penalties in the event we fail to perform in accordance with buy-back requirements. In some cases weprovide guarantees in connection with the performance of our buy-back obligations. Should we be unable to meet such obligations we may be subject to contractual penalties, and our chances of receiving additional business from theapplicable customers could be reduced or, in certain cases, eliminated. (See Item 3. Risk Factors – General Risks Related to Our Business and Market.) At December 31, 2012, we had outstanding buy-back obligations totaling approximately $748 million that extend through 2020. 57 Non-GAAP Financial Data The following non-GAAP financial data is presented to enable investors to have additional information on our business performance as well as afurther basis for periodical comparisons and trends relating to our financial results. We believe such data provides useful information to investors byfacilitating more meaningful comparisons of our financial results over time. Such non-GAAP information is used by our management to make strategicdecisions, forecast future results and evaluate our current performance. However, investors are cautioned that, unlike financial measures prepared inaccordance with GAAP, non-GAAP measures may not be comparable with the calculation of similar measures for other companies. The non-GAAP financial data below includes reconciliation adjustments regarding non-GAAP gross profit, operating income, net income and dilutedEPS. In arriving at non-GAAP presentations, companies generally factor out items such as those that have a non-recurring impact on the income statements,various non-cash items, significant effects of retroactive tax legislation and changes in accounting guidance and other items which, in management’sjudgment, are items that are considered to be outside the review of core operating results. In our non-GAAP presentation below, we made the followingadjustments to our GAAP net income: (1) added back amortization of purchased intangible assets; (2) added back significant reorganization, restructuringand other related expenses; (3) added back impairment of investments, including impairment of ARS; (4) subtracted gain from changes in holdings, includingrevaluation of the previously held shares at the acquisition date when a business combination is achieved in stages (step-up); (5) added back impairment lossfrom discontinued operations; (6) excluded the impact of the cessation of a program with a foreign customer; and (7) excluded the income tax effects of theforegoing. These non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures havelimitations in that they do not reflect all of the amounts associated with our results of operations, as determined in accordance with GAAP, and that thesemeasures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Investors should consider non-GAAP financial measures in addition to, and not as replacements for or superior to, measures of financial performance prepared in accordance with GAAP. 58 Reconciliation of GAAP (Audited) toNon-GAAP (Unaudited) Supplemental Financial Data(U.S. dollars in millions) 2012 2011 2010 GAAP gross profit 815.9 732.0 797.9 Adjustments: Amortization of intangible assets 24.2 30.9 25.0 Cessation of program(1) – 72.8 – Reorganization, restructuring and other related expenses(2) – – 12.8 Non-GAAP gross profit 840.1 835.7 835.7 Percent of revenues 29.1% 29.7% 31.3% GAAP operating income 203.1 115.7 207.4 Adjustments: Amortization of intangible assets 49.3 57.3 47.7 Cessation of program(1) – 72.8 – Reorganization, restructuring and other related expenses(2) – – 16.4 Impairment of investments(3) – – 1.3 Gain from changes in holdings(4) – – (4.8)Non-GAAP operating income 252.3 245.8 268.0 Percent of revenues 8.7% 8.7% 10.0% GAAP net income attributable to Elbit Systems’ shareholders 167.9 90.3 183.5 Adjustments: Amortization of intangible assets 49.3 57.3 47.7 Cessation of program(1) – 72.8 – Reorganization, restructuring and other related expenses(2) – 16.4 Impairment of investments(3) – 0.5 1.3 Gain from changes in holdings(4) (2.3) – (17.6)Adjustment of loss (gain) from discontinued operations, net(5) 0.4 9.4 (0.5)Related tax benefits (8.9) (23.7) (8.9)Non-GAAP net income attributable to Elbit Systems’ shareholders 206.3 206.6 221.9 Percent of revenues 7.1% 7.3% 8.3% Non-GAAP diluted net EPS 4.9 4.8 5.1 (1)Adjustment of expenses related to cessation of a program, which resulted in write-off of inventories and other related costs. (2)Adjustment of reorganization, restructuring and other related expenses in 2010 were mainly due to write-off of inventories in the amount ofapproximately $13 million related to the acquisitions of Soltam and ITL. (3)Impairment of investments in 2011 was due to adjustment of impairment in available-for-sale marketable securities, and in 2010 were dueto the impairment of intangible assets. (4)Adjustment of gain from changes in holdings includes the income from the sale of investments in affiliated companies of $2.3 million in2012, a sale of Mediguide shares of $12.8 million in 2010 and a gain of $4.8 million from a revaluation of a previously held investmentdue to accounting treatment as a business combination achieved in stages in 2010. (5)Adjustment of loss from discontinued operations, net of tax and minority interest, related to impairment of a held-for-sale investmentacquired during 2010, as part of the acquisition of the Mikal group of companies. 59 Item 6. Directors, Senior Management and Employees. Directors and Executive Officers Board of Directors (Board) Our directors as of February 28, 2013 are as follows: Name Age DirectorSince Michael Federmann (Chairman) 69 2000 Moshe Arad 78 2005 Avraham Asheri 75 2000 Rina Baum 67 2001 David Federmann 38 2007 Yigal Ne’eman 71 2004 Yehoshua Gleitman (External Director) 63 2010 Dov Ninveh 65 2000 Dalia Rabin (External Director) 62 2010 The term of office of each director, other than the External Directors, expires at the annual general shareholders meeting to be held during 2013. Theterm of office for Yehoshua Gleitman as an External Director expires in March 2016, and the term of office for Dalia Rabin as an External Director expires inNovember 2013. Michael Federmann. Michael Federmann has served as chairman of the Board since 2000. He has held managerial positions in the FedermannGroup since 1969, and since 2002 he has served as chairman and CEO of Federmann Enterprises Ltd. (FEL). Currently, he also serves as chairman of theboard of directors of Dan Hotels Ltd. (Dan Hotels). Mr. Federmann is chairman of the board of governors of the Hebrew University of Jerusalem (the HebrewUniversity). He serves as the president of the Israel - Germany Chamber of Industry and Commerce. Mr. Federmann holds a bachelor’s degree in economicsand political science from the Hebrew University. Moshe Arad. Moshe Arad served as vice president for external relations of the Hebrew University from 1994 to 2004. He currently serves as thechairman of the board of trustees of The Harry S. Truman Research Institute for the Advancement of Peace of The Hebrew University and is a member of theboard of the Israeli branch of the Mandel Foundation of Cleveland, Ohio. From 1994 to 1999, he was a member of the board of directors of Elbit Ltd.During 1992 and 1993, Mr. Arad served as director general of the Israel Ministry of Communications. From 1990 to 1992, he was a member of the Tel-Avivlaw firm of Herzog, Fox, Ne’eman. Mr. Arad served as Israel’s ambassador to the United States from 1987 to 1990 and as Israel’s ambassador to Mexicofrom 1983 to 1987. Ambassador Arad holds a bachelor’s degree in political science and international relations and an L.L.B. degree from the HebrewUniversity. Mr. Arad serves on the Audit Committee and the Financial Statements Review Committee of the Board. Avraham Asheri. Avraham Asheri has served as an economic advisor and a director of several companies since 1998. He currently serves on theboards of directors of Elron Electronic Industries Ltd., Koor Industries Ltd., Mikronet Ltd. and Radware Ltd. Mr. Asheri was president and chief executiveofficer of Israel Discount Bank from 1991 until 1998, and executive vice president and member of its management committee from 1983 until 1991. Prior tothat, he served for 23 years at the Israel Ministry of Industry and Trade and at the Israel Ministry of Finance, including as director general of the IsraelMinistry of Industry and Trade, managing director of the Israel Investment Center and Trade Commissioner of Israel to the United States. Mr. Asheri holds abachelor’s degree in economics and political science from the Hebrew University. Mr. Asheri serves as chair of the Corporate Governance and NominatingCommittee and as a member of the Audit Committee, the Compensation Committee and the Financial Statements Review Committee of the Board. He isconsidered by the Board to have financial and accounting expertise under the Companies Law. Rina Baum. Rina Baum is vice president for investments of FEL and since 1986 has served as director and general manager of Unico InvestmentCompany Ltd. She serves as a director of Dan Hotels, Etanit Building Products Ltd. and Incotec Ltd., as well as in other managerial positions within theFedermann Group. She also serves as a director in Harel-PIA Mutual Funds Management Company Ltd. Mrs. Baum holds an L.L.B. degree from the HebrewUniversity. 60 David Federmann. David Federmann has served in various management capacities in FEL since 2000. He currently serves as chairman of theboard of Freiberger Compound Materials GmbH (Freiberger) in Freiberg, Germany and as a member of the boards of directors of Dan Hotels and BGNTechnologies (the technology transfer company of Ben-Gurion University). David Federmann is the son of Michael Federmann, chairman of the Board. Mr.Federmann holds a bachelor’s degree in mathematics and philosophy from New York University. Dr. Yehoshua Gleitman (External Director). Dr. Yehoshua (Shuki) Gleitman has served since 2001 as the managing partner of Platinum VC, aventure capital firm. He currently serves as chairman of the board of directors of Capital Point Ltd. and is a director of Teuza – A Fairchild TechnologyVenture Ltd. From 2000 until 2005, he was the chief executive officer and a director of SFKT Ltd. From 1997 until 1999, Dr. Gleitman was the chiefexecutive officer of Ampal-American Israel Corporation. Prior to that he served in various senior management positions in the Israeli government and in Israeliindustry, including as director general and chief scientist of the Israel Ministry of Industry and Trade, chairman of the U.S.-Israel Industrial R&DFoundation, joint chairman of the U.S.-Israel Science and Technology Commission, managing director of AIMS Ltd., vice president and general manager ofElop Electro-Optic Industries Ltd.’s (Elop) marine and aerial operations and head of the Laser Branch of the Israel Ministry of Defense. Dr. Gleitman serves asthe honorary consul general of Singapore to Israel, is chairman of the executive board of Holon Institute of Technology and is a member of the executive boardof Tel-Aviv University. Dr. Gleitman holds bachelors of science, master of science and PhD degrees in physical chemistry from the Hebrew University. Dr.Gleitman serves as chair of the Audit Committee and of the Financial Statements Review Committee and as a member of the Corporate Governance andNominating Committee and the Compensation Committee of the Board. He is considered by the Board to have financial and accounting expertise under theCompanies Law. Yigal Ne’eman. Yigal Ne’eman has served as the general manager of the Academic College of Israel in Ramat Gan since 2010. From 1994 to 2010,he served as the chairman and president of the Israel College. From 1989 to 1993, he served as chairman and as a shareholder of several industrial,commercial and service companies. Mr. Ne’eman served as the president and CEO of Tadiran Ltd (Tadiran) from 1981 to 1989. During that period he alsoserved as chairman of the board of directors of Elisra Electronic Systems Ltd. and of Elop. Prior to that he held a number of management positions in thecontrol and finance departments of Tadiran. Mr. Ne’eman completed his accounting studies at the Hebrew University and is a Certified Public Accountant.Mr. Ne’eman serves as a member of the Audit Committee, the Financial Statements Review Committee and the Corporate Governance and NominatingCommittee of the Board. He is considered by the Board to have financial and accounting expertise under the Companies Law. Dov Ninveh. Dov Ninveh has served as chief financial officer and a manager in FEL since 1994 and as general manager of HerisAktiengesellschaft since August 2012. He serves as a director of Dan Hotels and Etanit Ltd. and as a member of the board of Freiberger. Mr. Ninveh served asa director of Elop from 1996 until 2000. From 1989 to 1994, he served as deputy general manager of Etanit Building Products Ltd. Mr. Ninveh holds abachelor’s degree in economics and management from the Israel Institute of Technology (the Technion). Dalia Rabin (External Director). Dalia Rabin has served since 2002 as the chairperson of the Yitzhak Rabin Center, a national institute dedicatedto ensuring that former Prime Minister and Minister of Defense Yitzhak Rabin’s legacy continues to impact Israeli society through experiential educationalprogramming, a national archive and a museum. Mrs. Rabin was a member of the Israeli government from 1999 until 2002. She was elected to the Knesset asa member of the Center Party in 1999 and served as chairperson of the Ethics Committee. She also served on the Constitution, Law and Justice Committee,the Committee for the Advancement of the Status of Women, the State Control Committee and the Committee for the Advancement of the Status of the Child. In2001, Mrs. Rabin was appointed Deputy Minister of Defense. She resigned in 2002 to head the Rabin Center. Prior to her election to the Knesset, Mrs. Rabinserved as the legal advisor of the professional associations of the General Federation of Labor (the Histadrut). She also served for 14 years in the Tel-AvivDistrict Attorney’s Office in the Civil Division, specializing in labor law. Mrs. Rabin holds an L.L.B. degree from Tel-Aviv University. Mrs. Rabin serves aschair of the Compensation Committee and as a member of the Audit Committee, the Financial Statements Review Committee and the Corporate Governanceand Nominating Committee of the Board. 61 Executive Officers Our executive officers (the President and CEO and the management officials reporting to the President and CEO) as of February 28, 2013 are asfollows: Name Age Position Joseph Ackerman 63 President and Chief Executive Officer Bezhalel Machlis 49 Executive Vice President - President and CEO Designee Elad Aharonson 39 Executive Vice President and General Manager – UAS Division Jonathan Ariel 56 Executive Vice President and Chief Legal Officer David Block Temin 57 Executive Vice President, Chief Compliance Officer and Senior Counsel Adi Dar 41 Executive Vice President and General Manager – Electro-Optics Elop Division Itzhak Dvir 65 Executive Vice President and Chief Operating Officer Jacob Gadot 65 Executive Vice President – International Marketing and Business Development Joseph Gaspar 64 Executive Vice President and Chief Financial Officer Zeev Gofer 60 Executive Vice President – Strategic and Business Development - North America Dalia Gonen 61 Executive Vice President – Human Resources Ran Hellerstein 62 Executive Vice President and Co-General Manager – Aerospace Division Edgar Maimon 57 Executive Vice President and General Manager – EW and SIGINT Elisra Division Ilan Pacholder 58 Executive Vice President – Mergers and Acquisitions, Offset and Financing Marco Rosenthal 66 Executive Vice President - Corporate Shared Services Haim Rousso 66 Executive Vice President – Engineering and Technology Excellence Gideon Sheffer 64 Executive Vice President – Strategic Planning and Business Development – Israel Yoram Shmuely 52 Executive Vice President and Co-General Manager – Aerospace Division Udi Vered 55 Executive Vice President and General Manager – Land and C4I Division 62 Joseph Ackerman. Joseph Ackerman was appointed as President and Chief Executive Officer in 1996. In August 2012, he announced hisretirement effective March 31, 2013. From 1996 to 2004, he served as a member of our Board. From 1994 to 1996, he served as senior vice president andgeneral manager of Elbit Ltd.’s defense systems division. Mr. Ackerman joined Elbit Ltd. in 1982 and held various management positions, including generalmanager – EFW, senior vice president – operations, vice president – operations and vice president – advanced battlefield systems. He serves as chairman or asa director on the boards of many of our affiliated companies. Mr. Ackerman holds a bachelor of science degree in aeronautical engineering from the Technionand was awarded an honorary doctorate by the Technion.Bezhalel Machlis. Bezhalel Machlis was designated in August 2012 to succeed Joseph Ackerman as the Company’s President and CEO, effectiveApril 1, 2013. From 2008 until December 2012, he served as executive vice president and general manager – land and C4I division, after serving as corporatevice president and general manager – land systems and C4I since 2004. In 2003, he served as corporate vice president and general manager – ground, C4I andbattlefield systems. From 2000 until 2002, he served as vice president – battlefield and information systems. Mr. Machlis joined Elbit Ltd. in 1991 and heldvarious management positions in the battlefield and information systems area. Prior to that, he served as an artillery officer in the IDF, where he holds the rankof colonel (reserves). Mr. Machlis holds a bachelor of science degree in mechanical engineering and a bachelor of arts degree in computer science from theTechnion and an MBA from Tel-Aviv University. He is a graduate of Harvard University Business School's Advanced Management Program. Elad Aharonson. Elad Aharonson was appointed as Executive Vice President and General Manager – UAS Division in 2011, after serving as vicepresident – UAV systems since 2009. He joined Elbit Systems in 2004 and held various senior program management positions relating to UAS. Prior to that,Mr. Aharonson served as an officer in the IDF holding command positions in the Artillery Branch and in the Ground Forces’ UAV unit. Mr. Aharonson holdsan L.L.B. degree in law and a bachelor’s degree in business administration from the Hebrew University. Jonathan Ariel. Jonathan Ariel was appointed as Executive Vice President and Chief Legal Officer in January 2012, after serving as senior vicepresident and general counsel since 2008. He joined Elbit Systems in 1996 and has held several positions within the legal department, including vicepresident and general counsel of Elop. Prior to joining Elbit Systems, Mr. Ariel served as a legal advisor both in-house and in private law firms in Israel andthe U.S. Mr. Ariel holds an L.L.B degree in law from Tel-Aviv University and is admitted to the Israeli Bar. David Block Temin. David Block Temin has served as Executive Vice President, Chief Compliance Officer and Senior Counsel since January2012, after serving as executive vice president, chief legal officer and chief compliance officer since 2008, as corporate vice president since 2000 and as generalcounsel since 1996. From 1987 to 1996, he was a legal advisor to Elbit Ltd. Prior to that, Mr. Block Temin was an attorney with law firms in New YorkCity. Mr. Block Temin received a juris doctor degree as well as a master of arts degree in international relations from Stanford University and holds a bachelorof arts degree in political science from the University of Maryland. He is admitted to the Israeli and New York bars. Adi Dar. Adi Dar was appointed as Executive Vice President and General Manager – Electro-Optics Elop Division in 2009. From 2006 until hiscurrent appointment he served as Elop’s vice president for business development. Prior to that he served in a number of management positions in ElbitSystems, which he joined in 2002. From 1999 until 2002, he was vice president for business development and marketing at Elron Telesoft Ltd. Mr. Darholds a bachelors degree in industrial engineering from the Technion and an MBA from Tel-Aviv University. Itzhak Dvir. Itzhak Dvir was appointed as an Executive Vice President in 2008 and has served as Chief Operating Officer since 2004. From June toDecember 2010, he also served as general manager (acting) of the UAS Division. He was appointed as a corporate vice president in 2000. Mr. Dvir served asgeneral manager – UAV, tactical and security systems from 2003 until 2004. From 2000 through 2002, he was general manager – C4I and battlefield systems.From 1996 until 2000, he was vice president and division manager – UAV and C3 division. Mr. Dvir joined Elbit Ltd. in 1989 and held variousmanagement positions, including vice president – UAV division, vice president – advance battlefield systems division and marketing director – battlefieldsystems division. Prior to that he served as a career officer in the IAF, retiring with the rank of colonel. Mr. Dvir holds a bachelor of science degree inaeronautical engineering from the Technion and a master of science degree in aeronautical engineering from the U.S. Air Force Institute of Technology at WrightPatterson Air Force Base. 63 Jacob Gadot. Jacob Gadot was appointed as Executive Vice President – International Marketing and Business Development in 2009. From 2008until his current appointment he was executive vice president – mergers and acquisitions, after serving as corporate vice president – mergers and acquisitionssince 2000. He also served as chief technology officer from 2001 until 2005. Mr. Gadot held the position of vice president – mergers and acquisitions from1998 to 2000 and vice president – business development from 1996 to 1998. Mr. Gadot joined Elbit Ltd. in 1983 and held various management positions,including vice president – international marketing and head of the airborne division. Prior to that, he worked for Motorola Israel, after serving for ten years asan officer in the IAF. Mr. Gadot holds a bachelor of science degree in electrical engineering from the Technion. Joseph Gaspar. Joseph Gaspar was appointed as an Executive Vice President in 2008 and as Chief Financial Officer in 2001. He was appointed asa corporate vice president in 2000 and served as corporate vice president – strategy, technology and subsidiaries from 2000 until 2001. From 1996 until 2000,he held the position of corporate vice president, marketing and business development of Elop. Mr. Gaspar joined Elop in 1975 and held several managementpositions, including vice president and general manager of Elop’s optronics product division and co-manager of an Elop subsidiary in the United States. Mr.Gaspar holds a bachelor of science degree from the Technion in electronic engineering with advanced studies in digital signal processing and communication. Zeev Gofer. Zeev Gofer was appointed as Executive Vice President – Strategic and Business Development – North America in 2009. From 2008 untilhis current appointment he was executive vice president – business development and marketing, after serving as corporate vice president – businessdevelopment and marketing since 2003. He previously served as corporate vice president and as co-general manager – aircraft and helicopter upgrades andsystems from 2000 until 2003. From 1999 until 2000, he was vice president – aircraft upgrades and airborne systems division, having served as divisionmanager since 1996. He joined Elbit Ltd. in 1982 and held various management positions, including director of the aircraft upgrade division, director of amajor aircraft upgrade program, director of avionics system engineering and technical manager of the Lavi aircraft avionics program. Mr. Gofer holds bachelorand master of science degrees in electronic engineering from the Technion and a master of science of management degree from the Polytechnic University ofNew York. Dalia Gonen. Dalia Gonen was appointed as Executive Vice President – Human Resources in 2008 after serving as vice president – humanresources from 2000. She became director of human resources in 1996. Ms. Gonen joined Elbit Ltd. in 1971 and held various positions in the humanresources department. Ms. Gonen holds a bachelor of arts degree in sociology from Haifa University and a master of science of management degree from thePolytechnic University of New York. Ran Hellerstein. Ran Hellerstein was appointed as Executive Vice President and Co-General Manager – Aerospace Division in 2008. He hasannounced his retirement and effective March 31, 2013 will stepdown from his current position. Mr. Hellerstein served as corporate vice president and co-general manager – aircraft and helmet systems since 2003. Mr. Hellerstein served as corporate vice president and co-general manager – aircraft and helicopterupgrades and systems from 2000 until 2003. From 1996 until 2000, he served as vice president – development and engineering division, having served asdivision manager since 1993. Mr. Hellerstein joined Elbit Ltd. in 1978 and served in various management positions, including manager of the engineeringdivision, department manager, technical manager and systems engineer. Mr. Hellerstein holds bachelor and master of science degrees in electrical engineeringfrom the Technion.Edgar Maimon. Edgar Maimon was appointed as Executive Vice President and General Manager – EW and SIGINT Elisra Division in February2013. From 2005 until his current appointment Mr. Maimon served as vice president of marketing and business development at Elbit Systems EW andSIGINT – Elisra Ltd. (Elisra). He joined Elisra in 2004. Prior to that Mr. Maimon served for 26 years in the IAF, where he holds the rank of colonel(reserves). He served as the head of the IAF’s C4I systems engineering department and held several additional senior positions in the IAF. Mr. Maimon holds abachelor of science degree in electronic engineering from Ben Gurion University. Ilan Pacholder. Ilan Pacholder was appointed as Executive Vice President – Mergers and Acquisitions in 2009, in addition to his position asExecutive Vice President – Offset and Financing to which he was appointed in 2008. During 2007, he served as vice president and chief financial officer ofTadiran Communications Ltd. Mr. Pacholder served as corporate secretary and vice president – finance and capital markets of Elbit Systems from 2003 until2006. From 2001 until 2003, he served as vice president – finance. Mr. Pacholder joined Elbit Ltd. in 1994 and held various senior positions in the financedepartment. Prior to joining Elbit Ltd. he served as the chief financial officer for Sanyo Industries in New York. Before that Mr. Pacholder worked for BankLeumi in New York and held the position of vice president in the international and domestic lending departments. Mr. Pacholder holds a bachelor of arts degreein accounting and economics from Queens College in New York and an MBA in finance and investments from Adelphi University. 64 Marco Rosenthal. Marco Rosenthal was appointed as Executive Vice President - Corporate Shared Services in 2011, having served prior to that asexecutive vice president and co-general manager – technologies and operations division from 2008, and as corporate vice president and co-general manager –technologies and operations division since 2005. He served as corporate vice president – manufacturing and purchasing from 2001 until 2005, having servedfrom 1999 to 2001 as vice president – operations and general manager of the Karmiel facility. From 1996 to 1999, he served as vice president – material.Mr. Rosenthal joined Elbit Ltd. in 1975 and held various management positions, including director of the sales department. Mr. Rosenthal holds a degree intechnical engineering from the Technion and a degree in business management from Haifa University. Haim Rousso. Haim Rousso was appointed as Executive Vice President – Engineering and Technology Excellence in 2009. Prior to that he servedfrom 2008 as executive vice president and general manager – electro-optics Elop division after serving as corporate vice president and general manager of Elopsince 2000. He held various management positions in Elop since 1972. Mr. Rousso holds bachelor and master of science degrees in electrical engineering fromthe Technion. Gideon Sheffer. Gideon Sheffer was appointed as Executive Vice President – Strategic Planning and Business Development – Israel in August2009. From 2008 until his current position he served as executive vice president – strategic planning, after serving as corporate vice president – strategicplanning since 2001. Prior to that he served as acting head of Israel’s National Security Council and as national security advisor to former Prime MinisterEhud Barak. In 1998, he completed 32 years of service in the IDF, retiring with the rank of major general. From 1995 to 1998, he served on the general staffas head of the IDF’s human resources branch. Before that, he served as deputy commander of the IAF. Mr. Sheffer held a number of command positions in theIAF after serving as a fighter aircraft and helicopter pilot. Mr. Sheffer holds a bachelor’s degree in Israel studies from Bar Ilan University and is a graduate ofthe Harvard University Business School’s Advanced Management Program. Yoram Shmuely. Yoram Shmuely was appointed as Executive Vice President and Co-General Manager – Aerospace Division in 2008 and effectiveMarch 31, 2013, will assume the position of sole General Manager of the Aerospace Division. Mr. Shmuely served as corporate vice president and co-generalmanager – airborne and helmet systems since 2003. He served as corporate vice president and general manager – helmet mounted systems from 2000 until2003. From 1998 until 2000, he was vice president – helmet mounted systems division. From its founding in 1996 until 1998, he served as president ofVSI. Mr. Shmuely joined Elbit Ltd. in 1990 and served as director of Elbit Ltd.’s helmet mounted display business. He served as a fighter aircraft pilot in theIAF. Mr. Shmuely holds a bachelor of science degree in electronic engineering from the Technion.Udi Vered. Yehuda (Udi) Vered was appointed Executive Vice President and General Manager – Land and C4I Division in January 2013. From2009 until his current appointment Mr. Vered served as executive vice president – service solutions as well as vice president – marketing for the land and C4Idivision. Prior to that, since 2004 he served as chief financial officer and vice president for contracts and sales of the land and C4I division. Mr. Vered joinedElbit Systems in 2003 as vice president for contracts and sales and chief financial officer – ground, C4I and battlefield systems. Before that, he served as anaircrew officer in the IAF, where he holds the rank of colonel (reserves). Mr. Vered holds a bachelor of arts degree in management and economics from Tel-AvivUniversity, an MBA from Ben Gurion University and is a graduate of the Harvard University Business School’s Advanced Management Program. President and CEO of Elbit Systems of America Elbit Systems of America’s President and CEO reports to the board of directors of Elbit Systems of America in accordance with the provisions of theSpecial Security Agreement with the U.S. Department of Defense. (See Item 4. Information on the Company – U.S. Subsidiaries.) Raanan Horowitz serves asPresident and CEO of Elbit Systems of America. 65 Raanan Horowitz. Raanan Horowitz was appointed President and Chief Executive Officer of Elbit Systems of America in 2007. He served asexecutive vice president and general manager of EFW from 2001 until his current appointment. From 1991 until 2001, Mr. Horowitz held various managementpositions with EFW and other U.S. subsidiaries of the Company. From 1989 to 1991, he served as a senior program manager for Elbit Ltd. Mr. Horowitzserves on the executive committee of the board of governors of the Aerospace Industries Association and is a member of the executive committee of the nationalboard of directors of the Leukemia and Lymphoma Society. Mr. Horowitz holds an MBA from the Seidman School of Business of Grand Valley StateUniversity in Allendale, Michigan. He also holds a master of science degree in electrical engineering and a bachelor of science degree in mechanical engineeringfrom Tel-Aviv University. Compensation of Directors and Executive Officers The following table sets forth the aggregate compensation paid to all of our directors and executive officers as a group for the fiscal year endedDecember 31, 2012: Salaries,Directors’ FeesCommissionsand Bonuses Pension,Retirementand SimilarBenefits (U.S. dollars in thousands) All directors (consisting of 9 persons) $296* $– All executive officers (consisting of 19 persons) $11,580** $1,003 *Elbit Systems’ shareholders at the annual general shareholders meeting held in 2004 approved payment to directors thereafter in accordance withmaximum regulatory rates payable to External Directors under Israeli law for companies similarly classified based on their shareholding equity.These rates were linked to the Israeli consumer price index. At an extraordinary general shareholders meeting held in 2008, our shareholdersapproved increasing compensation, so long as such approval has not been replaced or revoked by the shareholders. to our External Directors and toother directors meeting the director independence criteria of Nasdaq, each of whom has additional duties under applicable non-Israeli law. Theincreased compensation was consistent with amendments to Israeli law regarding compensation to External Directors who serve on the boards of“dual listed” companies, such as Elbit Systems, and are subject to corresponding additional duties. As a result, External Directors and other such “independent” directors are and will be entitled, so long as the above-mentioned resolution adopted in2008 is in effect, to an annual fee of NIS 114,775 (equal to approximately $29,858) and a per meeting fee of 2,525 NIS (equal to approximately$656), which reflect the fees levels previously approved at the 2008 Shareholders’ Extraordinary General Meeting and linked to the Israeli consumerprice index. The other directors are paid the following compensation: an annual fee of NIS 57,200 (equal to approximately $14,880) and a permeeting fee of NIS 2,158 (equal to approximately $561), which reflect the fees levels previously approved at the 2004 annual general shareholdersmeeting and linked to the Israeli consumer price index. In compliance with the Companies Law, our Audit Committee and the Board approved, in meetings held in 2011 in accordance with the IsraeliCompanies Regulations (Relief from Related Parties’ Transactions), 5760-2000 (the “Regulations”), payment of director’s compensation to MichaelFedermann and to David Federmann in amounts equal to the compensation paid by the Company to other directors of the Company who are not“independent” directors, as specified above. We currently intend to maintain such compensation rates to such directors. Compensation payments todirectors are made either directly to the director or to his or her employing company. **We recorded an amount of approximately $1.2 million in 2012 as compensation costs related to stock options granted to our executive officers underour 2007 Employee Stock Option Plan. (See below “Share Ownership – Elbit Systems’ Stock Option Plans.”) In August 2012 our Board approved a “Phantom” Option Retention Plan for Senior Officers (the Plan). The purpose of the Plan is to provide anincentive to retain applicable senior officers of Elbit Systems and certain of our subsidiaries by strengthening the alignment of the Plan recipients’financial interests with those of the Company and our shareholders. See Item 18. Financial Statements – Note 21(I). We recorded an amount ofapproximately $0.3 million in 2012 as compensation costs related to the tranches of phantom options granted to our executive officers under the Plan. Pursuant to recent amendments to the Companies Law, Elbit Systems is required to adopt a compensation policy and follow certain approvalrequirements with respect to the compensation of our directors and executive officers. See below “Board of Directors – Compensation Committee”and Item 10. Additional Information – General Provisions of Israeli Law and Related Provisions of Articles of Association – Office Holders. 66 Board Practices Appointment of Directors Our directors are elected by the shareholders at the annual general shareholders meeting. They hold office until the next annual general shareholdersmeeting, which is held at least once every calendar year but not more than 15 months after the previous general shareholders meeting. Between annual generalshareholders meetings our Board may appoint new directors to fill vacancies; however, new External Directors must be elected at a general shareholdersmeeting as described under “External Directors” below. Our Articles of Association authorize a maximum of 17 and a minimum of five directors. The Companies Law requires the board of directors of a public company, after considering the company’s type and size and the scope andcomplexity of its activities, to determine the minimum number of directors on the board having “financial and accounting expertise” as defined in theCompanies Law. Our Board has adopted a policy pursuant to which it will include a minimum of two directors having financial and accounting expertise asdefined under the Companies Law. Currently our Board has three directors who are considered by the Board to have financial and accounting expertise: Dr.Gleitman, Mr. Asheri and Mr. Ne’eman. In addition, the Companies Law provides that a person will not be elected and will not serve as a director in a publiccompany if he or she does not have the required qualifications and the ability to dedicate an appropriate amount of time for the performance of his or herdirector position in the company, taking into consideration, among other factors, the special needs and size of the company. A general shareholders meeting ofa company whose shares are publicly traded, at which the election of a director is to be considered, will not be held unless the nominee has declared to thecompany that he or she complies with the above-mentioned requirements, and the details of his or her applicable qualifications are provided, and in case suchnominee is an "Independent Director" as defined in the Companies Law, that such nominee has also declared that he or she complies with the independencecriteria under the Companies Law. Each of our elected directors has declared to our Board that he or she complies with the required qualifications under theCompanies Law for appointment as a member of our Board, detailing his or her applicable qualifications, and that he or she is capable of dedicating theappropriate amount of time for the performance of his or her role as a member of our Board. In addition, each of our Independent Directors also has declaredthat he or she complies with the criteria of an Independent Director under the Companies Law. The current External Directors on our Board were each appointed at a general meeting of shareholders, with their terms expiring as described under“External Directors” below. The other seven current directors were appointed at the annual general meeting of shareholders held in November 2012. There areno service contracts or similar arrangements with any director that provide for benefits upon termination of directorship. Nasdaq’s director independence and related rules applicable to boards of directors apply to Elbit Systems. Under these rules, our Board is requiredto meet the Nasdaq director independence criteria. Also applicable are certain other rules regarding independent directors serving on a director nominationcommittee and the manner for approving the compensation to Elbit Systems’ Chief Executive Officer. Directors on our Board are recommended forappointment or election by the Board’s Corporate Governance and Nominating Committee. (See below “Corporate Governance and Nominating Committee.”) Substitute Directors. The Articles of Association provide that any director may appoint another person to serve as a substitute director. A substitutedirector must be qualified under the Companies Law to serve as a substitute of the relevant director, and, under the Companies Law, in case the substituteddirector is an "Independent Director" as defined in the Companies Law, the substitute director must also comply with the requirements of the Companies Lawfor Independent Directors. If his or her appointment is for more than one meeting it will be subject to the approval of the Board. Such person may not act as asubstitute director for more than one director at the same time. In addition, a Board committee member may not substitute for another Board committee memberin meetings of the applicable committee. The same rules, including compensation, will apply to a substitute director as to the director who appointed him orher, and the substitute director may participate in Board and Board committee meetings in the same manner as the appointing director (subject to anyapplicable independence criteria). Subject to the Companies Law, a director who has appointed a substitute director may revoke the appointment at any time.In addition, the office of a substitute director will be vacated at any time that the office of the director who appointed the substitute is vacated for any reason.Any appointment or revocation of the appointment of a substitute director will be made by notice in writing to the substitute director and Elbit Systems. Theappointment or revocation, as the case may be, will become effective on the later of the date of receipt of the above notice or the date fixed in the notice. 67 External Directors Under the Companies Law publicly held Israeli companies are required to appoint at least two “External Directors.” Among other requirements, foreach publicly held company such as Elbit Systems, that is considered to have a controlling shareholder, a person may serve as an External Director: (A)if that person is not a relative of the controlling shareholder of that company, or if that person (and each of that person’s relatives, partnersand employers), or any person to whom he or she is subordinated (directly or indirectly), or any entity controlled by that person, did nothave, at any time during the two years preceding that person’s appointment as an External Director, any affiliation (as defined in theCompanies Law) with any of: (1) the applicable company; (2) the controlling shareholder of the applicable company or any of his or her relatives; (3) the entities controlling the company; (4) the entities controlled by the company; or (5) the entities controlled by the company’s controlling shareholders; (B)if and so long as: (1) no conflict of interest exists or may exist between his or her responsibilities as a member of the board of directors of the respectivecompany and his or her other positions or business activities; or (2) such position or business activities does not impair his or her ability to serve as a director; and (C)if and so long as: (1) that person (and each of that person’s relatives, partners and employers, or any person to whom he or she is subordinated (directly orindirectly) or any entity controlled by that person) has no business or professional relationships with any of the persons or entitiesmentioned in (A) above, even if such relationship is not on a regular basis (other than a negligible relationship); and (2) no other consideration except as permitted under the Companies Law is paid to that person in connection with that person's position as adirector in the relevant company. In general, at least one External Director must have “financial and accounting expertise”, and the other External Director(s) must have “professionalcompetence” as described below. However, in companies such as Elbit Systems that are “dual listed” (for example traded on a stock exchange in both Israeland the U.S.) if one or more other directors who meet the independence criteria applicable to members of the audit committee under the foreign applicable law(including stock exchange rules) have been determined by the board of directors to have “financial and accounting expertise” then it is permissible for any orall of the External Directors to have only “professional competence” as described below. Under the relevant regulations of the Companies Law, a director has“financial and accounting expertise” if he or she, based on his or her education, experience and qualifications, is highly skilled in respect of, andunderstands, business and accounting matters and financial statements, in a manner that enables him or her to have an in-depth understanding of thecompany’s financial statements and to stimulate discussion with respect to the manner in which the financial data is presented. 68 The evaluation of the “financial and accounting expertise” of a director is to be made by the board of directors taking into account the parametersspecified in the relevant regulations of the Companies Law. A director has “professional competence” if he or she (1) has an academic degree in eithereconomics, business administration, accounting, law or public administration or an academic degree in an area relevant to the company’s business, or (2) hasat least five years experience in a senior position in the business management of any corporate entity with a substantial scope of business, in a senior positionin public service or in the field of the applicable company’s business. The evaluation of the professional competence of a director is to be made by the board ofdirectors.According to the Companies Law, External Directors serve for a three-year term following which they may stand for re-election for one additionalterm, or up to two additional terms (if the articles of association of the company so allows) of three years each. Re-election of an External Director for eachadditional period beyond the first period requires that he or she: (i) is recommended for re-election by one or more shareholders holding at least 1% of all votingrights of the relevant company; or (ii) is recommended for re-election by the board of directors of the relevant company, and, in each case the nomination isapproved by the general meeting of shareholders of the relevant company with the applicable majority requirements as provided by the Companies Law. At ageneral meeting of shareholders held in 2011, our shareholders approved relevant amendments to our Articles of Association, consistent with the above,allowing External Directors of the Company to be re-elected up to two additional terms of service as permitted by the Companies Law.In addition, External Directors in companies such as Elbit Systems that are “dual listed” may stand for re-election to additional terms of up to threeyears each beyond the first three terms, subject to meeting the following conditions: (1)the audit committee and the board both determine that based upon the expertise and the unique contribution of the External Director to the workof the board and its committees, his or her re-election for an additional term is for the benefit of the company; (2)his or her re-election is recommended by one or more shareholders holding at least 1% of all voting rights of the relevant company; (3)his or her re-election is approved at a general shareholders meeting by the special majority required for nomination of External Directors underthe Companies Law; and (4)his or her terms of service as an External Director and the considerations of the audit committee and the board regarding his or her re-electionwere presented to the general meeting of shareholders prior to the vote on such approval.At a general meeting of shareholders held in 2008, our shareholders approved an amendment to our Articles of Association, consistent with the above,allowing External Directors of the Company to be elected to more than three terms of service. Any committee of the Board must include at least one ExternalDirector, and all External Directors must be members of the Audit Committee and the Compensation Committee. Yehoshua Gleitman and Dalia Rabin currently serve as our Board’s External Directors. Dr. Gleitman’s term of office ends in March 2016, and theterm of office of Dalia Rabin ends in November 2013. Yehoshua Gleitman was determined by the Board to have “financial and accounting expertise” underIsraeli law, and Dalia Rabin was determined by the Board to have the applicable “professional competence” to serve as an External Director. Audit Committee. Yehoshua Gleitman (Chair), Moshe Arad, Avraham Asheri, Yigal Ne’eman and Dalia Rabin are members of the AuditCommittee. The Audit Committee operates in accordance with an Audit Committee Charter that provides the framework for its oversight functions consistentwith Israeli and U.S. legal and regulatory requirements. All of the members of the Audit Committee meet the applicable requirements of the Companies Lawand have been determined to be independent as defined by the applicable Nasdaq rules and those of the U.S. Securities Exchange Commission (SEC). TheAudit Committee meets from time to time in executive sessions and also conducts annual assessments of the sufficiency of its Charter and of the Committee’scompliance with its obligations. (See Item 10. Additional Information – General Provisions of Israeli Law and Related Provisions – Internal Auditor and AuditCommittee; Item 16A. Audit Committee – Financial Expert and Item 16D. Exemptions from Listing Standards for Audit Committees.) 69 Financial Statements Review Committee. Yehoshua Gleitman (Chair), Moshe Arad, Avraham Asheri, Yigal Ne’eman and Dalia Rabin aremembers of the Board’s Financial Statements Review Committee, which was established in 2011. Pursuant to the Israeli Companies Regulations the financialreports of a public company such as Elbit Systems may be brought for discussion and approval of the board only after such committee has discussed andformulated recommendations to the board in connection with: (1) the valuations and estimates used in connection with the financial statements; (2) the internalcontrols related to financial reporting; (3) the completeness and appropriateness of disclosure in the financial statements; (4) the accounting policy adopted andaccounting treatment applied in the material matters of the company; and (5) valuations, including the assumptions and estimates underlying them, on whichdata in the financial statements is provided. The chairperson of the committee must be an External Director, and other members of the committee must bedirectors who meet certain independence requirements, and, among other criteria, must be able to read and understand financial statements, with at least one ofthe members having “financial and accounting expertise” (as defined above). Yehoshua Gleitman, Avraham Asheri and Yigal Ne’eman have been determinedby the Board to have “financial and accounting expertise”.Compensation CommitteeDalia Rabin (Chair), Avraham Asheri and Yehoshua Gleitman are members of the Board’s Compensation Committee. All of our CompensationCommittee members have been determined to be eligible to be members of a compensation committee in accordance with the recent amendments to theCompanies Law and also have been determined to be independent as defined by the applicable Nasdaq rules and those of the SEC.Under recent amendments to the Companies Law, which provide for new procedures relating to the approval of the terms of office and employment ofOffice Holders of and the formulation of a compensation policy applicable to Israeli public companies, the compensation committee of a public company,such as Elbit Systems, is required to consist of at least three members and all of the external directors must be members of the committee (one of which to beappointed as the chairperson) and constitute the majority thereof. The remaining members must be directors who qualify to serve as members of the auditcommittee as defined in the Companies Law. In addition to its other roles , under the amendments to the Companies Law the compensation committee of apublic company such as Elbit Systems is required: (i)to recommend to the board of directors the compensation policy for the company's Office Holders to be adopted by the company and torecommend to the board of directors, once every three years, regarding any extension or modifications of the current compensation policythat had been approved for a period of more than three years; (ii)from time to time to recommend to the board of directors any updates required to the compensation policy and examine the implementationthereof; (iii)to determine, with respect to the company's Office Holders, whether to approve their terms of office and employment in situations thatrequire the approval of the compensation committee in accordance with the Companies Law; and (iv)in certain situations described in the Companies Law, to determine whether to exempt the approval of terms of office of the CEO of thecompany from the requirement to obtain shareholder approval.According to the Companies Law amended as described above, terms of service and employment (including cash and equity-based compensation, exemptionfrom liability, indemnification, D&O insurance and other benefits and payments related to the service and employment) of a public company’s OfficeHolders must be approved also by the board as a whole and, with respect to terms of service and employment of the CEO or a director, also by the company'sshareholders in accordance with the majority requirements of the Companies Law. (For further information see Item 10. Additional Information – GeneralProvisions of Israeli Law and Related Provisions of Articles of Association– Office Holders.) 70 Corporate Governance and Nominating Committee. Avraham Asheri (Chair), Yehoshua Gleitman, Yigal Ne’eman and Dalia Rabin are membersof the Board’s Corporate Governance and Nominating Committee. This Committee operates in accordance with a Corporate Governance and NominatingCommittee Charter that specifies its oversight functions consistent with Israeli and U.S. legal and regulatory requirements. The role of the CorporateGovernance and Nominating Committee is to assist the Board in fulfilling its responsibilities with respect to the qualification of candidates to become Boardmembers and to monitor compliance with corporate governance requirements applicable to Board members. All of the members of the Corporate Governanceand Nominating Committee have been determined to be independent as defined by the applicable Nasdaq rules and those of the SEC. A nominee to our Boardmust have such experience in business or financial matters as would make such nominee an asset to the Board. In recommending director candidates, ourCorporate Governance and Nominating Committee takes into consideration such factors as it deems appropriate based on our current needs. These factorsmay include: professional and person ethics and integrity; business, professional and industry knowledge, sophistication and contacts; the ability to makeinformed and independent judgments on a wide range of issues; relevant skills and experience demonstrated through business, professional, charitable or civicaffairs; and the candidate’s ability to devote the required time and effort to serve on our Board. (See Item 16.G. Corporate Governance.) Board Committee Membership Audit Committee: Financial StatementsReview Committee: Corporate Governance andNominating Committee: Compensation Committee: Yehoshua Gleitman Yehoshua Gleitman Avraham Asheri Dalia Rabin(Chair) (Chair) (Chair) (Chair)Moshe Arad Moshe Arad Yehoshua Gleitman Avraham AsheriAvraham Asheri Avraham Asheri Yigal Ne’eman Yehoshua GleitmanYigal Ne’eman Yigal Ne’eman Dalia Rabin Dalia Rabin Dalia Rabin Employees Number of Employees. Most of our employees are based in Israel, and we have a significant number of employees in the United States. The totalnumber of employees worldwide and the number of employees in the U.S. at the end of 2012, 2011 and 2010 were as follows: Total U.S. Employees Employees 2012 12,134 1,772 2011 12,545 1,980 2010 12,317 1,963 Employment Contracts. The majority of our Israeli employees have individual employment contracts. However, by law some employees receiverights under a number of general collective bargaining agreements and under Israeli employment laws. See Item 4. Information on the Company – Conditions inIsrael – Israeli Labor Laws. We believe our overall relationship with our employees is satisfactory.Collective Bargaining Agreements. In Israel, several of our wholly-owned subsidiaries are each parties to collective bargaining agreements coveringa portion of their employees. A total of approximately 2,410 employees in Israel are covered by such agreements that extend for various periods up to 2017.Approximately 225 of the employees at Elbit Systems of America’s operations are covered by collective bargaining agreements in effect through variousperiods up to 2014. 71 Share Ownership Elbit Systems’ Stock Option Plans 2007 Employee Stock Option Plan In 2007, our shareholders approved the 2007 Option Plan (the Plan). The purpose of the Plan is to provide an incentive to applicable employees ofElbit Systems and certain of our subsidiaries, who are expected to contribute to the Company’s future growth and success and to strengthen the alignment ofthe option recipients’ interests with those of the Company and our shareholders. The options were allocated, subject to the required approvals, in two tracks as follows: (i) Regular Options – up to an aggregate of 1,250,000 optionsexercisable into 1,250,000 of our ordinary shares in consideration for the exercise price, all or any portion of which may be granted as Incentive Stock Options(Regular Options); and (ii) Cashless Options – up to an aggregate of 1,250,000 options, which entitle the participant to exercise options for an amountreflecting only the benefit factor (Cashless Options). Each of the participants is granted an equal amount of Regular Options and Cashless Options. Theexercise price for Israeli participants is the average closing price of our shares during 30 trading days preceding the options’ grant date. The exercise price ofoptions granted to a non-Israeli participant residing in the United States is the fair market value of the share on the day the options are granted. Generally, theoptions expire five years from the grant date. According to the Plan, the options granted on a certain date (such grant date being the Commencement Date) will become vested and exercisable inaccordance with the following vesting schedule: (1)50% of the options will be vested and exercisable from the second anniversary of the Commencement Date; (2)An additional 25% of the options will be vested and exercisable from the third anniversary of the Commencement Date; and (3)The remaining 25% of the options will be vested and exercisable from the fourth anniversary of the Commencement Date. In 2011, in accordance with Nasdaq Rule 5615(a)(3) allowing a foreign private issuer to follow its home country practice in lieu of certainrequirements of Nasdaq’s 5600 series of corporate governance rules, our Board approved an amendment to the Plan (the Amendment), which allows the PlanAdministrator (the Compensation Committee), subject to additional approvals as may be required under the Companies Law, to determine for each optiongranted and subject to the above-mentioned vesting periods, an expiration period of not less than five years and not more than seven years from theCommencement Date. In accordance with the Amendment, the Plan Administrator determined in November 2011 and 2012, respectively, to extend each time by one year thefinal exercise date of all the options granted to our employees during 2007 (except for the options granted to our employees in the U.S.), which were vested andnot yet exercised on the date of such applicable determination by the Plan Administrator. In November 2012, the Plan Administrator determined to extend byone year, the final exercise date of all the options granted to our employees during 2008 (except for the options granted to our employees in the U.S.), whichwere vested and not yet exercised on the date of such determination by the Plan Administrator. The final date for exercising options granted after 2008 remains,so long as the Plan Administrator does not determine otherwise, five years after the Commencement Date of each relevant option. Israeli participants are granted options under the Plan in accordance with the provisions of Section 102 of the Israeli Tax Ordinance related to theCapital Gains Tax Track.During 2007, we granted to approximately 200 employees an aggregate total of 2,381,300 options under the Plan. The average exercise price of theoptions was $33.27. During 2008, we granted an additional 135,800 options to 34 employees, at an average exercise price of $56.15. During 2009, we grantedan additional 58,500 options to 12 employees, at an average exercise price of $50.33. During 2010, we granted an additional 28,000 options to sevenemployees at an average exercise price of $52.31. During 2011, we granted an additional 63,300 options to 21 employees, at an average exercise price of$50.74. During 2012, we granted an additional 30,000 options to six employees at an average exercise price of $35.55. 72 In accordance with the Amendment and the determinations of the Plan Administrator mentioned above, the options granted during 2007 to employees(other than U.S. employees) and which are vested but not exercised by November 2012, are exercisable for seven years from the Commencement Date, and theoptions granted during 2008 to employees (other than U.S. employees) and which are vested but not exercised by November 2012, are exercisable for six yearsfrom the Commencement Date. All other options are exercisable for five years from the Commencement Date. The compensation expenses related to the optionsgranted in 2010, 2011 and 2012 as well as the compensation expenses related to the extensions of the options granted in 2007 and 2008 as mentionedabove, were not material.As part of the overall grant in the first quarter of 2007, our President, Joseph Ackerman, was granted 95,000 options under the Plan at an exerciseprice of $33.20 per share. Also, as part of the overall grant in the first quarter of 2007, our President Designee, Bezhalel Machlis, was granted 70,000 optionsunder the Plan at an exercise price of $33.20 per share, and 7,000 options in 2011 at an average price of $50.74. No directors were granted options under thePlan, but executive officers other than Mr. Ackerman and Mr. Machlis were granted under the Plan an aggregate of 568,000 options in 2007, at an averageexercise price of $33.34, an aggregate of 7,000 options in 2008, at an average exercise price of $53.60, an aggregate of 15,000 options in 2009, at an averageexercise price of $48.10, an aggregate of 5,000 options in 2010, at an average exercise price of $53.88 and an aggregate of 7,000 options in 2011, at anaggregate exercise price of $50.74. There were no grants of options under the Plan to executive officers during 2012. (For the full text of the Plan as amended by the Amendment see exhibit 4.3 – Amended 2007 Stock Option Plan to the post effective amendment to ourregistration statement on Form S-8, which amendment was filed with the SEC on December 1, 2011. See also Item 18. Financial Statements – Note 21(B).) 73 Item 7. Major Shareholders and Related Party Transactions. Major Shareholders Percentages We had, as of February 28, 2013, 41,911,989 ordinary shares outstanding(1) . The following table sets forth specific information as of February28, 2013, to the best of our knowledge, concerning: •beneficial ownership of more than 5% of our outstanding ordinary shares; and •the number of ordinary shares beneficially owned by all of our executive officers and directors as a group.Name of Beneficial Owner AmountOwned Percent ofOrdinaryShares Federmann Enterprises Ltd. 99 Hayarkon Street Tel-Aviv, Israel(2) 19,580,342 46.72% Heris Aktiengesellschaft c/o 99 Hayarkon Street Tel-Aviv, Israel 3,836,458(3) 9.15% All executive officers and directors as a group (28 persons) 197,796(4) 0.47% (1)The total number of ordinary shares excludes 1,408,921 ordinary shares held by us as treasury shares. (2)Federmann Enterprises Ltd. (FEL) owns our ordinary shares directly and indirectly through Heris Aktiengesellschaft (Heris) which iscontrolled by FEL. FEL is controlled by Beit Federmann Ltd. (BFL). BFL is controlled by Beit Bella Ltd. (BBL) and Beit Yekutiel Ltd.(BYL). Michael Federmann is the controlling shareholder of BBL and BYL. He is also the chairman of Elbit Systems’ Board and thechairman of the Board and the chief executive officer of FEL. Therefore, Mr. Federmann controls, directly and indirectly, the vote ofordinary shares owned by Heris and FEL. As of February 28, 2013, 4,655,448 ordinary shares held by FEL were pledged to Bank Leumi Le-Israel BM to guarantee loans providedto FEL in connection with FEL’s purchase in 2004 of our ordinary shares from Elron Electronics Industries Ltd. as well as to guarantee anincrease of the loan provided to FEL according to an 2007 amendment to the loan agreement. In addition, 2,175,000 ordinary shares heldby FEL were pledged in favor of Bank Hapoalim BM, in connection with FEL’s purchase in 2006 from Koor Industries Ltd. of 2,350,000of our ordinary shares. (3)The amount of ordinary shares owned by Heris is included in the amount of shares held by FEL as set forth in footnote (2) above. (4)This amount does not include: (i) any ordinary shares that may be deemed to be beneficially owned by Michael Federmann as described infootnote (2) above; and (ii) 301,373 ordinary shares underlying options that are currently exercisable or that will become exercisable within60 days of February 28, 2013. A portion of the underlying options are “phantom options” or “cashless” options that have been calculatedbased on our February 28, 2013 closing share price on the TASE of $38.94. 74 Rights in Shares, Significant Changes in Shareholders and Controlling Shareholders Our major shareholders have the same rights as other holders of our ordinary shares. (See also Item 10. Additional Information – Provisions Relatingto Major Shareholders. With respect to the Company’s repurchase of our ordinary shares see Item 16.E. Purchases of Equity Securities by the Issuer andAffiliated Purchasers.) The only changes in shareholdings by major shareholders in the last three years were those relating to FEL as follows: February 28, 2013 February 29, 2012 February 28, 2011 May 31, 2010 SharesOwned % ofSharesOwned SharesOwned % ofSharesOwned SharesOwned % ofSharesOwned SharesOwned % ofSharesOwned FEL 19,580,342(1) 46.72% 19,503,380(2) 45.97% 19,457,566(3) 45.50% 19,342,625 45.49%____________________ (1)Reflects incidental purchases by FEL of shares in open market transactions during March 2012 – February 2013. (2)Reflects incidental purchases by FEL of shares in open market transactions during May 2011 – February 2012. (3)Reflects incidental purchases by FEL of shares in open market transactions during May 2010 – February 2011. As of February 28, 2013, approximately 8.08% of our outstanding ordinary shares were held in the United States by approximately 153shareholders of record registered on the books of our transfer agent. We are not aware of any arrangement which may result in a change in control of the Company. Related Party Transactions Transactions with Affiliated Companies. In the ordinary course of business, some of our subsidiaries and affiliates engage in business activitieswith each other. The purchases among our related parties are made at prices and on terms equivalent to those used in transacting business with unrelatedparties under similar conditions. The sales among our related parties in respect to government defense contracts are made on the basis of costs incurred. (SeeItem 10. Additional Information – General Provisions of Israeli Law and Related Provisions of Articles of Association – Approval of Certain Transactions.) Transactions with Officers and Directors. See below – Item 10. Additional Information – General Provisions of Israeli Law and RelatedProvisions of Articles of Association and - Approval of Certain Transactions. For information on the grant of options in Elbit Systems’ shares to officers anddirectors, see Item 6. Directors, Senior Management and Employees – Share Ownership – Elbit Systems’ Stock Option Plans. 75 Item 8. Financial Information. Consolidated Statements and Other Financial Information See Item 18. Financial Statements. Export Sales Export sales constitute a significant portion of our sales. In 2012, export sales were approximately $2.4 billion, constituting approximately 82% ofour total sales. (For further information regarding the allocation of our revenues by geographic region see Item 5. Operating and Financial Review and Prospects– 2012 Compared to 2011 – Revenues.) Legal ProceedingsAminov. In November 2012, a claim in the amount of approximately $40 million regarding a commercial dispute was filed in the District Court ofTel-Aviv – Jaffa by Dr. Baruch Aminov against the Company, a European subsidiary of the Company and two of its officers. Based upon a preliminaryreview the Company believes that there is no merit to the allegations made in the claim and will respond accordingly in court. IMOD – Program Cancellation. In November 2012, Elbit Systems and its subsidiary Elop filed a lawsuit against the Government of Israel, fordamages and expenses caused in connection with the cancellation of export licenses for a project of a foreign customer. This followed the unsuccessful effortsto reach an appropriate compensatory settlement with the Government. The approximately $74 million lawsuit was filed with the District Court of the CentralRegion of Israel. See Item 18. Financial Statements - Note 1(C). Pinpoint. In 2009, a claim in the amount of approximately $10 million was filed in the District Court – Central District of Israel by PinpointAdvance Corporation (Pinpoint) and four of its founders against our Israeli subsidiary, Elbit Systems Holdings (1997) Ltd., as well as against one of ourofficers. Pinpoint is a special purpose acquisition company that was in negotiations with us and other shareholders of our subsidiary Kinetics, regarding thesale of shares in Kinetics during 2008. The transaction was not completed and negotiations were terminated. Pinpoint claims that the agreement was completedand thus entered into effect. Alternatively, Pinpoint claims that our decision not to complete the agreement was made in bad faith, and that under thecircumstances Pinpoint and its founders are entitled to pecuniary compensation equal to their rights and entitlements under the alleged breached contract. Webelieve there is no merit to the allegations made in the claim and have responded accordingly to the court. The claim is in the discovery stage. Credit Suisse. In 2009, Elbit Systems filed a claim in the U.S. District Court for the Southern District of Illinois against Credit Suisse Group(CSG). The complaint seeks to recover approximately $16 million that Elbit Systems believes was fraudulently obtained by CSG and by its subsidiaryCredit Suisse Securities (USA) from Tadiran Communications Ltd. (Tadiran Communications) in 2007 in connection with auction rate securities purchasedby Tadiran Communications through CSG. In 2008, Tadiran Communication was merged into Elbit Systems, and Tadiran Communications’ activities arecurrently performed as part of Elbit Systems’ wholly-owned Israeli subsidiary, Elbit Systems Land and C4I Ltd. CSG filed a motion to dismiss the claimbased on a release signed by Tadiran Communications in 2007. In 2009, the case was moved to the U.S. District Court for the Southern District of New York.In January 2013, the court ruled in Elbit Systems’ favor on a motion to dismiss filed by CSG, and the case is proceeding to the discovery stage.ImageSat In 2010, a claim was filed in the Supreme Court of the State of New York, County of New York (New York State Court) by certain minoritysecurity holders of ImageSat against ImageSat, IAI, Elbit Systems and Elop claiming a breach of the Security Holders Agreement between various securityholders of ImageSat, based on an alleged failure to appoint independent directors to the ImageSat board of directors. Elop holds approximately 14% (7% on afully diluted basis) of ImageSat’s issued share capital and is entitled to nominate one director to ImageSat’s board. Elbit Systems and Elop believe such claimis baseless and have filed corresponding responses to the New York State Court. In 2012, plaintiffs moved to enjoin defendants from taking any action to seattwo specific individuals as independent directors on the ImageSat Board of Directors, however, this motion was denied by the court. Plaintiffs have filed aNotice of Appeal. 76 In 2010, Elbit Systems and Elop were served with an Application to Approve a Derivative Action (the Application) filed in the District Court ofPetach Tikva, Israel, by certain minority shareholders of ImageSat. The Application names a number of respondents, including, among others, ImageSat,IAI, Elop, Elbit Systems and several former directors of ImageSat, including, among others, Michael Federmann, Joseph Ackerman and Joseph Gaspar (ElbitSystems, Elop and the above-named former directors are referred to as the Elbit Defendants). The Application requested the court to approve the filing of aderivative action on behalf of ImageSat for alleged breaches by some of the respondents of the applicants’ rights as minority shareholders in ImageSat. Theclaims contained various allegations that the defendants breached their fiduciary and/or contractual obligations to the detriment of the plaintiffs. In 2011, thecourt granted the Elbit Defendants motions to dismiss the Application, and in June 2011 the Applicants filed a Notice of Appeal of the court’s ruling with theIsraeli Supreme Court. A hearing is scheduled for September 2013. The Elbit Defendants believe that there is no merit to the allegations made against them inthis matter. In January 2012, a group of minority shareholders of ImageSat (the Petitioners), provided ImageSat with a letter of notice, according to which thePetitioners intend to file a petition before the Joint Court of Justice of Aruba, Curacao, Saint Maarten and of Bonaire, St. Eustatia, and Saba to make inquiryas to the policy and course of affairs at ImageSat and for other remedies authorized under the Civil Code of Curacao (the Letter of Notice). Although the Letterof Notice is directed at ImageSat, it contains various allegations against, among others, the Elbit Defendants (as described above in connection with the Israeliproceedings). The nature of the allegations is substantially similar to those previously made in the Israeli action as described above. In March 2013 the courtdenied the Petitioners’ request in the Letter of Notice. The Petitioners have the right to appeal the court’s ruling. IAI has agreed to indemnify Elbit Systems, Elop and the directors nominated by Elop to ImageSat’s board, for any losses arising out of any of theforegoing claims or legal proceedings, net of insurance proceeds received from ImageSat’s insurance policies and any indemnification proceeds received fromImageSat. Other Legal Proceedings. The Company is involved in other legal proceedings from time to time. Based on the advice of our legal counsel,management believes such current proceedings will not have a material adverse effect on our financial position or results of operations. Dividend Distributions We do not have a declared dividend policy. (Regarding declarations of dividends out of certain tax-exempt income see below Item 10. AdditionalInformation – Taxation – Investment Law.) Our Articles of Association provide that the Board may approve dividend payments to shareholders out of surplusearnings as permitted by applicable law. To date we have consistently paid a quarterly dividend to our shareholders. Our aggregate quarterly dividend payments for the last three full fiscal years were as follows: 2010 $1.44 per share2011 $1.44 per share2012$1.20 per share Significant Changes Other than those significant events described in this annual report, if any, there have not been any significant changes since December 31, 2012. Item 9. The Offer and Listing. Share Listings and Trading Prices Our ordinary shares are listed on the TASE and are quoted on Nasdaq under the symbol “ESLT”. 77 The high and low sale prices for our ordinary shares for the five most recent fiscal years are: Nasdaq TASE(1) High Low High Low 2008 $63.40 $36.25 $62.64 $36.06 2009 $70.50 $40.50 $69.78 $40.27 2010 $66.65 $46.80 $65.69 $46.70 2011 $56.75 $35.35 $55.36 $34.29 2012 $42.09 $29.59 $39.87 $29.02 The high and low quarterly sale prices for our ordinary shares for the two most recent full financial years and the next subsequent quarter are: Nasdaq TASE(1) High Low High Low 2011 First Quarter $55.95 $48.78 $52.58 $47.95 Second Quarter $56.75 $46.62 $55.36 $44.11 Third Quarter $49.94 $35.35 $49.20 $34.29 Fourth Quarter $45.63 $39.50 $44.00 $40.74 2012 First Quarter $40.99 $34.37 $39.87 $34.14 Second Quarter $37.83 $32.42 $35.07 $33.69 Third Quarter $34.58 $29.59 $33.99 $29.02 Fourth Quarter $40.20 $33.80 $37.26 $34.05 2013 First Quarter (through February 28, 2013) $41.62 $37.08 $40.49 $37.06 The monthly high and low sale prices of our ordinary shares for the most recent six months are: Nasdaq TASE(1) High Low High Low September 2012 $34.04 $30.54 $33.84 $30.47 October 2012 $37.81 $35.33 $37.77 $34.77 November 2012 $37.74 $33.80 $37.88 $34.05 December 2012 $40.33 $38.19 $40.50 $38.03 January 2013 $41.62 $37.76 $41.33 $37.20 February 2013 $39.02 $37.08 $39.39 $37.06 (1)The closing prices of our ordinary shares on the TASE have been translated into U.S. dollars using the daily representative rate of exchange of theNIS to the U.S. dollar as published by the Bank of Israel for the applicable day of the high/low amount in the specified period. Item 10. Additional Information. General Provisions of Israeli Law and Related Provisions of Articles of Association Israeli Companies Registrar. We are registered with the Israeli Companies Registrar. The registration number issued to us by the CompaniesRegistrar is 52-004302-7. 78 The Companies Law and Restated Articles of Association. The Companies Law is the basic corporation law governing Israeli publicly andprivately held companies. The Companies Law mandates specific provisions be included in an Israeli company’s articles of association, which are includedin Elbit Systems Restated Articles of Association (the Articles of Association). Purpose. Elbit Systems’ purpose, as described in Article 3 of the Articles of Association, includes any objectives permitted by law. Appointment and Removal of Directors. See Item 6. Directors, Senior Management and Employees – Board of Directors. Internal Auditor and Audit Committee. Publicly held Israeli companies are required to appoint an internal auditor. The main role of the internalauditor is to examine whether the company’s activities comply with the law, integrity and orderly business procedures. Publicly held companies are alsorequired to establish an audit committee of the board of directors. The audit committee must consist of at least three directors qualified to serve as members ofan audit committee under the Companies Law including all External Directors. The chair of the audit committee must be an External Director, and the majorityof the members must qualify as being “Independent Directors” in accordance with the criteria of the Companies Law. Our Audit Committee and internalauditor operate in accordance with an audit committee charter that provides the framework for their functions, consistent with applicable Israeli and U.S. lawsand regulations. (See Item 6. Directors, Senior Management and Employees – Board Practices – Audit Committee.) Office Holders The Companies Law specifies the duty of care and fiduciary duties that an “Office Holder” owes to a company. An Office Holder is defined as adirector, general manager, chief business manager, deputy general manager, vice general manager, any other person who fulfills these functions without regardto that person’s title or other manager directly subordinate to the general manager. Each person listed above as a director or executive officer in Item 6. Directors- Senior Management and Employees - Directors and Executive Officers, is an Office Holder of Elbit Systems.Under the Companies Law, an Office Holder’s fiduciary duty includes the general duty to act in good faith and for the benefit of the company,avoiding any conflict of interest between the Officer Holder’s position in the company and his or her personal affairs. The fiduciary duty also includesavoiding any competition with the company and avoiding exploiting any business opportunity of the company in order to receive personal advantage for theOffice Holder or others. Also, the Office Holder is required to disclose to the company any information or documents relating to the company’s affairs that theOfficer Holder has received due to his or her position as an Office Holder. Under the Companies Law voting agreements among directors or a director’s failureto exercise independent judgment while voting are each considered a breach of fiduciary duty. The duty of care requires an Office Holder to act in a way that areasonable Office Holder would act in the same position and under similar circumstances. This includes the duty to utilize reasonable means to obtaininformation regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevantinformation. Some members of our Board are also directors of FEL or companies controlled by FEL. Therefore, in the event of an issue or transaction betweenElbit Systems and any of those companies, those individuals who are affiliated with both of the applicable companies will be excluded from any decisionsconcerning such issue or transaction. In addition, an issue or transaction with any of such companies also requires authorization in accordance with therequirements of the Companies Law. Transactions with Office Holders, key employees and affiliates may require authorization in accordance with therequirements of the Companies Law. (See below – Item 10. Additional Information – Approval of Certain Transactions. For information on the grant of optionsin Elbit Systems’ shares to executive officers and directors, see Item 6. Directors, Senior Management and Employees – Share Ownership – Elbit Systems’Stock Option Plans). 79 In accordance with recent amendments to the Companies Law a public company, such as Elbit Systems, is required to adopt a compensation policysetting forth the principles to govern the terms of office and employment (including, cash and equity-based compensation, exemption from liability,indemnification, D&O insurance and other benefits and payments related to the service and employment) of the Office Holders of the company. The abovementioned amendments to the Companies Law also define the criteria to be considered or included in such compensation policy. The compensation policyneeds to be approved no later than September 2013 by the board of directors as a whole, after consideration of the recommendations of the compensationcommittee, and by the majority of the company's shareholders provided that either: (i)such majority includes a majority of the total votes of shareholders who are not controlling shareholders and do not have a Personal Interest inthe approval of the compensation policy and who participate in the voting, in person, by proxy or by written ballot, at the meeting (abstentionsnot taken into account); or (ii)the total number of votes of shareholders mentioned in (i) above that are voted against the approval of the compensation policy do not representmore than 2% of the total voting rights in the company.Under certain circumstances and subject to certain exceptions, the board of directors may approve the compensation policy even if not approved bythe shareholders as described above, provided that the compensation committee and the board of directors determine, following an additional discussion andbased on detailed reasons, that it is for the benefit of the company to adopt such compensation policy. We intend to comply with these new requirements of theCompanies Law within the required time frame.Commencing as of December 2012, compensation terms of an Office Holder are to be approved in accordance with the principles set forth in suchamendments to the Companies Law as if a compensation policy was already in force. In accordance with the Companies Law, as amended, the compensationpolicy must be re-approved every three years, in the manner described above. The board of directors is responsible for reviewing from time to time thecompensation policy and determining whether or not there are any circumstances that require adjustments to the current compensation policy. (See also Item 6.Directors, Senior Management and Employees - Board Practices - Compensation Committee and "Approval of Certain Transactions - Approval ofTransactions" below). Approval of Certain Transactions Approval Procedures. The Companies Law requires that certain transactions, actions and arrangements, mainly with related parties includingOffice Holders, be approved as provided for in the Companies Law and in a company’s articles of association and in many cases by the audit committee andby the board of directors. Sometimes shareholder approval is also required. Personal Interest and Extraordinary Transactions. The Companies Law requires that an Office Holder or a controlling shareholder (see“Provisions Relating to Major Shareholders” below) of a publicly traded company immediately disclose (and no later than the first board meeting thetransaction is discussed) any “Personal Interest” that he or she may have and all related material information known to him or her, in connection with anyexisting or proposed transaction of the company. A person with a Personal Interest in any such transaction that is brought for approval of the audit committeeor board of directors may not be present at the meeting where the transaction is being deliberated or approved (unless the chair of the audit committee or theboard, as the case may be, determines that such person’s presence at the meeting is required for presentation of the relevant transaction) and, in case suchperson is a director, he or she may not vote on the matter, unless a majority of the members of the audit committee or of the board of directors (as the case maybe) have a Personal Interest in the approval of the relevant transaction, in which case the directors having such Personal Interest may be present and mayparticipate in the vote. In the event that the majority of the members of the board of directors have a Personal Interest in the relevant transaction, the approval ofthe shareholders is also required. Personal Interest also includes any interest held by the Office Holder’s spouse, siblings, parents, grandparents, descendants,spouse’s descendants, spouse’s siblings and parents and the spouses of any of them. It also includes an interest by any entity in which the Office Holder orhis or her relative is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the generalmanager. An “extraordinary transaction” is other than in the ordinary course of business, other than on market terms or is likely to have a material impact onthe company’s profitability, assets or liabilities. Approval of Transactions The Companies Law requires approval by the board of directors for transactions that are not extraordinary with an Office Holder or in which anOffice Holder has a Personal Interest, unless the company’s articles of association provide otherwise. 80 The Companies Law requires approval by both the audit committee and the board of directors for the following transactions: (1)extraordinary transactions with an Office Holder or in which an Office Holder has a Personal Interest; (2)material actions or arrangements that may otherwise be considered a breach of fiduciary duty of an Office Holder; or (3)except for certain specific exemptions under the Companies Law, extraordinary transactions of a public company with its controllingshareholder or with another person in which the controlling shareholder has a Personal Interest, including a private offering in which thecontrolling shareholder has a Personal Interest, as well as an agreement of a public company with its controlling shareholder or his or herrelatives, directly or indirectly, including through a company controlled by him or her, regarding the grant of services to the applicablecompany or regarding the terms of service and/or employment of the controlling shareholder or his or her relatives, as the case may be,except that with respect to terms of service of the controlling shareholder or his or her relatives as Office Holders of the company theapproval of the compensation committee (instead of the audit committee) is required. Except for certain exemptions specified under the Companies Law, matters referred to herein also require shareholder approval, including, whereapplicable, by a specified percentage of non-interested shareholders, In addition, the Companies Law requires re-approval every three years with respect tosome of the matters referred to above. Re-approval when applicable is required by the audit committee, the board of directors and, except for certain specificexemptions, also by the shareholders. (See also “Provisions Relating to Major Shareholders” below.) Approval of Terms of Service and Employment of Office Holders In accordance with the recent amendments to the Companies Law, approval by both the compensation committee and the board of directors isrequired for all arrangements regarding terms of service including cash and equity based, exemption from liability, indemnification, D&O insurance andother benefits and payments related to the service and employment. Except for certain specific exemptions under the Companies Law, matters referred to hereinwith respect to the CEO of a public company or a director of a company (including engagement with respect to employment terms of a director in a positionother than as a director) also require shareholder approval. With respect to the CEO of a public company, or with respect to a director who is a controllingshareholder, shareholder approval must be by a special majority vote, provided that either: (i)such majority includes a majority of the total votes of shareholders who have no Personal Interest in the approval of the transaction and whoparticipate in the voting, in person, by proxy or by written ballot, at the meeting (abstentions not taken into account); or (ii)the total number of votes of shareholders mentioned above that are voted against the transaction do not represent more than 2% of the totalvoting rights in the company. With respect to transactions described above with the CEO the compensation committee may determine that such transaction does not have to beapproved by the shareholders of the company, provided that: (i) the CEO is considered to be "independent" based on criteria set forth in the Companies Law;(ii) the compensation committee determined, based on detailed reasons, that bringing the transaction to the approval of the shareholders may compromise theentering into the transaction; and (iii) the terms of the transaction are consistent with the company's compensation policy. In order to be approved, the terms of employment of Office Holders of a public company such as Elbit Systems must be consistent with thecompany's compensation policy. However the compensation committee and the board of directors may, under special circumstances, approve terms ofemployment which are not in accordance with the company's compensation policy, if: (i)the compensation committee and the board of directors have taken into consideration the mandatory considerations and criteria which arespecified in the Companies Law for a compensation policy and the respective employment terms include such mandatory considerations andcriteria; and 81 (ii)the company's shareholders approved such terms of employment, subject to the above-mentioned special majority requirement. Notwithstanding the above, the compensation committee and the board of directors may approve terms of employment of Office Holders (other thanCEO or directors) that are not in accordance with the company's compensation policy, even if the shareholders' do not approve such terms, provided that: (i)both the compensation committee and the board of directors re-discussed the transaction and decided to approve it despite the shareholders'objection, based on detailed reasons; and (ii)the company is not a "Public Pyramid Held Company". For the purpose hereof, a "Public Pyramid Held Company" is a public company thatis controlled by another public company (including by a company that only issued debentures to the public), which is also controlled byanother public company (including a company that only issued debentures to the public) that has a controlling shareholder. Under the Companies Law as amended, changes of the terms of a current arrangement regarding service and employment terms of an Office holder(other than a director), may require only the approval of the compensation committee, if the compensation committee has determined that such changes are notmaterial. Exemption, Insurance and Indemnification of Directors and Officers Exemption, Insurance and Indemnification under the Companies Law Under the Companies Law, an Israeli company may not exempt an Office Holder from liability with respect to a breach of his or her duty of loyalty,but may exempt in advance an Office Holder from his or her liability to the company, in whole or in part, with respect to a breach of his or her duty of care,provided that a relevant provision is included in the company’s articles of association. However, a company may not exempt in advance a director from his orher liability to the company with respect to a breach of duty of care in connection with a distribution made by the company. The Companies Law permits a company to obtain an insurance policy covering liabilities of Office Holders resulting from a breach of the OfficeHolder’s duty of care to the company or to another person, provided that a relevant provision is included in the company’s articles of association. Insurancemay also be obtained to cover liabilities from the breach of his or her fiduciary duty to the company, to the extent that the Office Holder acted in good faith andhad reasonable cause to believe that the act would not prejudice the interests of the company. It may also cover monetary liabilities charged against an OfficeHolder while serving the company. In addition, the Israeli Securities Law – 1968 (Securities Law) permits that such insurance policy will cover a paymentwhich an Office Holder is obligated to pay to an injured party as set forth in the relevant sections of the Securities Law as well as expenses incurred by anOffice Holder in connection with certain proceedings that are specified in the Securities Law, including reasonable litigation expenses (to include also lawyers'fees), provided that a relevant provision is included in the company's articles of association. Under the Companies Law, a company may indemnify an Office Holder against any monetary liability incurred in his or her capacity as an OfficeHolder whether imposed on him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by a court. Acompany can also indemnify an Office Holder against reasonable litigation expenses, including attorneys’ fees, incurred by him or her in his or her capacityas an Office Holder, in a proceeding instituted against him or her by the company, on its behalf or by a third party, or in connection with criminal proceedingsin which the Office Holder was acquitted, or as a result of a conviction for a crime that does not require proof of criminal intent or in which an indictment wasnot brought against the Office Holder. In addition, a company may indemnify an Office Holder in respect of payments that the Office Holder is obligated topay to an injured party as set forth in the relevant sections of the Securities Law, including reasonable litigation expenses (to include also lawyer's fees). Theseindemnifications are subject to the inclusion of relevant provisions in the company’s articles of association. Also under the Companies Law, provided that a relevant provision is included in the company’s articles of association, a company may indemnifyan Office Holder against reasonable litigation expenses, including attorneys’ fees, incurred by him or her in his or her capacity as an Office Holder, in aninvestigation or proceeding by an authority authorized to conduct such investigation or proceeding in which no indictment was filed and no monetarypayments in lieu of criminal proceedings were imposed against the Office Holder, or monetary payments in lieu of criminal proceedings were imposed on himor her provided that the alleged criminal offense does not require proof of criminal intent. 82 Under the Companies Law, a company may indemnify an Office Holder in respect of certain liabilities, either in advance of an event or following anevent. If a company undertakes to indemnify an Office Holder in advance of an event, the indemnification, other than reasonable litigation expenses, must belimited to foreseeable events in light of the company’s actual activities at the time the company undertook such indemnification and also limited to reasonableamounts or criteria under the circumstances, as determined by the board of directors, and the undertaking to indemnity will specify any such events, amountsor criteria. A company may not indemnify an Office Holder or enter into an insurance contract that would provide coverage for any monetary liability incurredor exempt an Office Holder from liability to the company with respect to each of the following: (1)a breach of fiduciary duty, except indemnification or insurance that provides coverage for a breach of a fiduciary duty to the companywhile acting in good faith and having reasonable cause to assume that such act would not prejudice the interests of the company; (2)a willful breach of the duty of care or reckless disregard for the circumstances or to the consequences of a breach of the duty of care otherthan mere negligence; (3)an act done with the intent to unlawfully realize a personal gain; (4)a fine or monetary penalty imposed upon such Office Holder; or (5)certain monetary liabilities that are set forth in the Securities Law. Insurance and Indemnification of Directors and Officers under the Articles of Association In accordance with and subject to the provisions of the Companies Law and the Securities Law, Elbit Systems’ Articles of Association allow fordirectors and officers liability insurance, in respect of a liability or payment imposed on a director or officer as a result of an act carried out by such person inhis or her capacity as a director or officer. This insurance may cover: (1)a breach of his or her duty of care to Elbit Systems or to another person; (2)a breach of his or her fiduciary duty to Elbit Systems, provided that the director or officer acted in good faith and had reasonable cause toassume that his or her act would not harm the interests of Elbit Systems; (3)a financial obligation imposed on him or her in favor of another person; (4)a payment that he or she are obligated to pay to an injured party as set forth in the relevant sections of the Securities Law; (5)expenses incurred by him or her in connection with certain administrative proceedings specified in the Securities Law, including reasonablelitigation expenses (including also lawyers' fees); or (6)any other event for which insurance of a director or officer is or may be permitted. In addition, in accordance with and subject to the Companies Law and the Securities Law, Elbit Systems’ Articles of Association permitindemnification, retroactively or in advance, of a director or officer against liability, payment or expense imposed or incurred by him or her as a result of anact carried out in his or her capacity as a director or officer, that may include: (1)a monetary liability imposed on the director or officer or paid by him or her in favor of a third party under a judgment, including ajudgment by way of compromise or a judgment of an arbitrator approved by a court; provided however, that in case such undertaking isgranted in advance it will be limited to events which, in the Board’s opinion, are foreseeable in light of the Elbit Systems’ actual activities atthe time of granting the obligation to indemnify, and to a sum or criteria as the Board deems reasonable under the circumstances, and theundertaking to indemnify will specify the aforementioned events and sum or criteria; 83 (2)a payment imposed on him or her in favor of an injured party in the circumstances specified in the Securities Law; (3)reasonable litigation expenses (including lawyer’s fees), incurred by a director or officer as a result of an investigation or proceedingconducted against him by an authority authorized to conduct such investigation or procedure, conducted against him or her by an authorityauthorized to conduct such investigation or procedure, provided that such investigation or procedure: (i) concludes without the filing of anindictment against the director or officer and without imposition of monetary payment in lieu of criminal proceedings; or (ii) concludes withimposing on the director or officer monetary payment in lieu of criminal proceedings, provided that the alleged criminal offense in questiondoes not require proof of criminal intent or was incurred by the director or officer in connection with a monetary sanction imposed by theCompanies Law or the Securities Law; (4)expenses incurred by a director or a officer in connection with certain administrative proceedings set forth in the Securities Law, includingreasonable litigation expenses (including lawyers' fees); (5)reasonable litigation expenses (including lawyers fees), expended by the director or officer or imposed on him or her by the court for: (a)proceedings issued against him or her by or on Elbit Systems’ behalf or by a third party; (b)criminal proceedings from which the director or officer was acquitted; or (c)criminal proceedings in which he or she was convicted of an offense that does not require proof of criminal intent; or (6)any other liability or expense for which it is or may be permissible to indemnify a director or an officer. The Articles of Association permit the grant of similar indemnification to any person acting on behalf or at the request of Elbit Systems as a directoror officer of another company in which Elbit Systems is directly or indirectly a shareholder or has any other interest. However, any indemnification so granted by Elbit Systems may not exceed 25% of Elbit Systems’ consolidated shareholders equity as reflected inour most recent consolidated financial statements published prior to the date of the indemnification payment. In 2011, Elbit Systems’ Audit Committee, Board and shareholders approved the grant to members of our Board of indemnification letters reflectingthe above conditions and limitations. Similar letters were also approved by the Audit Committee and the Board for grant to Office Holders of Elbit Systemswho are not directors. In August 2009, a general meeting of Elbit Systems’ shareholders approved a framework resolution that allows Elbit Systems to purchase directorsand officers (D&O) liability insurance that meets the framework resolution’s terms. The framework resolution covers a five-year period beginning in August2009, or until the close of our shareholders’ annual general meeting to be held in 2014, whichever occurs later, and allows for an aggregate increase ofinsurance coverage of up to $70 million (from the then current level of $45 million) for any year covered by the policy. As of February 28, 2013, the D&Opolicy’s limit of liability was up to $70 million. The framework resolution also allows for an increase of up to a maximum aggregate of 125% of the thencurrent annual premium ($391,400). As of February 28, 2013, the annual premium was $317,850. The Audit Committee and the Board must approve thatany purchase of D&O insurance falls within the terms of the framework resolution. In meetings held on November 11, 2012 and November 12, 2012,respectively, our Audit Committee and Board approved, in accordance with the Israeli Companies Regulations (Relief from Related Parties’ Transactions),5760-2000 (the “Regulations”), the inclusion of Michael Federmann and David Federmann (who may be considered direct or indirect controlling shareholdersof the Company) in the D&O liability insurance policy to be purchased, subject to the above mentioned terms, by the Company for the Company’s otherdirectors and Office Holders. 84 Rights, Preferences and Restrictions of Shares Elbit Systems currently has one type of share, this being ordinary shares. The share capital of Elbit Systems is NIS 80,000,000 divided into80,000,000 ordinary shares of NIS 1 nominal (par) value each of which 43,320,910 ordinary shares were issued and outstanding as of February 28, 2013. Allissued and outstanding ordinary shares are fully paid and non-assessable. Each ordinary share entitles its owner to receive notices of, to attend and to cast one vote at, a general meeting of shareholders. Our Articles of Association do not grant shareholders any rights to share in our profits other than through dividends. Subject to Israeli law, dividendsmay be declared by our Board and paid to the shareholders according to their respective rights. In the event that we go into liquidation, any surplus remainingafter the payment of liabilities is distributed to the shareholders in proportion to the amount paid by each on account of the nominal value of the shares paid.No account is taken of any premiums paid in excess of the nominal value. Our Board may make calls upon shareholders in respect of sums unpaid on their shares. Our Articles of Association contain no provisions whichdiscriminate against any existing or future shareholder as a result of said shareholder holding a substantial number of shares. A change of Elbit Systems’ share capital, by way of increasing the share capital, creation of new shares, or cancellation of unissued registeredshares (if there is no undertaking to allot such shares), requires a change to our Articles of Association and as such requires the vote of a special majority ofthe shareholders participating in a general meeting of shareholders (see “General Meetings of Shareholders” below.) If at any time our share capital is divided into different classes of shares, we may change the rights of shareholders by way of a resolution at ageneral meeting of shareholders, subject to the consent of the shareholders of the class whose rights are being impaired by the proposed change or subject to theadoption of a resolution by a special majority of the general meeting of the shareholders of such class, all of which is subject to other terms if and as providedby the terms of issuance of a particular class of shares. Our ordinary shares do not have pre-emptive rights. General Meetings of Shareholders An annual general meeting of our shareholders must be held once in each year and not later than 15 months after the preceding annual generalmeeting. The Board determines the location of the meeting. All shareholders are entitled to attend and vote in person or by proxy at annual general meetings.Notice of annual general meetings may be sent by us by personal delivery or by sending it by prepaid registered mail. Such notice may be sent by cablegram,telex, facsimile or other electronic means provided confirmation is made by registered mail as stated above. Such notice should be sent to shareholders at theaddress in our records. Any general meeting that is not an annual general meeting is called an extraordinary general meeting. All shareholders are entitled toattend and vote in person or by proxy at extraordinary general meetings. In general, subject to the Companies Law, ordinary resolutions in a general meeting require approval of a majority of the votes cast at the generalmeeting, whether in person or by proxy. (For information as to the required majority for the approval of related party transactions, see “Provisions Relating toMajor Shareholders” below.) For information as to the required majority for the approval of certain transactions with Office Holders of a public company, see"Approval of Certain Transactions – Approval of Transactions" above. However, under our Articles of Association, some resolutions require a specialmajority of at least 67% of all votes properly cast at a general meeting, without taking into account abstentions. Our Board may convene an extraordinary general meeting when and as it sees fit. In addition the Board must, according to statute, convene anextraordinary general meeting if it receives a demand to do so from either: (i) at least two directors; (ii) at least one quarter of the members of the Board; or (iii)one or more shareholders who hold: (A) an aggregate of at least 5% of our issued share capital and at least 1% of all voting rights; or (B) at least 5% of allvoting rights, and in such case the extraordinary meeting must be held not more than 56 days from the submission date of such request to the Board and notlater than 35 days from the applicable notice to shareholders described below. Any demand by a person or persons, as described in (i), (ii) and/or (iii) of thisparagraph, who demands that an extraordinary general meeting be convened, must be made in writing and sent to our registered office. 85 Subject to the provisions of our Articles of Association, as well as applicable law and regulations, including applicable laws and regulations of anystock market on which our shares are listed, notice of an annual general meeting and of an extraordinary general meeting must be sent at least 21 days (and insome cases at least 35 days) in advance to all shareholders recorded in our shareholders registry. Such notice must include the place, date and hour of themeeting, the agenda for the meeting, the proposed resolutions and instructions for proxy voting. The quorum required for a meeting of shareholders, except in the case of certain extraordinary meetings convened in special circumstances, consistsof at least two shareholders present in person or by proxy or other voting instrument and holding or representing between them at least one-third of the votingpower. The chairman of our Board presides at each of our shareholders’ meetings. A meeting adjourned for lack of a quorum will be adjourned to the same dayin the following week, at the same time and place, or to the day, time and place that the Board determines, with notice to the shareholders. At the reconvenedmeeting, if a quorum is not present within one-half hour from the time appointed for holding the adjourned meeting, the required quorum then is twoshareholders, present in person or by proxy or other voting instrument, representing at least 10% of the voting power. Nasdaq Listing Rule 5620(c) providesthat a company listed on the Nasdaq Global Select Market should have a quorum requirement for shareholder meetings of at least one-third of the company’soutstanding common voting stock. As described above, our general quorum requirement is consistent with the Nasdaq Listing Rule. However, in the case ofan adjourned meeting, our Articles of Association, consistent with what is permissible under the Companies Law, provide for a 10% quorum requirement. Limitations on Non-Israeli Shareholders No limitations exist or are imposed by Israeli law or our constituent documents with regard to the rights of non-Israeli shareholders or shareholdersnot resident in Israel to hold or exercise voting rights except for shareholders who are subjects of countries that are enemies of the State of Israel. (For adescription of Israeli regulations relating to acquisitions of a controlling interest in Israeli defense companies see Item 4. Information on the Company –Governmental Regulation – Approval of Israeli Defense Acquisitions.) Change of Control Subject to certain exceptions, the Companies Law provides that a merger requires approval both by the board of directors and by the shareholders ofeach of the merging companies. In approving a merger, the board of directors must determine that there is no reasonable expectation that, as a result of themerger, the merged company will not be able to meet its obligations to its creditors. Creditors may seek a court order to enjoin or delay the merger if there is anexpectation that the merged company will not be able to meet its obligations to its creditors. A court may also issue other instructions for the protection of thecreditors’ rights in connection with a merger. Under the Companies Law, an acquisition of shares in a public company must be made by means of a tender offer to all shareholders if, as a resultof the acquisition, the purchaser would hold 25% or more or 45% or more (as the case may be) of the company’s voting rights. This rule does not apply ifthere is already another shareholder who holds 25% or more or 45% or more (as the case may be) of the company’s voting rights, nor does it apply to apurchase of shares by way of a “private offering” in certain circumstances provided under the Companies Law. (For information regarding Israeli lawapplicable to acquisition of Israeli “Defense Entities” see Item 4. Information on the Company – Governmental Regulations – Approval of Israeli DefenseAcquisitions.) Provisions Relating to Major Shareholders We are required by law to maintain a separate registry of shareholders that hold 5% or more of either our issued shares or voting rights. 86 Under the Companies Law, the disclosure requirements with respect to the disclosure of a Personal Interest that apply to an Office Holder also applyto a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, includinga shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company, but excluding ashareholder whose power derives solely from his or her position as a director of the company or any other position with the company. Except for certainspecified exemptions under the Companies Law, extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a PersonalInterest, including a private offering in which the controlling shareholder has a Personal Interest, and an engagement of a public company with a controllingshareholder or his or her relative, directly or indirectly, including through a company controlled by such person, regarding the grant of services to theapplicable company (and if the controlling shareholder is an employee of the company but he or she is not an Office Holder regarding his or her employmentterms) require the approval of the audit committee (or, if the controlling shareholder is an Office Holder regarding his or her term of service, of thecompensation committee, the board of directors and the shareholders of the company, in that order.) The shareholder approval must be by a majority vote,provided that either: •such majority includes a majority of the total votes of shareholders who have no Personal Interest in the approval of the transaction and whoparticipate in the voting, in person, by proxy or by written ballot, at the meeting (abstentions not taken into account); or •the total number of votes of shareholders mentioned above that are voted against the transaction do not represent more than 2% of the totalvoting rights in the company. In addition, the Companies Law requires that, except for certain exemptions, transactions as above for a period of more than three years be re-approved in same manner for every three-year period. In addition, under the Companies Law, each shareholder has a duty to act in good faith in exercising his or her rights and fulfilling his or herobligations toward the company and other shareholders and to refrain from abusing his or her power in the company, such as in certain shareholder votes. Inaddition, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder whoknows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles ofassociation, has the power to appoint or to prevent the appointment of an Office Holder or any other power of the shareholder with respect to the company. Borrowing Power Our Articles of Association grant broad powers to the Board to have us borrow, repay borrowings, make guarantees and grant security interests inborrowings. Exchange Controls and Other Limitations Affecting Security Holders Non-residents of Israel may freely hold and trade our ordinary shares under general and specific permits issued under the Israeli Currency ControlLaw, 1978. Our Memorandum of Association and Articles of Association do not restrict the ownership of ordinary shares by non-residents of Israel. Neitherthe Memorandum of Association and Articles of Association nor Israeli law restrict the voting rights of non-residents. Under the general permit given through the Israeli Currency Control Law, 1978, non-residents of Israel who buy our ordinary shares inside oroutside of Israel with any foreign currency are able to receive a number of types of distributions in freely repatriable U.S. dollars or specified other currencies.These distributions include dividends, proceeds from the sale of shares and any amounts payable on the dissolution, liquidation or winding-up of ElbitSystems. In the last several years, the government of Israel liberalized its policies regarding exchange controls and investments in Israel and abroad. Taxation General The following is a summary of some aspects of the current tax law applicable to companies in Israel, with special reference to its effect on ElbitSystems and our Israeli subsidiaries, and government programs from which Elbit Systems and some of our Israeli subsidiaries benefit. The following also contains a discussion of specified Israeli and U.S. tax consequences to our shareholders. It also contains a discussion of theIsraeli tax consequences to holders of our Series A Notes. See Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources –Israeli Debt Offering. The Series A Notes are not registered for trading in the U.S. and may not be sold in the U.S. without registration or compliance withRegulation “S” under the Securities Act. Therefore, we have not included a discussion of U.S. tax consequences to holders of the Series A Notes. To the extentthat the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the viewsexpressed in the discussion will be accepted by the tax authorities in question. The discussion is not intended, and should not be construed, as legal orprofessional tax advice and is not exhaustive of all possible tax considerations. 87 Effective Israeli Corporate Tax Rate. Elbit Systems’ income tax liability in Israel is based on our unconsolidated earnings and such earnings ofour Israeli-based subsidiaries. It is determined in NIS and not in U.S. dollars. Tax liability of non-Israeli subsidiaries is determined according to the laws oftheir respective countries of residence. As a result, the tax provision in Elbit Systems’ consolidated financial statements does not directly relate to incomereported on these statements. General Corporate Tax in Israel Generally, Israeli companies were subject to Corporate Tax on taxable income at the rate of 25% for the 2012 tax year. The corporate tax rate andcorporate capital gains tax rate are scheduled to remain at 25% for future tax years following the Law for Tax Burden Reform (Legislative Amendments) –2011 (the Tax Burden Reform) which came into effect on January 1, 2012 and which repealed the gradual reduction in corporate tax rates enacted in previouslegislation. The corporate income tax rates for the 2011 and 2010 tax years were 24% and 25% respectively. Under the Israeli Tax Ordinance, 1961( the Ordinance) transfer pricing rules require that cross-border transactions between related parties be carriedout implementing an arm’s-length principle and reported and taxed accordingly. A portion of our Israeli operations have been granted “Approved Enterprise”, “Privileged Enterprise” and “Preferred Enterprise” status, as describedunder “Investment Law” below. These operations are subject to taxation at reduced rates applicable to those types of enterprises. We cannot assure you thatElbit Systems or our Israeli subsidiaries will continue to qualify for such benefits, or benefits under the Law for Encouragement of Industry in the future. Industry Encouragement. Under the Law for the Encouragement of Industry (Taxes), 1969, a company qualifies as an “Industrial Company” ifit is resident in Israel and at least 90% of its income (determined in Israeli currency) in a given tax year, with some exceptions, comes from “IndustrialEnterprises” owned by that company. An Industrial Enterprise is defined as an enterprise whose primary activity in a particular tax year is industrialmanufacturing activity. We believe Elbit Systems qualifies as an Industrial Company. The principal benefits of this status are amortization of the cost ofknow-how and patents over an eight-year period, under certain interpretations, deduction of expenses incurred in connection with a public issuance ofsecurities over a three-year period, accelerated depreciation for certain assets and an election under certain conditions to file a consolidated tax return withadditional related Israeli Industrial Companies. Eligibility for the benefits under this law is not subject to receipt of prior approval from any governmentalauthority. Investment Law The Israeli Law for the Encouragement of Capital Investments, 1959 (the Investment Law) provides tax benefits to companies that make capitalinvestments in eligible fixed assets. Under the Investment Law prior to an amendment in 2005, companies could apply to the Investment Center to be granted“Approved Enterprise” status for certain of their activities. Following the 2005 amendment, the Investment Law allows a company to claim a “PrivilegedEnterprise” status without the need to obtain approval from the Investment Center, or an “Approved Enterprise” status by applying to receive InvestmentCenter grants. Each approval for an Approved Enterprise and each Privileged Enterprise program relates to a specific investment program. The benefits granted to an Approved Enterprise under the Investment Law prior to the 2005 amendment and to a Privileged Enterprise after theamendment include: (1)Exemption from corporate tax for periods ranging between two – ten years depending on specific conditions; and (2)Reduced corporate tax rates for several years thereafter depending on certain conditions. In order to maintain the benefits under the Investment Law, a company must meet the criteria set forth in the applicable certificate of approval (for anApproved Enterprise) and certain requirements to establish that it contributes to the country’s economic growth and is a competitive factor for the GrossDomestic Product (a competitive enterprise). 88 As of December 31, 2012, Elbit Systems and some of our subsidiaries in Israel had active Approved Enterprise programs and Privileged Enterpriseprograms eligible for tax benefits. These programs will expire during the years 2015 to 2021. In January 2011, the Knesset enacted a reform to the Investment Law, effective January 2011. According to the reform a flat rate tax applies tocompanies eligible for the “Preferred Enterprise” status. In order to be eligible for Preferred Enterprise status, a company must meet minimum requirements toestablish that it contributes to the country’s economic growth and is a competitive factor for the Gross Domestic Product (a competitive enterprise). Benefitsgranted to a Preferred Enterprise include reduced and gradually decreasing tax rates. In peripheral regions (Development Area A) the reduced tax rate is 10% in2011 - 2012, 7% in 2013 - 2014 and 6% starting from 2015. In other regions the tax rate is 15% in 2011 - 2012, 12.5% in 2013 - 2014 and 12% starting from2015. Israeli companies which currently benefit from an Approved or Privileged Enterprise status and meet the criteria for qualification as a PreferredEnterprise can elect to apply the Preferred Enterprise benefits by waiving their benefits under the Approved and Privileged Enterprise status. Several of ourIsraeli subsidiaries have elected the Preferred Enterprise status. With the exception of distribution upon complete liquidation, a distribution from income exempt under the Approved Enterprise programs benefitswill subject the exempt income to corporate tax at the reduced corporate income tax rates pertaining to the Approved Enterprise programs. A distribution(including repurchase of shares) (See Item 16.E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers - for more information regarding ourrepurchase of shares) from income exempt under the Privileged Enterprise programs will subject the exempt income to tax at the reduced corporate income taxrates pertaining to the Privileged Enterprise programs upon distribution or complete liquidation. Distributed amounts will be subject to a 15% withholding tax. A distribution from a Preferred Enterprise out of the “Preferred Income” would be subject to 15% withholding tax for Israeli-resident individuals andnon-Israeli residents (subject to applicable treaty rates). A distribution from a Preferred Enterprise out of the “Preferred Income” would be exempt fromwithholding tax for an Israeli-resident company. A company electing to waive its Privileged Enterprise or Approved Enterprise status through June 30, 2015may distribute “Approved Income” or “Privileged Income” subject to 15% withholding tax for Israeli resident individuals and non-Israeli residents (subject toapplicable treaty rates) and exempt from withholding tax for an Israeli-resident company. Nonetheless, a distribution from income exempt under PrivilegedEnterprise and Approved Enterprise programs will subject the exempt income to tax at the reduced corporate income tax rates pertaining to the PrivilegedEnterprise and Approved Enterprise programs upon distribution, or complete liquidation in the case of a Privileged Enterprise’s exempt income. Elbit Systems’ Board and our Israeli subsidiaries’ boards of directors have decided that their respective policy is not to declare dividends out of suchtax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to these companies’ Approved Enterprises and PrivilegedEnterprises, as such retained earnings are essentially permanent in duration. In November 2012, the Knesset passed amendment 69 to the Investment Law (the Trapped Earnings Law) which provides a temporary, partial,relief from taxation on a distribution from exempt income for companies which elect the relief through November 2013. The Trapped Earnings Law allows acompany to qualify a portion of its exempt income (Elected Earnings) for a reduced tax rate ranging between 17.5% and 6%. While the reduced tax is payablewithin 30 days of election, an electing company is not required to actually distribute the Elected Earnings within a certain period of time. The applicable rate isbased on a linear formula involving the portion of Elected Earnings to exempt income and the applicable tax rate prescribed in the Investment Law. A companyelecting to qualify its exempt income must undertake to make designated investments in productive fixed assets, research and development or wages of newemployees (Designated Investment). The Designated Investment amount is defined by a formula which considers the portion of Elected Earnings to the exemptincome and the applicable tax rate prescribed by the Investment Law. In addition to the reduced tax rate a distribution of Elected Earnings would be subject to a 15% withholding tax. The Trapped Earnings Lawprovides an exemption from the 15% withholding tax for a distribution to an Israeli resident company from companies which have elected the PrivilegedEnterprise status and waived their Approved Enterprise and privileged Enterprise Status through June 2015. 89 We are currently assessing the implications of an election under the "Trapped Earnings law” on the Company and its Israeli subsidiaries. Capital Gains to a Shareholder Capital gains to Israeli residents. Following the amendment in the Tax Burden Reform, starting January 1, 2012, the tax rate on capital gains to a“non-principal” individual shareholder (those persons holding less than 10% of our ordinary shares) is 25%, and 30% to an individual “principal”shareholder. In addition, the Tax Burden Reform also eliminates the differentiation between real gain earned prior and post January 1, 2003 for shares listed ona stock exchange prior to January 1, 2012. The real gain is based on the difference between the adjusted average value of the shares during the last three tradingdays before January 1, 2003 (or the adjusted original cost if it is higher than the adjusted average value) and the value of the shares at the date of sale. In thelater case, the capital loss that might be set off is the difference between the adjusted average value and the value of the shares at the date of sale. Dealers insecurities in Israel are taxed at regular tax rates applicable to business income. Companies resident in Israel are taxed at rates applicable to capital gains. Capital gains to non-residents of Israel. Gains on the sale of ordinary shares traded on the TASE and on Nasdaq held by non-Israeli residentinvestors for tax purposes will generally be exempt from Israeli capital gains tax, subject to the provisions of the Israeli tax legislation. However, non-Israelicorporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is thebeneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Capital Gains to a Holder of Series A Notes Capital gains to Israeli residents. A capital gain for an individual derived from the sale of a debenture that is not linked to an index, such as ourSeries A Notes, will be taxable at a rate not to exceed 15% in case of a “non-principal” individual shareholder, or 20% in the case of a “principal” individualshareholder. Tax payers claiming a deduction of real interest expenses and linkage differences on debentures such as the Series A Notes will be taxed at a rate of30% on their real capital gains. Dealers in securities in Israel are taxed at regular tax rates applicable to business income. Companies resident in Israel are taxedat rates applicable to capital gains. Capital gains to non-residents of Israel. Gains on the sale of securities traded on the TASE, such as our Series A Notes, held by non-Israeliresident investors for tax purposes will generally be exempt from Israeli capital gains tax, subject to the provisions of the Israeli tax legislation. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident: (i) has a controlling interest of 25% or more in such non-Israeli corporation; or(ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Taxation on Dividends Paid to a Shareholder Income tax for individual Israeli residents. Residents of Israel are subject to income tax on distributions of dividends other than bonus shares(stock dividends). Following the amendment in the Tax Burden Reform, effective January 1, 2012, the tax rate on dividend income to a “non-principal”individual shareholder is 25% and 30% to an individual “principal” shareholder. The paying company withholds at source income tax at the rate of 25% or30% in the case of a “principal shareholder”. A company whose stock is traded on a stock exchange withholds tax at the rate of 25% from dividends paid to a“principal” shareholder for shares registered and held by a registration company. 90 Generally, dividends distributed from taxable income accrued during the period of benefit of an Approved Enterprise, Privileged Enterprise orPreferred Enterprise (see above “Investment Law”) are taxable at the rate of 15% if the dividend is distributed during the tax benefit period under the InvestmentLaw or within 12 years after that period (this limitation does not apply if the company qualifies as a foreign investors’ company according to the InvestmentLaw). These rates are the final tax on dividends. Income tax for non-residents of Israel. Non-residents of Israel are subject to income tax on distributions of dividends other than bonus shares(stock dividends). Following the Tax Burden Reform, effective January 1, 2012, the tax rate on dividend income to a "non-principal" non-resident of Israelshareholder is 25% and 30% to a "principal" shareholder (including a foreign company as opposed to an Israeli company). The paying company withholds atsource income tax at the rate of 25% for a “non-principal” shareholder, or 30% for a "principal" shareholder, A company whose stock is traded on a stockexchange will withhold tax at the rate of 25% from dividend paid to a "principal" shareholder for shares registered and held by a registration company, unlessa lower rate is applicable under a double taxation treaty. Accordingly, Elbit Systems withholds income tax at the source. Generally, dividends distributed fromtaxable income accrued during the period of benefit of an Approved Enterprise, Privileged Enterprise or Preferred Enterprise are taxable at the rate of 15% if thedividend is distributed during the tax benefit period under the Investment Law or within 12 years after the period (this limitation does not apply if the companyqualifies as a foreign investors’ company according to the Investment Law). These rates are the final taxes in Israel on dividends for individual and corporatenon-residents of Israel. Foreign residents who have Israeli derived income for which tax was withheld at the source are generally exempt from the duty to file taxreturns in Israel for such income. This includes income from Israeli derived interest, dividends and royalties. Taxation of Interest Income of Holders of Series A Notes Income tax for Israeli residents. Israeli resident individuals are tax exempt on the linkage differences derived from the debenture principal, undercertain conditions. An individual is taxable at a rate of 15% on interest or discount fees originating from debentures which are not linked to the index, whetherin whole or in part, such as the Series A Notes. Following the amendment in the Tax Burden Reform, effective January 1, 2012, the tax rate on interest incomeor discount fees originating from fully index-linked debentures, including debentures linked to a foreign currency is 25% in case of a "non-principal"shareholder. These tax rates will not apply if any of the following conditions are met: (1) the interest represents income from a “business” or is recorded in theindividual’s books of account or is required to be so recorded; (2) the individual has claimed deduction of linkage differences and interest expenses on thedebentures; (3) the individual is a “principal” individual shareholder; or (4) the individual is employed by a corporation that paid the interest, is a supplier ofgoods or services to the corporation, or has other special relations with the corporation, unless the tax assessing officer is satisfied that the interest rate has beenestablished in good faith and regardless of the existence of any such relations between the individual and the corporation. In these cases, the individual will betaxed at the marginal tax rate. The paying company will deduct tax at a rate of 15% on interest in respect of unlinked debentures, such as the Series A Notes, arate of 25% in the case of linked debentures, and the maximum tax rate will apply in the case of an individual who is a "principal" individual shareholder.The tax rate applicable to interest income (including linkage differences) or discount fees of an Israeli resident corporation is the corporate tax rate. The payingcompany will deduct tax at the corporate tax rate. Income tax for foreign residents. Commencing January 1, 2009, interest, discount fees or linkage differences paid to a foreign resident ondebentures listed on the TASE and issued by an Israeli resident corporation, such as our Series A Notes, are typically exempt from Israeli tax, provided thatthe income is not produced by the foreign resident’s permanent establishment in Israel. The tax exemption will not apply in the following circumstances: (1) theforeign resident is a “principal” shareholder in the issuing company; (2) the foreign resident is a relative, as defined in the Ordinance, of the issuingcompany; (3) the foreign resident is an employee, a supplier of goods or services or has special relations with respect to the issuing company (unless it isdemonstrated that the interest rate or discount fees have been determined in good faith and regardless of the existence of any special relations); or (4) a foreignresident company held by Israeli residents. If the tax exemption does not apply as above, the tax rate applicable to interest income received by foreign residents(individuals and corporations) originating from securities will be established in accordance with the provisions of the Ordinance, or in accordance with theprovisions of the relevant treaty for the avoidance of double taxation signed between the State of Israel and the foreign resident’s country of residence. In suchcase, the paying company will withhold tax according to the rates prescribed in the Ordinance as above, and this rate may be reduced subject to the relevanttreaty for the avoidance of double taxation. As indicated above, the Series A Notes are not registered under the Securities Act and may not be offered or sold inthe United States or to U.S. Persons (as defined in Regulation “S” under the Securities Act) without registration under the Securities Act or an exception fromthe registration requirements of the Securities Act. Israeli Tax on United States Shareholders Dividends paid by Elbit Systems to an individual shareholder resident in the United States are generally subject to withholding tax deducted atsource in Israel. Israel and the United States are parties to a tax treaty. Under the treaty, the withholding tax rate on a dividend is normally 25% or 15% inconnection with an Approved Enterprise, Privileged Enterprise or Preferred Enterprise. (See above “Investment Law.”) 91 A U.S. corporation would have a reduced withholding tax rate on dividends if it were to own 10% or more of Elbit Systems’ voting shares underspecified conditions. The reduced withholding tax rate on the dividend would be 12.5%. The U.S. corporation must own at least 10% of the voting sharesduring the portion of Elbit Systems’ tax year before the payment of the dividend and during the entire prior tax year. The reduced rate is also subject to twoother conditions. First, not more than 25% of Elbit Systems’ gross income for the prior tax year could consist of interest, other than interest received frombanking, financing or similar businesses or from certain subsidiaries. Second, the dividend cannot be derived from income during any period for which ElbitSystems is entitled to the reduced tax rate applicable to an Approved Enterprise / Privileged Enterprise. In this case the withholding tax rate would be 15%. Since Elbit Systems’ ordinary shares are traded on the TASE and on Nasdaq, gains on the sale of ordinary shares held by non-Israeli residentinvestors for tax purposes will generally be exempt from Israeli capital gains tax, subject to the provisions of the Israeli tax legislation. Under the terms of thetax treaty, Israel may tax capital gains realized by shareholders resident in the United States on a sale of ordinary shares of Elbit Systems if certain conditionsexist, however, such right is subject to the above exemption. Subject to certain conditions and limitations, any Israeli tax withheld or paid with respect to dividends on ordinary shares will generally be eligiblefor credit against a U.S. shareholder’s U.S. federal income tax liability at such U.S. shareholder’s election. The U.S. Internal Revenue Code of 1986, asamended, (the Code) provides limitations on the amount of foreign tax credits that a U.S. shareholder may claim, including extensive separate computationrules under which foreign tax credits allowable with respect to specific categories of income cannot exceed the U.S. federal income taxes otherwise payable withrespect to each such category of income. U.S. shareholders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income taxwithheld or paid, but only for a year in which these U.S. shareholders elect to do so for all foreign income taxes. Dividends with respect to the ordinary shareswill generally be classified as foreign source “passive income” for the purpose of computing a U.S. shareholder’s foreign tax credit limitations for U.S. foreigntax credit purposes. The rules relating to foreign tax credits are complex, and each U.S. holder of our ordinary shares should consult his or her tax advisor todetermine whether and if he or she would be entitled to this credit. This summary of Israeli taxation is based on existing treaties, laws, regulations and judicial and administrative interpretations. Therecan be no assurance that any of these may not be amended or repealed, possibly with retroactive effect, or that a tax authority may take acontrary position. Also, this summary does not address the tax consequences that may be applicable to specific persons based on their individualcircumstances. It also does not address any local or other foreign tax consequences. A shareholder or holder of Series A Notes should consult his orher own tax advisor as to the specific tax consequences of purchasing, holding or transferring shares or Series A Notes of Elbit Systems. United States Federal Income Tax Considerations General The following is a summary of material U.S. federal income tax considerations regarding the acquisition, ownership and disposition of ElbitSystems’ ordinary shares by a “U.S. Shareholder”, which, for these purposes, means a beneficial owner of an ordinary share who is, for U.S. federal incometax purposes: •a citizen or individual resident of the United States for U.S. federal income tax purposes; •a corporation (or an entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of theUnited States or any political subdivision thereof (including the District of Columbia); •an estate whose income is subject to U.S. federal income taxation regardless of its source; or •a trust if (A) a U.S. court is able to exercise primary supervision over the trust’s administration and (B) one or more U.S. persons have theauthority to control all of the trust’s substantial decisions. If a partnership or other entity treated as a partnership for U.S. federal income tax purposes holds ordinary shares of Elbit Systems, the tax treatmentof a partner generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership that holds our ordinary sharesis urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of our ordinary shares. 92 This summary is based on provisions of the Code, existing and proposed U.S. Treasury regulations, administrative pronouncements, rulings andjudicial decisions in effect as of the date of this annual report. These authorities and their interpretation are subject to change, possibly with retroactive effect.In addition, this summary does not discuss all aspects of U.S. federal income taxation that may be applicable to investors in light of their particularcircumstances or to investors who are subject to special treatment under U.S. federal income tax law, including U.S. expatriates, insurance companies, banks,regulated investment companies, securities broker-dealers, financial institutions, tax-exempt organizations, persons holding ordinary shares as part of astraddle, hedging or conversion transaction, persons subject to the alternative minimum tax, persons who acquired their Elbit Systems’ ordinary sharespursuant to the exercise of employee stock options or otherwise as compensation, persons having a functional currency other than the U.S. dollar, personsowning (directly, indirectly or by attribution) 10% or more of our outstanding voting shares and persons not holding ordinary shares as capital assets. Dividends A U.S. Shareholder generally will be required to include in gross income, as ordinary dividends, the amount of any distributions paid on ordinaryshares of Elbit Systems to the extent of Elbit Systems’ earnings and profits out of current or accumulated earnings and profits, including the amount of anyIsraeli taxes withheld in respect of such dividend. Dividends paid by Elbit Systems do not qualify for the dividends-received deduction applicable in certaincases to U.S. corporations. The amount of any distribution paid in NIS, including the amount of any Israeli withholding tax thereon, will be included in the gross income of aU.S. Shareholder of ordinary shares in an amount equal to the U.S. dollar value of the NIS calculated by reference to the spot rate of exchange in effect on thedate the distribution is received by the U.S. Shareholder. If a U.S. Shareholder converts dividends paid in NIS into U.S. dollars on the day Elbit Systemsdistributes the dividends, the U.S. Shareholder generally should not be required to recognize foreign currency gain or loss with respect to such conversion. Ifthe NIS received in the distribution are not converted into U.S. dollars on the date of receipt, any foreign currency gain or loss recognized upon a subsequentconversion or other disposition of the NIS will be treated as U.S. source ordinary income or loss. Special rules govern and special elections are available toaccrual method taxpayers to determine the U.S. dollar amount that should be included in income in the case of taxes withheld in a foreign currency. Accrualbasis taxpayers are urged to consult their own tax advisors regarding the requirements and the elections applicable in this regard. Dividends paid by us to a U.S. Shareholder on our ordinary shares will be treated as foreign source income and will generally be categorized as“passive category income” for U.S. foreign tax credit purposes. Subject to the limitations in the Code, as modified by the applicable tax treaty, a U.S.Shareholder may elect to claim a foreign tax credit against its U.S. federal income tax liability for Israeli income tax withheld from dividends received in respectof ordinary shares. U.S. Shareholders who do not elect to claim the foreign tax credit may instead claim a deduction for Israeli income tax withheld, but onlyfor a year in which the U.S. Shareholder elects to do so with respect to all foreign income taxes. A deduction does not reduce U.S. tax on a dollar-for-dollarbasis as it does for a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax credits. The rules relating to the determinationof the foreign tax credit are complex. Accordingly, if you are a U.S. Shareholder of ordinary shares, you should consult your own tax advisor to determinewhether and to what extent you would be entitled to the credit. Certain U.S. Shareholders (including individuals) are eligible for reduced U.S. federal income tax rates in respect of “qualified dividendincome.” Subject to applicable limitations, qualified dividend income included in income after December 31, 2012 is generally subject to U.S. federaltaxation at a maximum rate of 15%, or 20% in the case of taxpayers with annual taxable income that exceeds certain thresholds. For this purpose,qualified dividend income generally includes dividends paid by a non-U.S. corporation if, among other things, the U.S. Shareholder meets certainminimum holding periods and the non-U.S. corporation satisfies certain requirements, including that either: (i) the shares with respect to which thedividend has been paid are readily tradable on an established securities market in the United States; or (ii) the non-U.S. corporation is eligible for thebenefits of a comprehensive U.S. income tax treaty (such as the U.S. Treaty), which provides for the exchange of information. We currently believethat dividends paid with respect to our ordinary shares should constitute qualified dividend income for U.S. federal income tax purposes. Weanticipate that our dividends will be reported as qualified dividends on Forms 1099-DIV delivered to U.S. Shareholders. Each individual U.S.Shareholder of ordinary shares is urged to consult his or her own tax advisor regarding the availability to him of the reduced dividend tax rate in lightof his or her own particular situation and regarding the computations of his or her foreign tax credit limitation with respect to any qualified dividendincome paid by us, as applicable. 93 Sale, exchange or other disposition Upon the sale, exchange or other disposition of ordinary shares, a U.S. Shareholder generally will recognize capital gain or loss equal to thedifference between the U.S. dollar value of the amount realized on the sale, exchange or other disposition and the U.S. Shareholder’s adjusted tax basis,determined in U.S. dollars, of the ordinary shares. Any gain or loss recognized upon the sale, exchange or other disposition of the ordinary shares will betreated as long-term capital gain or loss if, at the time of the sale, exchange or other disposition, the holding period of the ordinary shares exceeds one year. Inthe case of individual U.S. Shareholders, capital gains generally are subject to U.S. federal income tax at preferential rates if specified minimum holdingperiods are met. The deductibility of capital losses by a U.S. Shareholder is subject to significant limitations. U.S. Shareholders should consult their own taxadvisors in this regard. In general, gain or loss recognized by a U.S. Shareholder on the sale, exchange or other disposition of ordinary shares will be U.S. source income orloss for U.S. foreign tax credit purposes. Pursuant to the applicable tax treaty, however, gain from the sale or other disposition of ordinary shares by a holderwho is a U.S. resident, for purposes of the applicable tax treaty, and who sells the ordinary shares within Israel, may be treated as foreign source income forU.S. foreign tax credit purposes. U.S. Shareholders who hold ordinary shares through an Israeli stockbroker or other Israeli intermediary may be subject to an Israeli withholding taxon any capital gains recognized if the U.S. Shareholder does not obtain approval of an exemption from the Israeli Tax Authorities. U.S. Shareholders areadvised that any Israeli tax paid under circumstances in which an exemption from such tax was available will not give rise to a deduction or credit for foreigntaxes paid for U.S. federal income tax purposes. U.S. Shareholders are advised to consult their Israeli stockbroker or intermediary regarding the procedures forobtaining an exemption. If a U.S. Shareholder receives NIS upon the sale of ordinary shares, that U.S. Shareholder may recognize ordinary income or loss as a result ofcurrency fluctuations between the date of the sale of the ordinary shares and the date the sales proceeds are converted into U.S. dollars. Passive Foreign Investment Company rules A non-U.S. corporation will be classified as a Passive Foreign Investment Company (a PFIC) for any taxable year if at least 75% of its gross incomeconsists of passive income (such as dividends, interest, rents, royalties (other than rents or royalties derived in the active conduct of a trade or business andreceived from an unrelated person) or gains on the disposition of certain minority interests), or at least 50% of the average value of its assets consists of assetsthat produce, or are held for the production of, passive income. We currently believe that we were not a PFIC for the year ended December 31, 2012. However,this conclusion is a factual determination that must be made at the close of each year and is based on, among other things, a valuation of our ordinary sharesand assets, which will likely change from time to time. If we were characterized as a PFIC for any taxable year, a U.S. Shareholder would suffer adverse taxconsequences. These consequences may include having gains realized on the disposition of ordinary shares treated as ordinary income rather than capitalgains and being subject to punitive interest charges on certain dividends and on the proceeds of the sale or other disposition of the ordinary shares.Furthermore, dividends paid by a PFIC are not eligible to be treated as “qualified dividend income” (as discussed above). The PFIC rules are complex. U.S. Shareholders should consult their own tax advisors regarding the potential application of the PFIC rules to theownership of our ordinary shares. Informational reporting and backup withholding Dividend payments with respect to ordinary shares and proceeds from the sale, exchange or other disposition of ordinary shares may be subject toinformational reporting to the Internal Revenue Service (the IRS) and possible U.S. backup withholding at a current rate of 28%. Backup withholding will notapply, however, to a holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification orwho is otherwise exempt from backup withholding. U.S. persons who are required to establish their exempt status generally must provide IRS Form W-9(Request for Taxpayer Identification Number and Certification). Non-U.S. Shareholders generally will not be subject to U.S. informational reporting orbackup withholding. However, such holders may be required to provide certification of non-U.S. status (generally on IRS Form W-8BEN) in connection withpayments received in the United States or through certain U.S.-related financial intermediaries. 94 Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a holder’s U.S. federal income taxliability, and a holder may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing anyrequired information. Holders of our ordinary shares should consult their own tax advisors concerning the specific U.S. federal, state and local tax consequencesof the ownership and disposition of the ordinary shares in light of their particular situations as well as any consequences arising under the lawsof any other taxing jurisdiction. In particular, U.S. Shareholders are urged to consult their own tax advisors concerning whether they will beeligible for benefits under the above-mentioned tax treaty. Documents on Display We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we filereports and other information with the SEC. These materials, including this annual report and its exhibits, may be inspected and copied at the SEC’s PublicReference Room (the Public Reference Room) at 100 F Street, N.E., Washington, D.C. 20549, and copies of the materials may be obtained from the PublicReference Room at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the SEC in the United Statesat 1-800-SEC-0330. Item 11. Quantitative and Qualitative Disclosures About Market Risk. General Market risks relating to our operations result primarily from changes in exchange rates and interest rates. We do not believe that we were exposed toany material market risk at December 31, 2012. We take various measures to compensate for the effects and fluctuation in both exchange rates and interestrates. We use financial instruments and derivatives in order to limit the exposure to risks deriving from changes in exchange rates and interest rates. The use ofsuch instruments does not expose us to additional significant exchange rate or interest rate risks because the derivatives are covering expenses in thecorresponding underlying assets, liabilities or forecasted transactions. No derivatives instruments are entered into for trading purposes. Exchange Rate Risk Management General While our functional currency is the U.S. dollar, we also have some non-U.S. dollar or non-U.S. dollar linked currency exposures. These exposuresare mainly derived from our revenues and expenses denominated in foreign currencies and non-U.S. dollar accounts receivable, payments to suppliers andsubcontractors, obligations in other currencies and payroll related expenses incurred, mainly in NIS. Some subcontractors are paid in local currency underprime contracts where we are paid in U.S. dollars. We take various measures to compensate for the effects of fluctuations in exchange rates. These measures include currency hedging transactions (inwhich we purchase foreign exchange contracts to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreigncurrencies) and attempts to maintain a balance between monetary assets and liabilities in our functional currencies. We also attempt to share currency riskswith subcontractors on a “back-to-back” basis, by having the subcontractor assume a proportional amount of the exchange risk. We use currency hedging contracts to limit exposure to changes in foreign currency exchange rates associated with revenue denominated in a foreigncurrency, primarily GBP and Euro. We also use currency hedging contracts to hedge against anticipated costs to be incurred in a foreign currency, primarilyNIS, and to limit our exposure to exchange rate fluctuations related to payroll expenses incurred in NIS. The objective of the foreign exchange contracts is tobetter ensure that the U.S. dollar-equivalent cash flows are not adversely affected by changes in U.S. dollar/foreign currency exchange rates. In accordancewith ASC 815 “Derivatives and Hedging” (ASC 815), these contracts are designated as cash flow hedges. The gain on the effective portion of a cash flowhedge is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into revenues when the hedged exposureaffects revenues, or as financial expenses, if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge is de-designated, becausethe hedged transaction is no longer probable of occurring or related to an ineffective portion of a hedge, is recognized in “financial expenses, net” in ourconsolidated statements of income. 95 As of December 31, 2012, the principal amount of our outstanding forward contracts was $671.1 million. Most of these contracts met therequirements of hedge accounting. The table below provides information regarding our derivatives instruments held in order to limit the exposure to exchange rate fluctuation as ofDecember 31, 2012. The table below does not include information regarding the cross currency interest rate swap transactions in order to effectively hedge the effect ofinterest and exchange rate differences resulting from the NIS Series A Notes. Maturity Date - Notional Amount 2013 2014 2015 2016 2017 onwards Total Fair Value atDecember 31,2012 ( US dollars in millions) Sell US$ and buy: EUR 44.8 12.5 2.6 0.8 – 60.7 (0.9)GBP 43.0 2.3 – – – 45.3 1.2 NIS 386.0 – – – – 386.0 17.2 Other currencies 1.7 2.5 (0.7) 0.1 0.7 4.3 1.4 Total 475.5 17.3 1.9 0.9 0.7 496.3 18.9 Maturity Date - Notional Amount 2013 2014 2015 2016 2017 onwards Total Fair Value atDecember 31,2012 ( US dollars in millions) Buy US$ and sell: EUR 81.8 40.1 7.3 2.5 – 131.7 2.2 GBP 27.7 0.3 0.3 – – 28.3 (0.1)Othercurrencies 11.5 2.1 0.7 0.7 (0.2) 14.8 (1.3)Total 121.0 42.5 8.3 3.2 (0.2) 174.8 0.8 At December 31, 2012, a 5% strengthening of the U.S. dollar relative to the currencies in which our derivative instruments were denominated wouldhave resulted in an decrease in our unrealized gains by $20.4 million, and a 5% weakening in the value of the U.S. dollar relative to the currencies in whichour derivative instruments were denominated would have resulted in an increase in our unrealized gains of $22.3 million. This calculation assumes that eachexchange rate would have changed in the same direction relative to the U.S. dollar. Consistent with the use of these contracts to neutralize the effect of exchangerate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlyingtransactions being hedged. When taken together, these forward currency contracts and the offsetting underlying commitments did not create material marketrisk. Interest Rate Risk Management On December 31, 2012, our liquid assets and obligations were comprised of cash and cash equivalents, bank deposits, short and long-term loansand Series A Notes. Our deposits are mainly in U.S. dollars. In June 2010, we completed a public offering on the TASE of NIS 1.1 billion (approximately $283 million), payable in ten equal annual installmentson June 30 of each of the years 2011 through 2020. The Series A Notes bear a fixed interest rate of 4.84% per annum, payable on June 30 and December 30 ofeach of the years 2010 through 2020. In March 2012, we issued through a public offering on the TASE additional Series A Notes in the aggregate principalamount of NIS 807 million (approximately $217 million), and in May 2012, we issued additional Series A Notes in an aggregate principal amount of NIS 92million (approximately $24 million) through a private placement to Israeli institutional investors. We also entered into ten-year cross currency interest rateswap transactions in order to effectively hedge the effect of interest and exchange rate differences resulting from the NIS Series A Notes (including theadditional Series A Notes that were issued in March and May 2012). Under the cross currency interest rate swaps, the Company received fixed NIS at a rateof 4.84% on NIS 1.1 billion and pays floating six-month USD LIBOR + an average spread of 1.84% on $450 million, which reflects the U.S. dollar value ofthe Series A Notes on the specific dates the transactions were entered. (See above Item 5. Operating and Financial Review and Prospects – Israeli DebtOffering.) The remaining debt is mainly in bank loans in U.S. dollars at floating interest rates . The majority of our borrowings are usually linked to therelevant LIBOR plus a spread of 1.6% - 2.5%, and therefore are exposed to changes in interest rates. Most of our loans will mature within the next two to threeyears. 96 Should interest rates either increase or decrease, such change may affect our results of operations due to changes in the cost of the liabilities and thereturn on the assets that are based on variable rates. At December 31, 2012, a 10% change in the then current interest rates would not have had a materialimpact on our financial results. Item 12. Description of Securities Other than Equity Securities. Not applicable. Item 13. Defaults, Dividend Arrearages and Delinquencies. Not applicable. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. Not applicable. Item 15. Controls and Procedures. Disclosure Controls and Procedures. We maintain disclosure controls and procedures designed to ensure that information required to be disclosedin our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Thesecontrols and procedures also provide that such information is accumulated and communicated to our management, including our Chief Executive Officer(CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonableassurance of achieving the desired control objectives. Also, management necessarily was required to use its judgment in evaluating the cost to benefitrelationship of possible disclosure controls and procedures. As of December 31, 2012, we performed an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures. The evaluation was performed with the participation of senior management of major business areas andkey corporate functions, and under the supervision of the CEO and CFO. Based on the evaluation, our management, including the CEO and CFO, concludedthat our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that couldsignificantly affect internal controls after the date we completed the evaluation. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts and expenditures are being made in accordance with authorizations of our management anddirectors; and 97 (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could havea material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements including the possibility ofhuman error and the circumvention or overriding of sound control procedures. Projections of any evaluation of effectiveness to future periods are subject to therisks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, including our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in“Internal Control – Integrated Framework.” Based on this assessment, management believes that, as of December 31, 2012, our internal control over financialreporting is effective. The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by Kost Forer Gabbay & Kasierer(Kost), an independent registered public accounting firm in Israel and a member of Ernst & Young Global (E&Y), as stated in their report included in Item18. Financial Statements. Changes in Internal Control over Financial Reporting. During the period covered by this annual report, there have not been any changes in ourinternal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 16A. Audit Committee Financial Expert. Avraham Asheri, Yehoshua Gleitman and Yigal Ne’eman, members of our Audit Committee, each meets the criteria of an “Audit CommitteeFinancial Expert” under the applicable rules and regulations of the SEC, and each of their designations as an Audit Committee Financial Expert has beenratified by the Board. They are all “independent”, as that term is defined in the Nasdaq listing standards. Item 16B. Code of Ethics. We have adopted a code of business conduct and ethics that is applicable to all our directors, officers and employees including our principalexecutive, financial and accounting officers and persons performing similar functions. The code of ethics was approved by our Board and covers areas ofprofessional and business conduct. It is intended to promote honest and ethical behavior, including fair dealing and the ethical handling of conflicts of interest.The code of ethics includes a “whistleblower” process to encourage reports of violations. We provide training on our code of ethics to all of our employees. Ourcode of ethics is posted on our website: www.elbitsystems.com. Item 16C. Principal Accountant Fees and Services. At the annual general shareholders meeting held in November 2012, our shareholders reappointed Kost to serve as our independent auditors. Kostand other E&Y affiliates billed the Company the following fees for professional services in each of the last two fiscal years: Year Ended December 31 2012 2011 (U.S. dollars in thousands) Audit Fees $3,129 $2,961 Tax Fees $415 $444 Other Fees $355 413 Total $3,899 $3,818 “Audit Fees” are the aggregate fees for the audit of our consolidated annual financial statements. This category also includes services generallyprovided by the independent auditor, such as consents and assistance with and review of documents filed with the SEC, as well as with documentation relatedto Sarbanes-Oxley Act implementation. It also includes fees billed for accounting consultations regarding the accounting treatment of matters that occur in theregular course of business, implications of new accounting pronouncements and other accounting issues that occur from time to time. 98 “Tax Fees” are the aggregate fees billed for professional services rendered for tax compliance and tax advice, other than in connection with the audit.Tax compliance involves preparation of original and amended tax returns, tax planning and tax advice. “Other Fees” are fees billed for services related to conceptual analysis of finance software. Kost and other E&Y affiliates did not bill the Company for services other than the Audit Fees, Tax Fees and Other Fees described above for fiscalyear 2012 or fiscal year 2011. Our Audit Committee has adopted a pre-approval policy for the engagement of our independent accountant to perform permitted audit and non-auditservices. Under this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the Audit Committee pre-approves annually a range of specific audit and non-audit services in the categories of Audit Service, Audit-Related Services, Tax Services and other servicesthat may be performed by our independent accountants, and the maximum pre-approved fees that may be paid as compensation for each pre-approved servicein those categories. The Audit Committee is notified periodically and before commencement of any work in these categories. Any proposed services exceedingthe pre-approved fees or which includes other scope of work requires specific pre-approval by the Audit Committee. Accordingly, all of the above-mentionedindependent audit fees were pre-approved by our Audit Committee. Item 16D. Exemptions from the Listing Standards for Audit Committees. Not applicable. Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. Reference is made to the disclosure relating to changes in shareholdings of major shareholders in Item 7 of this annual report on Form 20-F. In September 2011, we announced that our Board authorized us to repurchase up to one million of our ordinary shares over the following 12 months,in open market purchases on the TASE. Set forth below is a summary of the ordinary shares repurchased by us during 2012 and the approximate maximumnumber of ordinary shares that may yet be purchased under the repurchase plan approved by our Board (the Plan): Period Total Numberof SharesPurchased bythe Company Average PricePaid Per Share Total Numberof SharesPurchased asPart of the Plan MaximumNumber ofShares thatMay Yet BePurchasedUnder the Plan January 1 – January 31, 2012 64,901 $40.74 64,901 694,731 February 1 – February 29, 2012 131,631 $38.23 131,631 563,100 March 1 – March 31, 2012 63,100 $36.33 63.100 500,000 April 1 – April 30, 2012 -- $-- -- 500,000 May 1 – May 31, 2012 -- $-- -- 500,000 June 1 – June 30, 2012 94,722 $34.05 94,722 405,278 July 1 – July 31, 2012 130,135 $32.43 130,135 275,143 August 1 – August 31, 2012 227,057 $30.97 227,057 48,086 September 1 – September 30, 2012 48,086 $31.46 48,086 -- Item 16F. Changes in Registrant’s Certifying Accountant. Not Applicable. 99 Item 16G. Corporate Governance. As a foreign private issuer, Nasdaq Marketplace Rule 5615(a)(3) allows us to follow Israeli corporate governance practices instead of certainNasdaq Stock Market requirements. That rule requires that we provide Nasdaq with a letter from outside Israeli counsel stating that our corporate governancepractices are not prohibited by Israeli law and disclose in our annual reports the Nasdaq requirements we do not follow and the equivalent Israelirequirement. In 2011, we notified Nasdaq of our intent to follow Israeli home country practice in connection with an amendment to our 2007 Stock OptionPlan, which was approved by our board of directors as permitted by Israeli law without approval by our shareholders. See also “Item 10 – AdditionalInformation – Memorandum and Articles of Association – Approval of Certain Transactions.” In addition, as described above in “Item 10 – Additional Information – Memorandum and Articles of Association – Meetings of Shareholders”, underour corporate governance documents and applicable provisions of the Israeli Companies Law, the quorum requirement for an adjourned meeting of ourshareholders differs from the relevant Nasdaq requirement. Item 16H. Mine Safety Disclosure. Not applicable. Item 17. Financial Statements. Not applicable. Item 18. Financial Statements. See Consolidated Financial Statements attached to this annual report on Form 20-F. 100 Item 19. Exhibits. (a) Index to Financial Statements Page Report of Independent Registered Public Accounting Firm F-2Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting F-3Consolidated Balance Sheets at December 31, 2012 and 2011 F-4Consolidated Statements of Income F-6Consolidated Statements of Changes in Equity F-8Consolidated Statements of Cash Flows F-11Notes to Consolidated Financial Statements F-13Schedule II – Valuation and Qualifying Accounts S-1 (b) Exhibits 1.1Elbit Systems’ Memorandum of Association(1) 1.2Elbit Systems’ Restated Articles of Association(2) 4.1Elbit Systems 2007 Stock Option Plan, as amended(3) 4.2Elbit Systems’ Post Merger Stock Option Plan (Summary in English)(1) 8Primary Operating Subsidiaries of Elbit Systems 12.1Certification of Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 12.2Certification of Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 13.1Certification of Chief Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 13.2Certification of Chief Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 15.1Consent of Kost Forer Gabbay & Kasierer (1)Filed as an exhibit to Elbit Systems’ Annual Report on Form 20-F (File No. 0-28998) for the year ended December 31, 2000, which was filed withthe Securities and Exchange Commission on April 5, 2001, and incorporated herein by reference. (2)Filed as an exhibit to Elbit Systems’ Report on Form 6-K for March 2008, which was filed by Elbit Systems with the Securities and ExchangeCommission on March 26, 2008, and incorporated herein by reference. (3)Filed as exhibit 4.3 to Elbit Systems’ post-effective amendment No. 1 to registration statement on Form S-8 (File No. 333-139512), which was filedby Elbit Systems with the Securities and Exchange Commission on December 1, 2011, and incorporated herein by reference. 101 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements forfiling on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 13, 2013 ELBIT SYSTEMS LTD. By:/s/ JOSEPH ACKERMAN Name:Joseph Ackerman Title:President and Chief Executive Officer (Principal Executive Officer) 102 ELBIT SYSTEMS LTD. ANDSUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTSas of December 31, 2012  ELBIT SYSTEMS LTD. ANDSUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTSas of December 31, 2012in thousands of U.S. dollars C O N T E N T S Page REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMF - 2 - F - 3 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance SheetsF - 4 - F - 5 Consolidated Statements of IncomeF - 6 Consolidated Statements of Comprehensive IncomeF - 7 Statements of Changes in EquityF - 8 - F - 10 Consolidated Statements of Cash FlowsF - 11 - F - 13 Notes to the Consolidated Financial StatementsF - 13 - F - 64  Kost Forer Gabbay &Kasierer3 Aminadav St.Tel-Aviv 67067, IsraelTel: 972 (3)6232525Fax: 972 (3)5622555www.ey.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors ofElbit Systems Ltd. We have audited the accompanying consolidated balance sheets of Elbit Systems Ltd. (“Elbit Systems”) and subsidiaries as of December 31, 2012 and 2011,and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period endedDecember 31, 2012. Our audits also included the financial statement schedule listed in the index at Item 19. These consolidated financial statements andschedule are the responsibility of Elbit Systems’ management. Our responsibility is to express an opinion on these consolidated financial statements andschedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ElbitSystems and subsidiaries as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three yearsin the period ended December 31, 2012, in conformity with U.S generally accepted accounting principles. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forththerein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Elbit Systems’ internal controlover financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission, and our report dated March 12, 2013, expressed an unqualified opinion thereon. Kost Forer Gabbay & KasiererA member of Ernst & Young Global Tel Aviv, IsraelMarch 12, 2013 F - 2 Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, IsraelTel: 972 (3)6232525Fax: 972 (3)5622555www.ey.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Shareholders and Board of Directors ofElbit Systems Ltd. We have audited Elbit Systems Ltd.’s (“Elbit Systems”) internal control over financial reporting as of December 31, 2012, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). ElbitSystems’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting included in the Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express anopinion on Elbit Systems’ internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. In our opinion, Elbit Systems maintained, in all material respects, effective internal control over financial reporting, as of December 31, 2012, based on theCOSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof Elbit Systems and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes inequity and cash flows for each of the three years in the period ended December 31, 2012, and our report dated March 12, 2013, expressed an unqualifiedopinion thereon. Kost Forer Gabbay & KasiererA member of Ernst & Young Global Tel Aviv, IsraelMarch 12, 2013 F - 3 ELBIT SYSTEMS LTD. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSU.S. dollars (In thousands) December 31, Note 2012 2011 CURRENT ASSETS: Cash and cash equivalents $199,241 $202,577 Short-term bank deposits 15,444 21,693 Available-for-sale marketable securities (9) 50,111 - Trade and unbilled receivables, net (3) 688,129 669,524 Other receivables and prepaid expenses (4) 180,103 180,024 Inventories, net of customer advances (5) 751,247 761,269 Total current assets 1,884,275 1,835,087 LONG-TERM INVESTMENTS AND RECEIVABLES: Investments in affiliated companies, partnerships and other companies (6) 126,482 110,159 Long-term trade and unbilled receivables (7) 229,687 162,762 Long-term bank deposits and other receivables (8) 19,269 12,215 Deferred income taxes, net (18F) 31,465 36,130 Severance pay fund (2R) 302,680 283,477 709,583 604,743 PROPERTY, PLANT AND EQUIPMENT, NET (10) 501,286 517,608 GOODWILL (11) 500,598 499,326 OTHER INTANGIBLE ASSETS, NET (11) 214,963 263,746 $3,810,705 $3,720,510 The accompanying notes are an integral part of the consolidated financial statements. F - 4 ELBIT SYSTEMS LTD. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSU.S. dollars (In thousands, except share data) December 31, Note 2012 2011 CURRENT LIABILITIES: Short-term bank credit and loans (12) $181 $2,998 Current maturities of long-term loans and Series A Notes 90,056 127,627 Trade payables 260,975 303,601 Other payables and accrued expenses (13) 704,450 756,529 Customer advances in excess of costs incurred on contracts in progress (14) 453,382 407,222 Total current liabilities 1,509,044 1,597,977 LONG-TERM LIABILITIES: Long-term loans, net of current maturities (15) 173,745 302,255 Series A Notes, net of current maturities (16) 408,610 235,319 Employee benefit liabilities 407,661 394,115 Deferred income taxes and tax liabilities,net (18F) 48,787 48,467 Customer advances in excess of costs incurred on contracts in progress (14) 156,497 154,696 Other long-term liabilities 55,735 59,961 1,251,035 1,194,813 COMMITMENTS AND CONTINGENT LIABILITIES (20) EQUITY: (21) Elbit Systems Ltd. equity: Share capital: Ordinary shares of 1 New Israeli Shekels (“NIS”) par value each; Authorized – 80,000,000 shares as of December 31, 2012 and 2011; Issued 43,290,666 and 43,257,077 shares as of December 31, 2012 and 2011, respectively; Outstanding 41,881,745 and 42,607,788 shares as of December 31, 2012 and2011, respectively 12,105 12,093 Additional paid-in capital 237,234 232,407 Treasury shares – 1,408,921 and 649,289 shares as of December 31, 2012 and 2011,respectively (40,428) (14,422) Accumulated other comprehensive loss (33,544) (56,226) Retained earnings 841,748 724,485 Total Elbit Systems Ltd. equity 1,017,115 898,337 Non-controlling interests 33,511 29,383 1,050,626 927,720 Total liabilities and equity $3,810,705 $3,720,510 The accompanying notes are an integral part of the consolidated financial statements. F - 5 ELBIT SYSTEMS LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEU.S. dollars (In thousands, except per share data) Year ended December 31, Note 2012 2011 2010 Revenues (22) $2,888,607 $2,817,465 $2,670,133 Cost of revenues 2,072,742 2,085,451 1,872,263 Gross profit 815,865 732,014 797,870 Operating expenses: Research and development, net (23) 233,387 241,092 234,131 Marketing and selling 241,911 235,909 229,942 General and administrative 137,517 139,349 131,200 Other operating income, net - - (4,756) Total operating expenses 612,815 616,350 590,517 Operating income 203,050 115,664 207,353 Financial expenses, net (24) (26,086) (13,569) (21,251) Other income, net (25) 78 1,909 13,259 Income before income taxes 177,042 104,004 199,361 Income taxes (18D) 17,099 13,624 24,037 159,943 90,380 175,324 Equity in net earnings of affiliated companies and partnerships (6B) 11,160 15,377 18,796 Income from continuing operations 171,103 105,757 194,120 Income (loss) from discontinued operations and impairment, net (1D) (616) (15,977) 921 Net income $170,487 $89,780 $195,041 Less: net loss (income) attributable to non-controlling interests (2,608) 508 (11,543) Net income attributable to Elbit Systems Ltd.’s shareholders $167,879 $90,288 $183,498 Earnings per share attributable to Elbit Systems Ltd.’s shareholders: (21) Basic net earnings (losses) per share: Continuing operations 3.99 2.33 4.29 Discontinued operations (0.01) (0.22) 0.01 Total $ 3.98 $2.11 $4.30 Diluted net earnings (losses) per share: Continuing operations 3.98 2.31 4.24 Discontinued operations (0.01) (0.22) 0.01 Total $ 3.97 $2.09 $4.25 Weighted average number of shares used in computation of basic earnings pershare 42,190 42,764 42,645 Weighted average number of shares used in computation of diluted earnings pershare 42,277 43,131 43,217 Amounts attributable to Elbit Systems Ltd.’s shareholders Income from continuing operations, net of income taxes $168,245 $99,778 $182,951 Discontinued operations, net of income taxes (366) (9,490) 547 Net income attributable to Elbit Systems Ltd.’s shareholders $167,879 $90,288 $183,498 The accompanying notes are an integral part of the consolidated financial statements. F - 6 ELBIT SYSTEMS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEU.S. dollars (In thousands, except share data) Year ended December 31, 2012 2011 2010 Net income $170,487 $89,780 $195,041 Other comprehensive income (loss), net of tax: Foreign currency translation differences 1,972 (5,597) 2,991 Unrealized gains (losses) on derivative instruments 24,885 (20,025) 6,668 Pension and post-retirement benefit plans (4,956) (15,807) (2,781)Unrealized gains (losses) on available-for-sale marketable securities 781 3,663 (2,925) 22,682 (37,766) 3,953 Total comprehensive income (loss) 193,169 52,014 189,994 Less: comprehensive income (loss) attributable to non-controlling interest (4,128) 4 (10,508)Comprehensive income attributable to Elbit Systems Ltd.'s shareholders $ 189,041 $52,018 $179,486 The accompanying notes are an integral part of the consolidated financial statements. F - 7 ELBIT SYSTEMS LTD. AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITYU.S. dollars (In thousands, except share data) Number ofoutstandingshares Sharecapital Additionalpaid–incapital Accumulatedothercomprehensiveincome (loss) Retainedearnings Treasuryshares Non–controllinginterest Totalequity Balance as ofJanuary 1, 2010 $42,530,895 $ 12,006 $272,127 $ (22,413) $ 575,469 $ (4,321) $24,326 $857,194 Exercise of options 162,445 44 3,546 - - - - 3,590 Stock-basedcompensation - - 5,211 - - - - 5,211 Tax benefit in respectof options exercised - - 710 - - - - 710 Dividends paid - - - - (63,137) - - (63,137) Fair value of non-controlling interestsrelated tothe acquisition of ITL - - - - - - 4,298 4,298 Other comprehensiveincome, net oftax benefit of $1,801 - - - 3,953 - (1,035) 2,918 Net income attributableto non- controllinginterests - - - - - - 11,543 11,543 Net income attributableto non-controllinginterest fromdiscontinued operation - - - - - - (374 ) (374) Net income attributableto Elbit Systems Ltd.'sshareholders - - - - 183,498 - - 183,498 Balance as ofDecember 31, 2010 $42,693,340 $ 12,050 $281,594 $ (18,460) $ 695,830 $ (4,321)$ 38,758 $1,005,451 The accompanying notes are an integral part of the consolidated financial statements. F - 8 ELBIT SYSTEMS LTD. AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY (CONT.)U.S. dollars (In thousands, except share data) Number ofoutstandingshares Sharecapital Additionalpaid–incapital Accumulatedothercomprehensiveincome (loss) Retainedearnings Treasuryshares Non–controllinginterest Totalequity Balance as of January 1,2011 $42,693,340 $12,050 $281,594 $(18,460) $695,830 $(4,321) $38,758 $1,005,451 Exercise of options 154,816 43 3,790 - - - - 3,833 Stock-based compensation - - 1,996 - - - - 1,996 Tax benefit in respect ofoptions exercised - - 169 - - - - 169 Dividends paid - - - - (61,633) - - (61,633) Purchase of treasury shares (240,368) - - - - (10,101) - (10,101) Purchase of subsidiaries shares from non- controlling interest, net - - (55,142) - - - (15,858) (71,000) Other comprehensiveincome, net of tax benefit of$10,400 - - - (37,766) - - 504 (37,262) Net income attributable to non-controlling interests - - - - - - (508) (508) Net loss attributable to non-controlling interest from discontinuedoperation - - - - - - 6,487 6,487 Net income attributable to Elbit Systems Ltd.'sshareholders - - - - 90,288 - - 90,288 Balance as of December31, 2011 $42,607,788 $12,093 $232,407 $(56,226) $724,485 $(14,422) $29,383 $927,720 The accompanying notes are an integral part of the consolidated financial statements. F - 9 ELBIT SYSTEMS LTD. AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY (CONT.)U.S. dollars (In thousands, except share data) Number ofoutstandingshares Sharecapital Additionalpaid–incapital Accumulatedothercomprehensiveincome (loss) Retainedearnings Treasuryshares Non–controllinginterest Totalequity Balance as of January 1,2012 $42,607,788 $12,093 $232,407 $(56,226) $724,485 $(14,422) $29,383 $927,720 Exercise of options 33,589 12 1,340 - - - - 1,352 Stock-based compensation - - 3,326 - - - - 3,326 Tax benefit in respect ofoptions exercised - - 161 - - - - 161 Dividends paid - - - - (50,616) - - (50,616) Purchase of treasury shares (759,632) - - - - (26,006) - (26,006) Other comprehensiveincome, net of tax expenseof $1,574 - - 22,682 - 1,520 24,202 Net income attributable tonon- controlling interests - - - - - - 2,608 2,608 Net income attributable toElbit Systems Ltd.'sshareholders - - - - 167,879 - - 167,879 Balance as of December31, 2012 $41,881,745 $12,105 $237,234 $(33,544) $841,748 $(40,428) $33,511 $1,050,626 The accompanying notes are an integral part of the consolidated financial statements. F - 10 ELBIT SYSTEMS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars (In thousands) Year ended December 31, 2012 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 170,487 $89,780 $195,041 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 138,796 150,618 132,141 Write-off impairment and discontinued operations,net 616 15,977 1,284 Stock-based compensation 3,326 1,996 5,211 Amortization of Series A Notes discount (premium) and related issuance costs, net 153 422 (258)Deferred income taxes and reserve, net 6,579 (8,777) (28,162)Loss (gain) on sale of property, plant andequipment 1,197 (1,645) (1,426)Loss (gain) on sale of investment (829) 2,189 (19,151)Equity in net earnings of affiliated companies and partnerships, net of dividend received(*) (1,602) (270) (8,791)Changes in operating assets and liabilities, net of amounts acquired: Increase in short and long-term trade receivables, and prepaid expenses (91,988) (65,062) (84,708)Decrease (increase) in inventories, net 10,022 (95,363) (49,724)Increase (decrease) in trade payables, other payables and accrued expenses (75,724) 17,225 76,807 Severance, pension and termination indemnities,net (10,612) 1,879 4,160 Increase (decrease) in advances received from customers 47,961 81,946 (36,396)Net cash provided by operating activities 198,382 190,915 186,028 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (81,637) (121,977) (138,644)Acquisitions of subsidiaries and business operations (Schedule A) - (12,173) (229,556)Investments in affiliated companies and other companies (4,241) (13,555) (4,956)Proceeds from sale of property, plant andequipment 7,335 15,059 10,667 Proceeds from sale of investments 705 329 27,941 Investment in long-term deposits (779) (609) (14,484)Proceeds from sale of long-term deposits 2,849 40,396 30,240 Investment in short-term deposits and available-for-sale marketable securities (340,899) (88,842) (189,345)Proceeds from sale of short-term deposits and available-for-sale marketable securities 299,029 126,306 252,550 Net cash used in investing activities (117,638) (55,066) (255,587) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of options 1,352 3,833 3,590 Purchase of non-controlling interests - (71,000) - Repayment of long-term loans (319,601) (73,666) (488,657)Proceeds from long-term loans 122,038 172,303 387,692 Proceeds from issuance of Series A Notes 246,973 - 283,213 Series A Notes issuance costs (2,035) - (2,530)Purchase of treasury shares (26,006) (10,101) - Repayment of Series A Notes and convertible debentures (53,530) (29,998) - Purchase of convertible debentures of asubsidiary - (2,121) - Dividends paid (50,616) (61,633) (63,137)Tax benefit in respect of options exercised 161 169 710 Change in short-term bank credit and loans,net (2,817) (12,117) (40,972)Net cash provided by (used in) financingactivities (84,081) (84,331) 79,909 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,336) 51,518 10,350 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 202,577 151,059 140,709 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $199,241 $202,577 $151,059 (*) dividend received from affiliated companies and partnership $ 9,558 $15,107 $10,925 The accompanying notes are an integral part of the consolidated financial statements. F - 11 ELBIT SYSTEMS LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)U.S. dollars (In thousands) Year ended December 31, 2012 2011 2010 SUPPLEMENTAL CASH FLOW ACTIVITIES: Cash paid during the year for: Income taxes, net $5,734 $18,955 $60,759 Interest $19,168 $10,258 $13,524 SCHEDULE A: Acquisitions of subsidiaries and business operations Estimated net fair value of assets acquired and liabilities assumed at the date of acquisition was asfollows: Working capital (deficit), net (excluding cash and cash equivalents) $- $306 $(57,937)Property, plant and equipment - 1,938 56,233 Other long-term assets - - 16,008 Goodwill and other intangible assets - 17,993 261,910 Deferred income taxes - (1,171) (15,515)Long-term liabilities - (6,893) (26,845)Non-controlling interest - - (4,298) $- $12,173 $229,556 The accompanying notes are an integral part of the consolidated financial statements. F - 12 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars (In thousands)Note 1 - GENERAL A.Elbit Systems Ltd. (“Elbit Systems”) is an Israeli corporation, 46.75% owned by the Federmann Group. Elbit Systems’ shares aretraded on the Nasdaq National Market in the United States (“Nasdaq”) and on the Tel Aviv Stock Exchange (“TASE”). Elbit Systemsand its subsidiaries (collectively the “Company”) are engaged mainly in the field of defense electronics, homeland security andcommercial aviation. Elbit Systems’ principal wholly-owned subsidiaries are the Elbit Systems of America, LLC (“ESA”) companies,Elbit Systems Electro-Optics Industries Elop Ltd. (“Elop”), Elbit Systems Land and C4I Ltd. (“ESLC”) and Elbit Systems EW andSIGINT – Elisra Ltd. (“Elisra”) (formerly known as Elisra Electronic Systems Ltd.). B.A majority of the Company’s revenues are derived from direct or indirect sales to governments or to governmental agencies. As a result,a substantial portion of the Company’s sales is subject to the special risks associated with sales to governments or to governmentalagencies. These risks include, among others, the dependency on the resources allocated by governments to defense programs, changesin governmental priorities, changes in governmental registration, changes in governmental regulations and changes in governmentalapprovals regarding export licenses required for the Company’s products and for its suppliers. As for major customers, refer to Note22(C). C.In December 2011, the Israeli Government, due to political considerations, did not renew the Company’s export authorization tocomplete performance under an approximately $90,000 contract to supply systems to a foreign customer. As a result of the cessation ofthe program, and in accordance with our legal advisors opinion, the Company recorded in its 2011 results of operations an expense ofapproximately $72,800 ($62,000 net of taxes), which was included in cost of goods sold. In May 2012, the foreign customer drewdown an amount of approximately $33,600 in advance and performance guarantees. The remaining balance will be utilized after 2013.In November 2012, following discussions with the Israeli Government regarding a possible compensatory settlement (whichdiscussions did not result in an agreement regarding such settlement), the Company filed a lawsuit against the Government of Israel torecover damages and resulting expenses in the amount of approximately $74,000 in connection with the cancellation of the exportauthorization. The lawsuit was filed with the District Court of the Central Region of Israel. D.DISCONTINUED OPERATIONS Fraser-Volpe LLC (“FV”) is a U.S. Company held approximately 59.4% by the Company through the Company’s wholly-ownedsubsidiary ITL Optronics Inc. ("ITL"). ITL and FV were acquired by the Company in the fourth quarter of 2010, as part of theacquisition of the Mikal group of companies, with the balance of ITL’s shares being acquired in February 2011. Since the acquisition date, Company’s management is committed to and still is in process of selling its holdings in FV. Accordingly,FV was classified in the consolidated financial statements as held-for-sale, discontinued operations, in accordance with the criteria setin ASC 360-10-45-9, and the operating results and the cash flows for the years ended at December 31, 2012 and 2011 were classifiedas discontinued operations, in accordance with ASC 205-20, “Discontinued Operations”. F - 13 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars (In thousands)Note 1 - GENERAL (Cont.) D.DISCONTINUED OPERATIONS (Cont.) During the third quarter of 2011, the Company recognized an impairment loss of approximately $16,000 on its holdings in FV, ofwhich the non-controlling interest was approximately $6,500. Net loss recognized in the financial statements related to the abovementioned impairment was approximately $9,500. As of December 31, 2012 and 2011, net assets related to FV amounted to $1,172 and $1,748, respectively, and are included in“Other Receivables and Prepaid Expenses” (See Note 4). In October 2012 the Company signed an agreement for the sale of its interest in FV for an amount of $2,000 for which a downpayment of $100 was paid by the purchaser in December 2012. The results of operations and cash flows of the discontinuedoperations, for each of the three years ended December 31, 2012, were immaterial. The Company expects to finalize the sale during2013. Note 2 - SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). A.USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significantassumptions are employed in estimates used in determining values of intangible assets, warranty and contract loss accruals, legalcontingencies, tax assets and tax liabilities, stock-based compensation costs, retirement and post-retirement benefits (including theactuarial assumptions), financial instruments with no observable market quotes, as well as in estimates used in applying the revenuerecognition policy. Actual results may differ from estimated results. B.FUNCTIONAL CURRENCY 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 theCompany operates. Thus, the functional and reporting currency of the Company is the U.S. dollar. Transactions and balances of the Company and certain subsidiaries, which are denominated in other currencies, have beenremeasured into U.S. dollars in accordance with principles set forth in ASC 830, “Foreign Currency Matters”. All exchange gains andlosses from the remeasurement mentioned above are reflected in the statement of income as financial expenses or income, asappropriate. For those foreign subsidiaries and investees whose functional currency has been determined to be other than the U.S. dollar, assets andliabilities are translated at year-end exchange rates, and statement of income items are translated at average exchange rates prevailingduring the year. Resulting translation differences are recorded as a separate component of accumulated other comprehensive income inequity. F - 14 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) C.PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Elbit Systems and it's wholly and majority-owned subsidiaries. Intercompany transactions and balances, including profit from intercompany yet realized outside the Company, have been eliminatedupon consolidation. D.COMPREHENSIVE INCOME The Company accounts for comprehensive income in accordance with ASC 220, "Comprehensive Income". This statementestablishes standards for the reporting and display of comprehensive income and its components. Comprehensive income generallyrepresents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to,shareholders. In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”, whichis effective for annual reporting periods beginning after December 15, 2011. Accordingly, the Company adopted ASU 2011-05 onJanuary 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statementof changes in shareholders’ equity. Upon adoption of the new guidance, the Company elected to present a separate statement ofconsolidated comprehensive income. The components of accumulated other comprehensive income (loss), net of taxes, in the amount of $23,845 and $25,419 at December31, 2012 and 2011, respectively, were as follows: Year ended December 31, 2012 2011 Foreign currency translation differences $(5,189) $(7,161)Unrealized gains (losses) on derivative instruments 14,771 (10,114)Pension and post–retirement benefit plans (42,354) (37,398)Unrealized gains (losses) on available-for-sale marketable securities $(772) $(1,553) Accumulated other comprehensive income (loss), net of taxes $(33,544) $(56,226) E.BUSINESS COMBINATIONS The Company applies ASC 805, “Business Combinations”. ASC 805 requires recognition of assets acquired, liabilities assumed,and non-controlling interest in the acquire at the acquisition date, measured at their fair values as of that date. This ASC also requiresthe fair value of acquired in-process research and development (“IPR&D”) to be recorded as intangibles with indefinite lives,contingent consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs to be expensed asincurred. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimatedcontingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and inacquired income tax position are to be recognized in earnings. F - 15 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands)Note 2 -SIGNIFICANT ACCOUNTING POLICIES (Cont.) F.CASH AND CASH EQUIVALENTS Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three monthsor less, when purchased. G.SHORT-TERM BANK DEPOSITS Short-term bank deposits are deposits with original maturities of more than three months but less than one year. The short–term bankdeposits are presented at their cost, which approximates fair value. H.AVAILABLE-FOR-SALE MARKETABLE SECURITIES The Company accounts for all its investments in debt securities and for investments in marketable equity securities of entities inwhich it does not have significant influence, in accordance with ASC 320, “Investments - Debt and Equity Securities”. The Companyclassifies all debt securities and marketable equity securities as “available-for-sale”. All of the Company’s investments in available-for-sale securities are reported at fair value. Unrealized gains and losses are comprised of the difference between fair value and the cost ofsuch securities and are recognized, net of tax, as accumulated other comprehensive income (“OCI”). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Suchamortization together with interest and dividends on securities are included in "financial expenses, net". The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the costbasis of such securities is judged to be other-than-temporary impairment (“OTTI“). Factors considered in making such adetermination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period andif the entity has the intent to sell the debt security, or if it is more likely than not that it will be required to sell the debt security beforerecovery of its amortized cost basis. However, if an entity does not expect to sell a debt security, it will still need to evaluate expectedcash flows to be received and determine if a credit loss exists. In the event of a credit loss, only the amount of impairment associatedwith the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in OCI. I.INVENTORIES Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from slow-movingitems or technological obsolescence for which recoverability is not probable. Cost is determined as follows; ·Raw materials using the average or FIFO cost method. ·Work in progress: ·Costs incurred on long-term contracts in progress include direct labor, material, subcontractors, other direct costsand an allocation of overheads, which represent recoverable costs incurred for production, allocable operatingoverhead cost and, where appropriate, research and development costs (See Note 2(V)). F - 16 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands)Note 2 -SIGNIFICANT ACCOUNTING POLICIES (Cont.) I.INVENTORIES (Cont.) ·Labor overhead is generally included on a basis of updated hourly rates and is allocated to each project according tothe amount of hours expended. Material overhead is generally allocated to each project based on the value of directmaterial that is charged to the project. Advances from customers are allocated to the applicable contract inventories and are deducted from the inventory balance. Advances inexcess of related inventories are classified as liabilities. Pre-contract costs are generally expenses, but can be deferred and included in inventory, only when such costs can be directlyassociated with a specific anticipated contract and if their recoverability from the specific anticipated contract is probable according tothe guidelines of ASC 605-35. J.INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES Investments in affiliated companies and partnerships that are not controlled but over which the Company can exercise significantinfluence (generally, entities in which the Company holds approximately between 20% and 50% of the voting rights of the investee) arepresented using the equity method of accounting. Profits on intercompany sales, not realized outside the Company, are eliminated. TheCompany discontinues applying the equity method when its investment (including advances and loans) is reduced to zero and theCompany has not guaranteed obligations of the affiliate or otherwise committed to provide further financial support to the affiliate. Investments in preferred shares, which are not in substance common stock, are recorded on a cost basis according to ASC 323-10-15-13, “Investments-Equity Method and Joint Ventures-In-substance Common Stock” and ASC 323-10-40-1, "Investment-Equity Methodand Joint Ventures-Investee Capital Transactions". A change in the Company’s proportionate share of an investee’s equity, resulting from issuance of common or in-substance commonshares by the investee to third parties, is recorded as a gain or loss in the consolidated income statements in accordance with ASC 323-10-40-1. Investments in non-marketable equity securities of entities in which the Company does not have control or the ability to exercisesignificant influence over their operation and financial policies, are recorded at cost (generally when the Company holds less than 20%of the voting rights). Management evaluates investments in affiliated companies, partnerships and other non-marketable equity securities for evidence ofother-than-temporary declines in value. Such evaluation is dependent on the specific facts and circumstances. Accordingly, indetermining whether other-than-temporary declines exist, management evaluates various indicators for other-than-temporary declinesand evaluates financial information (e.g. budgets, business plans, financial statements, etc.). During 2012 and 2011, no materialimpairment was recognized. F - 17 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands)Note 2 -SIGNIFICANT ACCOUNTING POLICIES (Cont.) K.VARIABLE INTEREST ENTITIES ASC 810-10, “Consolidation”, provides a framework for identifying variable interest entities (“VIEs”) and determining when acompany should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financialstatements. According to ASC 810-10, the Company consolidates a VIE when it has both (1) the power to direct the economicallysignificant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that couldpotentially be significant to the variable interest entity. The determination about whether the Company should consolidate a VIE isevaluated continuously as existing relationships change or future transactions occur. The Company’s assessment of whether an entity is a VIE and the determination of the primary beneficiary is judgmental in nature andinvolves the use of significant estimates and assumptions. Those include, among others, forecasted cash flows, their respectiveprobabilities and the economic value of certain preference rights. In addition, such assessment also involves estimates of whether agroup entity can finance its current activities, until it reaches profitability, without additional subordinated financial support. Also according to ASC 810, a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should bereported as a separate component of equity in the consolidated financial statements. As such, changes in the parent’s ownership interestwith no change of control are treated as equity transactions, rather than step acquisitions or dilution gains or losses. The amendmentclarifies that losses of partially owned consolidated subsidiaries shall continue to be allocated to the non-controlling interests even whentheir investment was already reduced to zero. UAV Tactical Systems Ltd. (“U-TacS”) in the U.K. is considered to be a VIE. As Elbit Systems is the primary beneficiary and hasboth the power to direct its activities and absorb the majority of its loss or right to majority of its earnings based upon holding themajority voting rights in U-TacS (51%), U-TacS is consolidated in the Company’s financial statements. L.LONG-TERM RECEIVABLESLong-term trade, unbilled and other receivables, with long-term payment terms, which are considered collectible, are recorded at theirestimated present values (determined based on the market interest rates at the date of initial recognition). F - 18 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands)Note 2 -SIGNIFICANT ACCOUNTING POLICIES (Cont.) M.LONG-TERM BANK DEPOSITS Long-term bank deposits are deposits with maturities of more than one year. These deposits are presented at cost and earn interest atmarket rates. Accumulated interest to be received over the next year is recorded as a current asset. The deposits and accumulatedinterest approximate fair value. N.PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, net of accumulated depreciation and investment grants. For equipment produced forthe Company’s own use, cost includes materials, labor and overhead (including interest costs, when applicable) but not in excess ofthe 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 and leasehold improvements (*) 2-20 Instruments, machinery and equipment3-33 Office furniture and other4-33 Motor vehicles12-33(Mainly 15%) (*)Prepayments for operating leases and leasehold improvements are amortized generally over the term of the lease or the usefullife of the assets, whichever is shorter. O.OTHER INTANGIBLE ASSETS Other identifiable intangible assets mainly consist of purchased technology, customer relations and trademarks. These intangibleassets are stated at cost net of accumulated amortization and impairments, and are amortized over their useful life using the straight-line method, or the accelerated method, which ever better reflects the applicable expected utilization pattern. P.IMPAIRMENT OF LONG-LIVED ASSETSThe Company’s long-lived assets and finite-lived intangible assets are reviewed for impairment in accordance with ASC 360-10-35“Property, Plant and Equipment – Subsequent Measurement” whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of assets (or assets group) to be held and used is measured by a comparison of the carrying amount of an asset to thefuture undiscounted cash flows expected to be generated by the asset. If an asset is determined to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. For each of the three years inthe period ended December 31, 2012, no material impairment has been identified. As required by ASC 820, “Fair Value Measurements”, the Company applies assumptions that marketplace participants wouldconsider in determining the fair value of long-lived assets (or assets groups). F - 19 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 2 -SIGNIFICANT ACCOUNTING POLICIES (Cont.) Q.GOODWILL IMPAIRMENT Goodwill is subject to an annual impairment test at the reporting unit level (or more frequently if impairment indicators arise). The Company identified several reporting units based on the guidance of ASC 350, “Intangibles – Goodwill and Other”. ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the secondphase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such case, thesecond phase is then performed, and the Company measures impairment by comparing the carrying amount of the reporting unit’sgoodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess. For each of thethree years in the period ended December 31, 2012, no material impairment losses have been identified. As required by ASC 820, “Fair Value Measurements”, the Company applies assumptions that market place participants wouldconsider in determining the fair value of each reporting unit. R.SEVERANCE PAY Elbit Systems’ and its Israeli subsidiaries’ obligations for severance pay are calculated pursuant to Israel’s Severance Pay Law basedon the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date and arepresented on an undiscounted basis (the “Shut Down Method”). Employees are entitled to one month’s salary for each year ofemployment or a portion thereof. The obligation is provided by monthly deposits with insurance policies and by an accrual. The valueof these policies is recorded as an asset on the Company’s balance sheet. The deposited funds may be withdrawn only upon thefulfillment of the obligation, pursuant to the Severance Pay Law or labor agreements. The value of the deposited funds is based on thecash surrender value of these policies and includes profits (or losses) accumulated to balance sheet date. Elbit Systems and its Israeli subsidiaries have entered into an agreement with some of its employees implementing Section 14 of theSeverance Pay Law and the General Approval of the Labor Minister dated June 30, 1998, issued in accordance to the said Section 14,mandating that upon termination of such employees’ employment, all the amounts accrued in their insurance policies shall be releasedto them. The severance pay liabilities and deposits covered by these plans are not reflected in the balance sheet as the severance payrisks have been irrevocably transferred to the severance funds.Severance pay expenses for the years ended December 31, 2012, 2011 and 2010 amounted to approximately $58,326, $50,018 and$50,228, respectively. S.PENSION AND OTHER POSTRETIREMENT BENEFITS The Company accounts, for its obligations for pension and other postretirement benefits, in accordance with ASC 715,“Compensation – Retirement Benefits” (See Note 17). F - 20 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands)Note 2 -SIGNIFICANT ACCOUNTING POLICIES (Cont.) T.REVENUE RECOGNITION The Company generates revenues principally from long-term contracts involving the design, development, manufacture and integrationof defense systems and products. In addition, to a minor extent, the Company provides support and services for such systems andproducts. Revenues from long-term contracts are recognized primarily using ASC 605-35, “Construction-Type and Production-Type Contracts”,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 contractefforts are recorded using the cost-to-cost method of accounting as the basis to measure progress toward completing the contract andrecognizing revenues using the percentage-of-completion basis. According to this method, sales and profits are recorded based on theratio 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 contracts which provide for a substantial level of production effort are recordedon a percentage-of-completion basis, using the units-of-delivery as the basis to measure progress toward completing the contract andrecognizing revenues. In certain circumstances, which involve long-term fixed-price production type contracts for non-homogenousunits or small quantities of units, or when the achievement of performance milestones provides a more reliable and objective measureof the extent of progress toward completion, revenue is recognized based on the achievement of performance milestones. Sales and anticipated profit under long-term fixed-price contracts that involve both development and production efforts are recordedusing the cost-to-cost method and units-of-delivery method as applicable to each phase of the contract, as the basis to measure progresstoward completion. In addition, when measuring progress toward completion under the development portion of the contract, in certaincircumstances, 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 eachindividual contract. Estimated gross profit or loss from long-term contracts may change due to differences between actual performanceand original estimated forecasts.Any changes in estimated gross profit from prior estimates are recognized in results of operations in the current period when they arereasonably determinable by management, for the inception-to-date effect of such changes (on a cumulative catch-up basis). Anticipatedlosses 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 earningsin the proportion that incurred costs bear to total estimated costs. F - 21 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.) U.S. dollars (In thousands) Note 2 -SIGNIFICANT ACCOUNTING POLICIES (Cont.) T.REVENUE RECOGNITION (Cont.) Amounts representing contract change orders, claims or other items are included in sales only when they can be reliably estimated andrealization is probable. Penalties and awards applicable to performance on contracts are considered in estimating sales and profit ratesand are recorded when they are probable and there is sufficient information to assess anticipated contract performance. The Company believes that the use of the percentage-of-completion method is appropriate as the Company has the ability to makereasonably 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 theparties to the contracts, the consideration to be exchanged and the manner and terms of settlement. In all cases, revenue is recognizedwhen the Company expects to perform its contractual obligations, and its customers are expected to satisfy their obligations under thecontract. Management reviews periodically the estimates of progress towards completion and project costs. These estimates are determined basedon engineering estimates and past experience, by personnel having the appropriate authority and expertise to make reasonable estimatesof the related costs. Such engineering estimates are reviewed periodically for each specific contract by professional personnel fromvarious disciplines within the organization. These estimates take into consideration the probability of achievement of certainmilestones, as well as other factors that might impact the contract’s completion and project cost. A number of internal and external factors affect the Company's cost estimates, including labor rates, estimated future prices ofmaterial, revised estimates of uncompleted work, efficiency variances, linkage to indices and exchange rates, customer specificationsand testing requirement changes. If any of the above factors were to change, or if different assumptions were used in estimatingprogress cost and measuring progress towards completion, it is possible that materially different amounts would be reported in theCompany’s consolidated financial statements. In certain circumstances, sales under short-term fixed-price production type contracts or sale of products are accounted for inaccordance with SAB No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”), and recognized when all the followingcriteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price to the buyer is fixed ordeterminable, no further obligation exists and collectability is reasonably assured.In cases where the contract involves the delivery of products and performance of services, or other obligations such as buy-back (SeeNote 20(B)), the Company follows the guidelines specified in ASC 605-25, “Revenue Recognition – Multiple-Element Arrangements”in order to allocate the contract consideration between the identified different elements using the relative selling price method to allocatethe entire arrangement consideration. The selling price for each element would be allocated by using a hierarchy of: (1) Vendor SpecificObjective Evidence (“VSOE”); (2) third-party evidence of the selling price for that element; or (3) estimated selling price (“ESP”), forindividual elements of an arrangement when VSOE or third-party evidence of the selling price is unavailable. F - 22 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.) U.S. dollars (In thousands) T.REVENUE RECOGNITION (Cont.) The Company determines ESP for the purposes of allocating the consideration to individual elements of an arrangement by consideringseveral external and internal factors including, but not limited to, pricing practices, margin objectives, geographies in which theCompany offers products and services and internal costs. The determination of ESP is judgmental and is made through consultation with and approval by management. Service revenues include contracts primarily for the provision of supplies or services other than associated with design, developmentor production activities. It may be a stand-alone service contract or a service element, which was separated from the design,development or production contract according to the criteria established in ASC 605-25. Service contracts primarily include operationand maintenance contracts, outsourcing-type arrangements, return and repair contracts, training, installation services, etc. Revenuesfrom services were less than 10% of consolidated revenues in each of the years ended December 31, 2012, 2011 and 2010. As for research and development costs accounted for as contract costs refer to Note 2(V). U.WARRANTY The Company estimates the costs that may be incurred under its basic warranty. Such costs are: (1) estimated as part of the totalcontract’s cost or (2) recorded as a liability at the time revenue for delivered products is recognized. The specific terms and conditionsof those warranties vary depending upon the product sold and the country in which the Company does business. Factors that affectthe Company’s warranty cost include the number of delivered products, engineering estimates and anticipated rates of warrantyclaims. The Company periodically assesses the adequacy of its recorded warranty cost and adjusts the amount as necessary. Specificwarranty reserves are recorded in the period defects or potential products failures are identified and recorded based on estimates madeby management. The estimates are evaluated on a periodic basis. Changes in the Company’s provision for warranty, which is included in other payables and accrued expenses in the Balance Sheet,are as follows: 2012 2011 Balance, at January 1 $176,831 $164,778 Warranties issued during the year 81,952 75,434 Reduction due to warranties forfeited or claimed during theyear (69,070) (63,381) Balance, at December 31 $189,713 $176,831 V.RESEARCH AND DEVELOPMENT COSTS Research and development costs, net of participation grants, include costs incurred for independent research and development and bidand proposal efforts and are expensed as incurred unless the costs are related to certain contractual arrangements which are recorded aspart of cost of revenues, over the period that revenue is recognized, consistent with the Company’s revenue recognition accountingpolicy. The Company does not have significant stand-alone research and development arrangements performed for others. The Company has certain research and development contractual arrangements that meet the requirements for best efforts research anddevelopment accounting. Accordingly, the amounts funded by the customer are recognized as an offset to its research and developmentexpenses rather than as contract revenues. F - 23 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) V.RESEARCH AND DEVELOPMENT COSTS (Cont.) Elbit Systems and certain Israeli subsidiaries receive grants (mainly royalty-bearing) from the Israeli Chief Scientist’s Office (“OCS”)and from other sources for the purpose of partially funding approved research and development projects. The grants are not to berepaid, but instead Elbit Systems and certain Israeli subsidiaries are obliged to pay royalties as a percentage of future sales if andwhen sales from the funded projects are generated. These grants are recognized as a deduction from research and development costs atthe time the applicable entity is entitled to such grants on the basis of the research and development costs incurred. Since the paymentof royalties is not probable when the grants are received, the Company records a liability in the amount of the estimated royalties foreach individual contract, when the related revenues are recognized, as part of cost of revenues. For more information regarding OCSroyalties’ commitments see Note 20(A). W.INCOME TAXES The Company accounts for income taxes and uncertain tax positions in accordance with ASC 740, “Income Taxes”. This guidanceprescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differencesbetween financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be ineffect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred taxassets to amounts that are more likely than not to be realized. The Company established reserves for uncertain tax positions based on the evaluation of whether or not the Company’s uncertain taxposition is “more likely than not” to be sustained upon examination. The Company records interest and penalties pertaining to itsuncertain tax positions in the financial statements as income tax expense. X.CONCENTRATION OF CREDIT RISKS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cashequivalents, short and long-term deposits, marketable securities and trade receivables. The majority of the Company’s cash and cash equivalents and short and long-term deposits are invested with major banks mainly inIsrael and the United States. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions.Management believes that the financial institutions that hold the Company’s investments have a high credit rating. The Company's marketable securities include investments in corporate debentures, U.S. Treasury Bills, U.S. government agencydebentures and Israeli Treasury Bills. The Company's investment policy limits the amount that the Company may invest in any onetype of investment or issuer, thereby reducing credit risk concentrations. The Company’s trade receivables are derived primarily from sales to large and stable customers and governments located mainly inIsrael, the United States and Europe. The Company performs ongoing credit evaluations of its customers and has not experienced inrecent years any unexpected material losses. An allowance for doubtful accounts is recognized with respect to those amounts that theCompany has determined to be doubtful of collection. F - 24 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) X.CONCENTRATION OF CREDIT RISKS (Cont.) The Company entered into foreign exchange forward contracts, cross currency interest rate swaps and option strategies (together“derivative instruments”) intended to protect against the increase in the dollar equivalent value of forecasted non-dollar currency cashflows and interest as applicable. These derivative instruments are designed to effectively hedge the Company’s non-dollar currency andinterest rates exposures (See Note 2(AA)). Y.DERIVATIVE FINANCIAL INSTRUMENTS The Company accounts for derivatives and hedging based on ASC 815, “Derivatives and Hedging”, which requires the Company torecognize all derivatives on the balance sheet at fair value. If a derivative meets the definition of a cash flow hedge and is so designated,changes in the fair value of the derivative will be recognized in other comprehensive income until the hedged item is recognized inearnings. The ineffective portion of a derivative’s change in fair value is recognized immediately in earnings. If a derivative does notmeet the definition of a hedge, the changes in the fair value are included immediately in earnings in “Financial income (expenses), net”,in each reporting period (See Note 24). As part of its hedging strategy, the Company enters into forward exchange contracts in order to protect the Company from the risk thatthe eventual dollar cash flows from the sale to international customers and purchase of products from international vendors will beadversely affected by changes in exchange rates. The Company also enters into forward exchange contracts and options strategies in order to limit the exposure to exchange ratefluctuation associated with payroll expenses mainly incurred in NIS. In connection with the issuance of the NIS 1.1 billion Series A Notes in 2010 and the issuance of an additional NIS 0.9 billion SeriesA Notes in 2012 on the Tel Aviv Stock Exchange (See Note 16), the Company entered into cross-currency interest rate swaptransactions with a notional principal of the NIS 1.1 billion and NIS 0.9 billion to effectively hedge the effect of interest and exchangerate difference from NIS Series A Notes. The cross currency interest rate swap effectively converts the fixed interest rate of the debt to afloating interest rate. The terms of the swap agreements substantially match the terms of the debt. Under the terms of the swapagreements, the Company received interest payments semi-annually in NIS at an annual rate of 4.84% on the notional principal andpays interest semi-annually in U.S. Dollars at an annual weighted rate of 1.84% over the six-month LIBOR on the notional principal.The swap agreements are designated as a fair value hedge. The gains and losses related to changes in the fair value of the interest rateswaps are included in interest expense and substantially offset changes in the fair value of the hedged portion of the underlying hedgedSeries A Notes. F - 25 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands)Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) Z.STOCK-BASED COMPENSATION The Company accounts for share-based arrangements under ASC 718, “Compensation – Stock Compensation”, which requires allshare-based payments, including grants of employee stock options, to be recognized in the income statement based on their fair values. The fair value based cost of employee stock options is estimated at the grant date using a lattice-based option valuation model with thefollowing weighted average assumptions: 2012 2011 2010 Dividend yield 2.45% 2.23% 2.20%Expected volatility 36.07% 31.59% 31.92%Risk-free interest rate 0.83% 2.01% 1.56%Expected life 4 years 4 years 4 years Forfeiture rate 0.56% 0.56% 0.56%Suboptimal factor 1.75 1.75 1.75 Because lattice-based option valuation models incorporate ranges of assumptions for inputs, the average of those ranges are disclosed.Expected volatilities are based on implied volatilities from traded options on Elbit Systems’ stock, historical volatility of the stock andother factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. Theexpected term of options granted is derived from the output of the option valuation model and represents the period of time that optionsgranted are expected to be outstanding. The average of the range, given above, results from certain groups of employees exhibitingdifferent behavior. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant for periods within the contractual life of the option. The dividend yield assumption is based onhistorical dividends. AA.FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, short-term bank deposits, trade receivables, short-term bank credit and loansand trade payables approximate their fair values due to the short-term maturities of such instruments. The fair value of long-term loans is estimated by discounting the future cash flows using current interest rates for loans of similarterms and maturities. The carrying amount of the long-term loans approximates their fair value. As of December 31, 2012, the fair value of the Series A Notes based on quoted market price of the Tel-Aviv Stock Exchange wasapproximately $477,943. The Company accounts for certain assets and liabilities at fair value under ASC 820, “Fair Value Measurements and Disclosures”.Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants. As such, fair value is a market-based measurement that should be determined based onassumptions that market participants would use in pricing an asset or a liability. F - 26 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.) U.S. dollars (In thousands) Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) AA.FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont.) The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable inthe market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level inputthat is significant to the fair value measurement in its entirety. The three levels of inputs that may be used to measure fair value are as follows: Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets; Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in Level1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities inmarkets with insufficient volume or infrequent transactions, or other inputs that are observable (model-derived valuations in whichsignificant inputs are observable), or can be derived principally from or corroborated by observable market data; and Level 3 - Unobservable inputs which are supported by little or no market activity. The availability of observable inputs can vary from instrument to instrument and is affected by a wide variety of factors, including,for example, the type of instrument, the liquidity of markets and other characteristics particular to the transaction. To the extent thatvaluation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requiresmore judgment and the instrument are categorized as Level 3.The Company’s cross-currency interest rate swaps are valued under an income approach using industry-standard models thatconsider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying, andcounterparty non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full termof the instruments, can be derived from observable data or are supported by observable levels at which transactions are executed in themarketplace and accordingly are categorized as Level 2.The Company measures its marketable equity securities, debt securities and foreign currency derivative instruments at fair value.Marketable equity securities and government debt securities are classified within Level 1. The Company's corporate debt marketablesecurities trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealerquotations, or alternative pricing sources with reasonable levels of price transparency and accordingly are categorized as Level 2. The Company’s foreign currency derivative instruments are classified within Level 2 when the valuation inputs are based on quotedprices and market observable data of similar instruments and in Level 3 when valuation inputs are based on significant unobservabledata. F - 27 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.) U.S. dollars (In thousands)Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) AA.FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont.) Assets and liabilities measured at fair value on a recurring basis are summarized below: Fair value measurement atDecember 31, 2012 using QuotedPricesin ActiveMarkets forIdenticalAssets (Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Description of Assets Available-for-sale marketable debt securities: Government bonds $12,620 $- $- Corporate bonds - 37,491 - Foreign currency derivatives and option contracts - 24,738 - Cross currency interest rate swap - 22,415 - Liabilities Foreign currency derivative and option contracts - (4,992) - Total $12, 620 $79,652 $- Fair value measurement atDecember 31, 2011 using Quoted Pricesin ActiveMarkets forIdentical Assets (Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Description of Assets Available-for-sale marketable debt securities: Government bonds $- $- $- Foreign currency derivatives and option contracts - 14,755 - Cross Currency interest rate swap - 8,877 - Liabilities Foreign currency derivative and option contracts - (25,954) - Total $- $(2,322) $- AB.BASIC AND DILUTED NET EARNINGS PER SHARE Basic earnings per share are computed based on the weighted average number of outstanding ordinary shares during each year. Dilutedearnings per share are computed based on the weighted average number of outstanding ordinary shares during each year, plus dilutivepotential ordinary shares considered outstanding during the year. Outstanding stock options are excluded from the calculation of thediluted earnings per ordinary share when their effect is anti-dilutive. The weighted average number of shares related to outstanding anti-dilutive stock options excluded from the calculations of diluted netearnings per share was 125,709, 76,815 and 23,041 for the years 2012, 2011 and 2010, respectively. F - 28 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands)Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) AC.TREASURY SHARES Elbit Systems’ shares held by Elbit Systems and its subsidiaries are recognized at cost and presented in treasury shares as a reductionof shareholders’ equity. AD.RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2012, the Company retrospectively adopted a new standard issued by the Financial Accounting Standards Boardby presenting total comprehensive income and the components of net income and other comprehensive income (loss) in two separatebut consecutive statements. The adoption of this guidance resulted only in a change in how the Company presents other comprehensiveincome in the Company's consolidated financial statements and did not have any impact on the Company's results of operations,financial position or cash flows. Comparative prior periods amounts are also presented. AE.RECLASSIFICATIONS Certain financial statement data for prior years has been reclassified to conform to current year financial statement presentation. Note 3 - TRADE AND UNBILLED RECEIVABLES, NET December 31, 2012 2011 Receivables (1) $454,641 $456,479 Unbilled receivables 242,616 219,906 Less – allowance for doubtful accounts (9,128) (6,861) $688,129 $669,524 (1) Includes receivables due from affiliated companies $20,623 $20,030 Unbilled receivables on long-term contracts principally represent sales recorded under the percentage-of-completion method of accounting, whensales or revenues based on performance attainment, though appropriately recognized, cannot be billed yet under terms of the contract as of thebalance sheet date. Accounts receivable related to claims are items that the Company believes are earned, but are subject to uncertaintyconcerning determination of their ultimate realization. Such amounts were not material as of the balance sheet date. Accounts receivables andunbilled receivables, other than those detailed under Note 7, are expected to be billed and collected during 2013. Short and long-term trade and unbilled receivables include receivables from IMOD in the amount of $417,536 and $404,104, as of December31, 2012 and 2011, respectively. As for long-term trade and unbilled receivables – see Note 7. F - 29 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 4 - OTHER RECEIVABLES AND PREPAID EXPENSES December 31, 2012 2011 Deferred income taxes, net $31,801 $35,263 Prepaid expenses 45,219 37,504 Government institutions 56,340 72,266 Derivative instruments 35,580 20,520 Held-for-sale investment (*) 1,172 1,748 Other 9,991 12,723 $180,103 $180,024 (*) See Note 1(D). Note 5 - INVENTORIES, NET OF CUSTOMER ADVANCES December 31, 2012 2011 Cost incurred on long-term contracts in progress $832,642 $866,325 Raw materials 119,416 110,528 Advances to suppliers andsubcontractors 35,857 47,168 987,915 1,024,021 Less - Cost incurred on contracts in progress deducted from customer advances 68,306 38,048 Advances received from customers (*) 104,297 150,195 Provision for losses on long-termcontracts 64,065 74,509 $751,247 $761,269 (*)The Company has transferred legal title of inventories to certain customers as collateral for advances received. Advances are allocatedto the relevant inventories on a per-project basis. In cases where advances are in excess of the inventories, the net amount is presented incustomer advances (See Note 14). Note 6 -INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES A.Investments in affiliated companies: December 31, 2012 2011 Companies accounted for under the equity method $122,237 $105,914 Companies accounted for on a cost basis 4,245 4,245 $126,482 $110,159 F - 30 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES (Cont.) B.Investments in companies accounted for under the equity method: December 31, 2012 2011 SCD (1) $ 68,692 $63,854 VSI (2) 16,715 8,154 Opgal (3) 13,470 14,626 Netcity (4) 12,129 10,418 Other(5) 11,231 8,862 $122,237 $105,914 (1)Semi Conductor Devices (“SCD”) is an Israeli partnership, held 50% by the Company and 50% by Rafael AdvancedDefense Systems Ltd. (“Rafael”). SCD is engaged in the development and production of various thermal detectors and laserdiodes. SCD is jointly controlled and therefore is not consolidated in the Company’s financial statements. (2)Vision Systems International LLC (“VSI”) based in San Jose, is a California limited liability company that is held 50% byESA and 50% by a subsidiary of Rockwell Collins Inc. VSI operates in the area of helmet mounted display systems forfixed-wing military aircraft. VSI is jointly controlled and therefore is not consolidated in the Company’s financial statements.In November 2012, Rockwell Collins and ESA established Rockwell Collins ESA Vision Systems LLC ("RCEVS"), aDelaware limited liability company, held 50% by each party, which will engage in similar activities to VSI. (3)Opgal Optronics Industries Ltd. (“Opgal”) is an Israeli company owned 50.1% by the Company and 49.9% by a subsidiaryof Rafael. Opgal focuses mainly on commercial applications of thermal imaging and electro-optic technologies. The Companyjointly controls Opgal with Rafael, and therefore Opgal is not consolidated in the Company’s financial statements. (4)UTI NETCITY Investments BV S.A ("Netcity") is a Romanian company held 40% by the Company. During 2011, theCompany invested in Netcity approximately $8,100, in addition to $2,700 that were invested in 2010. Netcity is engaged inthe construction of fiber-telecommunication networks in Romania. (5)During 2012, the Company invested in an Asian company approximately $2,789. The Asian company in which theCompany holds 51%, is engaged in the assembly and maintenance of communication equipment. The Asian company is notcontrolled by the Company since the partner has participation rights in the day-to-day to operations, and therefore theCompany is not consolidated in the Company’s financial statements. (6)Equity in net earnings of affiliated companies is as follows: Year ended December 31, 2012 2011 2010 SCD $5,524 $5,807 $11,470 VSI 8,403 8,454 6,265 Other (2,767) 1,116 1,061 $11,160 $15,377 $18,796 F - 31 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES (Cont.) B.Investments in companies accounted for under the equity method (Cont.) (7)The summarized aggregate financial information of companies accounted for under the equity method is as follows: Balance Sheet Information: December 31, 2012 2011 Current assets $278,751 $272,274 Non-current assets 114,289 67,151 Total assets $393,040 $339,425 Current liabilities $118,506 $158,548 Non-current liabilities 44,137 24,809 Shareholders’ equity 230,397 156,068 $393,040 $339,425 Income Statement Information: Year ended December 31, 2012 2011 2010 Revenues $385,792 $402,438 $476,286 Gross profit $102,730 $117,222 $137,228 Net income $27,596 $38,131 $36,728 (8)See Note 20(E) for guarantees. Note 7 - LONG-TERM TRADE AND UNBILLED RECEIVABLES December 31, 2012 2011 Receivables $ 201 $5,303 Unbilled receivables 229,486 157,459 $229,687 $162,762 The majority of the long-term unbilled receivables are expected to be billed and collected during the years 2014 - 2016. Long-term trade andunbilled receivables are mainly related to the IMOD. Note 8 - LONG-TERM BANK DEPOSITS AND OTHER RECEIVABLES December 31, 2012 2011 Restricted deposits with banks (1) $- $2,271 Hedging receivables in respect to Series A Notes (See Note 16) 11,555 3,112 Deposits with banks and other long-term receivables (2) 7,714 6,832 $19,269 $12,215 (1)Restricted deposits in respect of an issued bank guarantee. (2)Includes long-term balances of a non-qualified deferred compensation plan structured under Section 409A in the amount of $6,093and $5,427 as of December 31, 2012 and 2011, respectively (See Note 17). F - 32 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 9 - AVAILABLE-FOR-SALE MARKETABLE SECURITIES In 2012 the Company invested approximately $51,000 in available-for-sale marketable securities.As of December 31, 2012, the fair value, amortized cost and gross unrealized holding gains and losses of such securities were as follows: December 31, 2012 Amortizedcost Grossunrealizedgains Grossunrealizedlosses Fair value Government debentures - fixed and floating interest rate $12,428 192 - $12,620 Corporate debentures - fix and floating interest rate 36,901 594 (4) 37,441 $49,329 786 (4) $50,111 The contractual maturities of the available-for-sale marketable securities in future years are as follows: December31,20122014 $1,810 2015 9,735 2016 18,016 2017 13,659 2018 and after 2,920 $46,140 As of December 31, 2012, interest receivable amounted to $537, included in other receivables. F - 33 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 10 - PROPERTY, PLANT AND EQUIPMENT, NET December 31, 2012 2011 Cost (1): Land, buildings and leasehold improvements (2) $373,286 $361,246 Instruments, machinery and equipment (3) 641,911 629,290 Office furniture and other 95,080 76,939 Motor vehicles and airplanes 133,467 131,106 1,243,744 1,198,581 Accumulated depreciation (742,458) (680,973) Depreciated cost $501,286 $517,608 Depreciation expenses for the years ended December 31, 2012, 2011 and 2010 amounted to $89,551, $93,666 and $84,412, respectively. (1)Net of investment grants received (mainly for instruments, machinery and equipment) in the amounts of $36,990 and $29,367 as ofDecember 31, 2012 and 2011, respectively. (2)Set forth below is additional information regarding the real estate owned or leased by the Company (in square feet): Israel (a) U.S. (b) OtherCountries (c) Owned 2,158,000 710,000 891,000 Leased 1,896,000 631,000 303,000 (a)Includes offices, development and engineering facilities, manufacturing facilities, maintenance facilities, hangar facilities anda landing strip in various locations in Israel used by Elbit Systems’ Israeli subsidiaries. (b)Includes offices, development and engineering facilities, manufacturing facilities and maintenance facilities of Elbit Systemsof America primarily in Texas, New Hampshire, Florida, Alabama and Virginia. (c)Includes offices, design and engineering facilities and manufacturing facilities, mainly in Europe, Brazil, Australia andAsia. (3)Includes equipment produced by the Company for its own use in the aggregate amount of $239,758 and $173,649 as of December31, 2012 and 2011, respectively. As for pledges of assets – see Note 20(I). F - 34 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 11 - GOODWILL AND OTHER INTANGIBLE ASSETS, NET A.Composition of identifiable intangible assets: Weightedaverage useful lives December 31, 2012 2011 Original cost: Technology 10 $254,798 $254,668 Customer relations 6 201,809 201,346 Trademarks and other 11 65,002 64,872 521,609 520,886 Accumulated amortization: Technology 140,233 119,598 Customer relations 137,356 115,352 Trademarks and other 29,057 22,190 306,646 257,140 Amortized cost $214,963 $263,746 B.Amortization expenses amounted to $49,245, $56,952 and $47,729 for the years ended December 31, 2012, 2011 and 2010,respectively. C.The estimated aggregate amortization expense for each of the five succeeding fiscal years is:2013 $ 45,734 2014 43,219 2015 36,901 2016 28,106 2017 16,556 2018 and after 44,447 D.Changes in goodwill, during 2012 are as follows: 2012 Balance, at January 1, $499,326 Net translation differences (1) 1,272 Balance, at December 31, $500,598 (1)Foreign currency translation differences resulting from goodwill allocated to reporting units, whose functional currency hasbeen determined to be other than the U.S. dollar. F - 35 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 12 - SHORT-TERM BANK CREDIT AND LOANS December 31, Interest % 2012 2011 Short-term loans 2.5% $- $158 Short-term bank credit 3.42-5% 181 2,840 $ 181 $2,998 Weighted average interest rate 2.40 % Note 13 - OTHER PAYABLES AND ACCRUED EXPENSES December 31, 2012 2011 Payroll and related expenses $ 136,240 $143,805 Provision for vacation pay 47,236 43,401 Provision for income tax, net of advances 35,269 26,858 Other income tax liabilities 34,451 36,707 Value added tax (“VAT”) payable 11,160 15,202 Provision for royalties 31,410 31,549 Provision for warranty 196,559 185,067 Derivative instruments 4,956 25,954 Deferred income tax, net 479 - Provision for losses on long-term contracts (1) 51,850 109,171 Other (2) 154,840 138,815 $ 704,450 $756,529 (1)Includes a provision of $5,167 and $43,900 as of December 31, 2012 and 2011, respectively, related to the cessation of a programwith a foreign customer (See Note 1(C)). (2)Primarily includes provisions for estimated future costs in respect of (1) penalties and the probable loss from claims (legal orunasserted) in the ordinary course of business (e.g., damages caused by the items sold and claims as to the specific products ordered),and (2) unbilled services of service providers. Note 14CUSTOMER ADVANCES IN EXCESS OF COSTS INCURRED ON CONTRACTS IN PROGRESS December 31, 2012 2011 Advances received $782,482 $750,161 Less - Advances presented under long-term liabilities 156,497 154,696 Advances deducted from inventories 104,297 150,195 521,688 445,270 Less - Costs incurred on contracts in progress (See Note 5) 68,306 38,048 $453,382 $407,222 As for guarantees and liens, See Notes 20(E), 20(G) and 20(I). F - 36 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 15 - LONG-TERM LOANS, NET OF CURRENT MATURITIES Years ofDecember 31, Currency Interest % maturity2012 2011 Long-term bank loans(*)U.S. dollars Libor+1.25-2.5% mainly 2-3 $174,381 $369,564 GBP Libor + 1.11-3.28% mainly 1-3 29,917 29,298 Other Libor + 1.7-4% mainly 1-3 1,228 1,408 205,525 400,270 Less: current maturities 31,781 98,015 $173,745 $302,255 (*) For covenants see Note 20(F). As of December 31, 2012 the LIBOR annual rate: For long-term loans denominated in U.S. dollars was 1.25%.-2.5%. For long-term loans denominated in GBP was 2.2%. The maturities of these loans for periods after December 31, 2012 are as follows:2013 – current maturities $31,781 2014 75,137 2015 16,895 2016 81,712 $205,525 F - 37 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 16 - SERIES A NOTES, NET OF CURRENT MATURITIES December 31, 2012 2011 Series A Notes $450,040 $259,094 Less – Current maturities (58,275) (29,612)Carrying amount adjustments on Series ANotes(*) 16,158 7,412 Premium (discount) on Series A Notes, net 687 (1,575) $408,610 $235,319 (*)As a result of fair value hedge accounting, described below, and in Notes 2(Y) and 2(AA). The carrying value of the Series A Notes isadjusted for changes in the interest rates. In June 2010, the Company issued Series A Notes in the aggregate principal amount of NIS 1.1 billion (approximately $283,000), payable in 10equal annual installments on June 30 of each of the years 2011 through 2020. The Series A Notes bear a fixed interest rate of 4.84% per annum,payable on June 30 and December 30 of each of the years 2010 through 2020 (the first interest payment was made on December 30, 2010, and thelast interest payment will be made on June 30, 2020). Debt issuance costs were approximately $2,530, of which $2,164 was allocated to theSeries A Notes discount, and $366 was allocated to deferred issuance costs and are amortized as financial expenses over the term of the Series ANotes due in 2020. In March 2012, the Company issued additional Series A Notes in the aggregate principal amount of NIS 807 million (approximately $217,420).The immediate gross proceeds received by the Company for the issuance of the March 2012 Series A Notes were approximately NIS 831 million(approximately $224,000). Debt issuance costs were approximately $2,010, of which $1,795 was allocated to the Series A Notes discount, and$215 was allocated to deferred issuance costs and are amortized as financial expenses over the term of the Series A Notes due in 2020. Premiumwas approximately $3,675 and is amortized as financial income over the term of the Series A Notes due in December 2020. In May 2012, the Company issued additional Series A Notes in an aggregate principal amount of NIS 92 million (approximately $24,407)through a private placement to Israeli institutional investors. The immediate gross proceeds received by the Company for the issuance of the May2012 Series A Notes were approximately NIS 95 million (approximately $24,900). Debt issuance costs were approximately $94. These costswere allocated to deferred issuance costs and are amortized as financial expenses over the term of the Series A Notes due in 2020. Premium wasapproximately $260 and is amortized as financial income over the term of the Series A Notes due in December 2020. The 2010 Series A Notes together with the 2012 Series A Notes form one single series with the same terms and conditions. The Series A Notes (principal and interest) are not linked to any currency or index. The Series A Notes are unsecured, non convertible and donot restrict the Company’s ability to issue additional notes of any class or distribute dividends in the future. There are no covenants on theSeries A Notes. The Series A Notes are listed for trading on the Tel-Aviv Stock Exchange. During the years ended December 31, 2012, 2011 and 2010, the Company recorded $10,787, $5,753 and $4,395, respectively, as interestexpenses and $153, $422 and $258, respectively, as amortization of debt issuance costs net on the Series A Notes. F - 38 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands)Note 16 - SERIES A NOTES, NET OF CURRENT MATURITIES (Cont.)The Company also entered into ten-year cross currency interest rate swap transactions in order to effectively hedge the effect of interest andexchange rate differences resulting from the 2010 NIS Series A Notes. Under the cross currency interest rate swaps, the Company will receivefixed NIS at a rate of 4.84% on NIS 1.1 billion and pay floating six-month USD LIBOR + an average spread of 1.65% on $287,000, whichreflects the U.S. dollar value of the Series A Notes on the specific dates the transactions were consumed. Both the debt and the swap instrumentswill pay semi-annual coupons on June 30 and December 31. The purpose of these transactions was to convert the NIS fixed rate Series A Notesinto USD LIBOR (6 months) floating rate obligations. As a result of these agreements, the Company is currently paying an effective interest rateof six-month LIBOR (0.45% at December 31, 2012) plus an average of 1.65% on the principal amount, as compared to the original 4.84% fixedrate. The above transactions qualify for fair value hedge accounting. On April 2012 and May 2012 the Company entered into cross currency interest rate swap transactions in order to effectively hedge the effect ofinterest and exchange rate differences resulting from the 2012 issuance of Series A Notes. Under these cross currency interest rate swaps, theCompany will receive fixed NIS at a rate of 4.84% on NIS 807 million and NIS 92 million and pay floating six-month USD LIBOR + anaverage spread of 2.02% on $217,300 and 2.285% on $24,100, respectively, which reflects the U.S. dollar value of the 2012 issued Series ANotes on the specific dates the transactions were consumed. Both the debt and the swap instruments will pay semi-annual coupons on June 30and December 31. The purpose of these transactions was to convert the NIS fixed rate Series A Notes into USD LIBOR (6 months) floating rateobligations. As a result of these agreements, the Company is currently paying an effective interest rate of six-month LIBOR (0.45% at December31, 2012) plus an average of 1.84% on the 2012 principal amounts, as compared to the original 4.84% fixed rate. The above transactionsqualify for fair value hedge accounting. Future principal payments for the Series A Notes are as follows: December 31,2012 2013 (current maturities) $ 58,275 2014 58,275 2015 58,275 2016 58,275 2017 58,275 2018 and after 175,510 $466,885 F - 39 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 17 - BENEFIT PLANS AND OBLIGATIONS FOR TERMINATION INDEMNITY The Company’s subsidiaries ESA, Telefunken and a European subsidiary sponsor benefit plans for their employees in the U.S., Germany andBelgium, respectively, as follows: Defined Benefit Retirement Plan based on Employer’s Contributions a)ESA has three defined benefit pension plans (the “Plans”) which cover the employees of ESA’s subsidiaries EFW and Kollsman.Monthly benefits are based on years of benefit service and annual compensation. Annual contributions to the Plans are determinedusing the unit credit actuarial cost method and are equal to or exceed the minimum required by law. Pension fund assets of the Plansare invested primarily in stocks, bonds and cash through a financial institution, as the investment manager of the Plans’ assets.Pension expense is allocated between cost of sales and general and administrative expenses, depending on the responsibilities of theemployee. The measurement date for the EFW and Kollsman benefit obligation is December 31. Participation in ESA’s qualified defined benefit plans was frozen as of January 1, 2010 for non-represented employees. Currentparticipants will continue to accrue benefits; however no new non-represented employees will be allowed to enter the plan. b)Telefunken Radio Communication Systems GmbH & Co. (“Telefunken”), a wholly-owned German subsidiary, has mainly onedefined benefit pension plan (the “P3-plan”) which covers all employees. The P3-plan provides for yearly cash balance credits equal toa percentage of a participant’s compensation, which accumulate together with the respective interest credits on the employee’s cashbalance accounts. In case of an insured event (retirement, death or disability) the benefits can be paid as a lump sum, in installmentsor as a life-long annuity. The P3-plan is an unfunded plan. c)A wholly-owned European subsidiary in Belgium has a defined benefit pension plan, which is divided into two categories: 1)Normal retirement benefit plan, with eligibility at age 65. The lump sum is based on employee contributions of 2% of thefinal pensionable salary up to a certain breakpoint, plus 6% exceeding the breakpoint at a maximum of 5% of pensionablesalary, and the employer contributions, with a maximum of 40 years. The vested benefit is equal to the retirement benefitcalculated with the pensionable salary and pensionable service observed at the date of leaving service. 2)Pre-retirement death benefit to employees. The plan is funded and includes profit sharing. F - 40 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 17 - BENEFIT PLANS AND ACCRUED TERMINATION LIABILITY (Cont.) The following table sets forth the Plans’ funded status and amounts recognized in the consolidated financial statements for the years endedDecember 31, 2012 and 2011: December 31, 2012 2011 Changes in benefit obligation: Benefit obligation at beginning of year $ 153,097 $119,983 Service cost 9,709 8,205 Interest cost 6,567 6,361 Exchange rate differences 299 (508) Actuarial losses 10,747 21,313 Benefits paid (3,329) (2,257) Benefit obligation at end of year $ 177,090 $153,097 Changes in the Plans’ Assets: Fair value of Plans’ assets at beginning of year 81,780 69,493 Actual return on Plans’ assets (net of expenses) 11,002 (722)Employer contribution 12,341 15,266 Benefits paid (3,329) (2,257)Fair value of Plans’ assets at end of year $ 101,794 $81,780 Accrued benefit cost, end of year: Funded status (75,296) (71,317)Unrecognized net actuarial loss 63,178 60,650 Unrecognized prior service cost 498 584 $ (11,620) $(10,083)Amount recognized in the statement of financial position: Accrued benefit liability, current (85) (85)Accrued benefit liability, non-current (75,211) (71,232)Accumulated other comprehensive income, pre-tax 63,676 61,234 Net amount recognized $ (11,620) $(10,083) Year ended December 31, 2012 2011 2010 Components of the Plans’ net periodic pension cost: Service cost $ 9,709 $8,205 $7,031 Interest cost 6,567 6,361 5,858 Expected return on Plans’ assets (6,400) (5,512) (4,914)Amortization of prior service cost 172 104 95 Amortization of transition amount (131) (147) (130)Amortization of net actuarial loss 4,107 1,988 1,769 Total net periodic benefit cost $14,023 $10,999 $9,709 Additional information Accumulated benefit obligation $167,667 $144,682 $112,643 December 31, 2012 2011 Weighted average assumptions: Discount rate as of December 31 4.1% 4.4%Expected long-term rate of return on Plans’ assets 7.0% 7.3%Rate of compensation increase 2.2% 2.4% F - 41 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 17 - BENEFIT PLANS AND ACCRUED TERMINATION LIABILITY (Cont.) Asset Allocation by Category as of December 31: 2012 2011 Asset Category: Equity Securities 57.5% 56.8%Debt Securities 34.8% 36.1%Other 7.7% 7.1%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 whileminimizing the risk levels associated with investing. The investment policy is structured to consider the retirement plan’s obligations and theexpected timing of benefit payments. The target asset allocation for the Plan years presented is as follows: 2012 2011 Asset Category: Equity Securities 50% 56.0%Debt Securities 40% 41.2%Other 10% 2.8%Total 100.0% 100.0% The fair value of the asset values by category at December 31, 2012 is as follows: QuotedPrices inActiveMarkets forIdenticalAssets SignificantObservableInputs SignificantUnobservableInputs Asset Category Total (Level 1) (Level 2) (Level 3) Cash $38 $38 $- $- Cash Equivalents: Money Market Funds (a) 4,153 4,153 - - Fixed Income Securities: Mutual Funds (b) 36,618 36,618 - - Equity Securities: International Companies (c) 1,554 1,554 - - Mutual Funds (d) 47,091 47,091 - - Other 12,340 12,340 Total $101,794 $101,794 $- $- (a)This category includes highly liquid daily traded cash-like vehicles. (b)This category invests in highly liquid diverse mutual funds representing a diverse offering of debt issuance. (c)This change represents common stocks of companies domiciled outside of the U.S.; they can be represented by ordinary shares orADRs. (d)This category represents highly liquid diverse equity mutual funds of varying asset classes and styles. F - 42 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 17 - BENEFIT PLANS AND ACCRUED TERMINATION LIABILITY (Cont.) In developing the overall expected long-term rate of return on assets assumption, ESA used a building block approach in which rates of return inexcess of inflation were considered separately for equity securities, debt securities, real estate and all other assets. The excess returns wereweighted by the representative target allocation and added along with an approximate rate of inflation to develop the overall expected long-term rateof return. It is the policy of ESA to meet the ERISA minimum contribution requirements for a Plan year. The minimum contributionrequirements for the 2012 Plan year have been satisfied as of December 31, 2012. Benefit payments over the next five years are expected to be$4,072 in 2013; $4,659 in 2014, $5,258 in 2015, $5,879 in 2016 and $6,587 in 2017. Retiree Medical Plan Effective January 1, 2003, ESA commenced offering retiree medical benefits to a limited number of retirees at EFW. The measurement date for ESA benefit obligation is December 31. The following table sets forth the retiree medical plans’ funded status andamounts recognized in the consolidated financial statements for the years ended December 31, 2012 and 2011: December 31, 2012 2011 Change in Benefit Obligation: Benefit obligation at beginning of period $3,145 $2,914 Service cost 299 253 Interest cost 117 151 Actuarial (gain) loss (688) (63)Employee contribution 17 19 Benefits paid (107) (129)Benefit obligation at end of period $2,781 $3,145 Change in Plan Assets: Fair value of plan assets at beginning of period $- $- Employer contribution 90 110 Employee contribution 17 19 Benefits paid (107) (129)Fair value of plan assets at end of period $- $- F - 43 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 17 - BENEFIT PLANS AND ACCRUED TERMINATION LIABILITY (Cont.) Year ended December 31, 2012 2011 Accrued benefit cost, end of period: Funded status $(2,781) $(3,145)Unrecognized net actuarial loss 246 455 Unrecognized prior service cost - - Accrued benefit cost, end of period $(2,535) $(2,690)Amounts recognized in the statement of financial position: Accrued benefit liability, current $(175) $(111)Accrued benefit liability, non-current (2,606) (3,034)Accumulated other comprehensive loss, pretax 246 455 Net amount recognized $(2,535) $(2,690) Components of net periodic pension cost (for period): Service cost $299 $253 Interest cost 117 151 Amortization of prior service cost 12 74 Amortization of net actuarial loss - 22 Total net periodic benefit cost $428 $500 Assumptions as of end of period: Discount rate 3.78% 3.78% Health care cost trend rate assumed for next year 8.00% 8.50% Ultimate health care cost trend rate 5.00% 5.00% The effect of a 1% change in the health care cost trend rate at December 31, 2012 is as follows: 1% increase 1% decrease Net periodic benefit cost $53 $(46)Benefit obligation $244 $(216) Defined Contribution Plan The 401(k) savings plan (“401(k) plan”) is a defined contribution retirement plan that covers all eligible ESA employees, as defined in section401(k) of the U.S. Internal Revenue Code. Employees may elect to contribute a percentage of their annual gross compensation to the 401(k) plan.ESA may make discretionary matching contributions as determined by ESA. Total expense under the 401(k) plan amounted to $4,436, $4,356and $3,896 for the years ended December 31, 2012, 2011 and 2010, respectively. Expense for the deferred 401(k) plan is allocated between costof sales and general and administrative expenses depending on the responsibilities of the related employees. F - 44 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 17 - BENEFIT PLANS AND ACCRUED TERMINATION LIABILITY (Cont.) Non-Qualified Defined Contribution Plan In 2007, ESA implemented two new benefit plans for the executives of the organization. The non-qualified, defined contribution plan isstructured under Section 409(A). The plan provides the employees at vice president level and above the opportunity to defer up to 100% of theirsalary to the 409(A) plan. ESA provides a match of 50 cents on the dollar up to 10% of the employees’ total salary and incentive basedcompensation. The contribution can be made into the 401(k) plan, the 409(A) plan or both plans. The purpose is to provide comparable definedcontribution plan benefits for the senior management across three ESA locations. The 409(A) plan funds are contributed to several life insurancepolicies. Participant contributions to the plan were $742, $441 and $543 for the years ended December 31, 2012, 2011 and 2010 respectively,and the total ESA contribution to the plan was $133 for 2012. The cash and cash surrender value of these life insurance policies at December31, 2012 was $3,867. The total liability related to the 409(A) plan was $3,976 at December 31, 2012. The second plan implemented is a non-qualified, defined benefit plan for the top three executives of ESA. The plan provides a calculated,guaranteed payment in addition to their regular pension through the company upon retirement. The plan is funded with several life insurancepolicies. They are not segregated into a trust or otherwise effectively restricted. These policies are corporate owned assets that are subject to theclaims of general creditors and cannot be considered as formal plan assets. The defined benefit plan put in place meets the ERISA definition ofan unfunded deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. The planassets of life insurance policies have a cash surrender of $2,199 at December 31, 2012. Related liability for the pension payments is $3,015 atDecember 31, 2012. As of December 31, 2012, all executives had partially vested balances in the plan. Note 18 - TAXES ON INCOME A.APPLICABLE TAX LAWS (1)Israeli Corporate Income Tax Rates Corporate tax rates in Israel were 25% in 2010, 24% in 2011 and 25% in 2012. In December 2011 the Knesset passed the Law for the Tax Burden Reform (Amended Legislation) – 2011 (“the Tax BurdenReform”), which came into effect on January 1, 2012. Pursuant to the Tax Burden Reform, the corporate tax rate isscheduled to remain at a rate of 25% for future tax years. In view of this increase in the corporate tax rate to 25% in 2012, thereal capital gains tax rate and the real betterment tax rate were also increased accordingly. The net effect of the Tax Burden Reform on the deferred tax balances of the Company was recognized in the period ofenactment (fourth quarter of 2011). The implementation of the Tax Burden Reform by the Company and its Israelisubsidiaries did not have a material effect on the Company’s 2011 results. F - 45 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 18 - TAXES ON INCOME (Cont.) A.APPLICABLE TAX LAWS (Cont.) (2)Tax benefits under Israel’s Law for the Encouragement of Industry (Taxes), 1969: Elbit Systems and most of its subsidiaries in Israel are “Industrial Companies”, as defined by the Law for theEncouragement of Industry (Taxes), 1969, and as such, these companies are entitled to certain tax benefits, mainlyamortization of costs relating to know-how and patents over eight years, accelerated depreciation and the right to deductpublic issuance expenses for tax purposes. (3)Tax benefits under Israel’s Law for the Encouragement of Capital Investments, 1959: Elbit Systems’ and certain of its Israeli subsidiaries’ (“the companies”) operations have been granted “Approved Enterprise”status under Israel’s Law for the Encouragement of Capital Investments, 1959 (the “Law”). Accordingly, certain income ofthe companies derived from the “Approved Enterprise” programs is tax exempt for two-years and subject to reduced tax ratesof 25% for a five-year to eight-year period or tax exempt for a ten-year period, commencing in the first year in which thecompanies had taxable income (limited to twelve years from commencement of production or fourteen years from the date ofapproval, whichever is earlier). An Amendment to the Law from 2005 defines the “Privileged Enterprise” status rather than the previous terminology of“Approved Enterprise” and limits the scope of enterprises which may qualify for “Privileged Enterprise” status by settingcriteria such as that at least 25% of the Privileged Enterprise program’s income be derived from exports. Additionally, the2005 Amendment enacted major changes in the manner in which tax benefits are awarded under the Law so that companiesno longer require an Investment Center approval in order to qualify for tax benefits. Similar criteria have been set for the“Preferred Enterprise” status which was added in an Amendment to the Law in 2011. Companies are not required to receivean Investment Center approval in order to qualify for the tax benefits under the Preferred Enterprise status, however,companies which are under an Approved Enterprise or Privileged Enterprise program must waive their former benefits to electthe Preferred Enterprise benefits. Tax-exempt income generated by the Company and certain of its Israeli subsidiaries’ Approved Enterprises will be subject totax upon dividend distribution, tax-exempt income generated by the Company and certain of its Israeli subsidiaries’Privileged Enterprise programs will be subject to tax upon dividend distribution or complete liquidation. Income generatedunder a Preferred Enterprise is not subject to additional taxation upon distribution or complete liquidation. F - 46 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 18 - TAXES ON INCOME (Cont.) A.APPLICABLE TAX LAWS (Cont.) The entitlement to the above benefits is subject to the companies’ fulfilling the conditions specified in the Law, regulations promulgatedthereunder and the letters of approval for the specific investments in “Approved Enterprises”. In the event of failure to comply withthese conditions, the benefits may be canceled and the companies may be required to refund the amount of the benefits, in whole or inpart, including interest (see Note 18(A)(3)). As of December 31, 2012, the Company’s management believes that the Company and itsIsraeli subsidiaries have met all conditions of the Law and letters of approval. As of December 31, 2012, the tax benefits for the Company’s Approved Enterprise and Privileged Enterprise existing programs willexpire within the period of 2015 to 2021. As of December 31, 2012, retained earnings of the Company included approximately $694,342 in tax-exempt profits earned by thecompany’s “Approved Enterprises” and “Privileged Enterprises”. If the retained tax-exempt income is distributed, with respect to the“Approved Enterprises” and the “Privileged Enterprises”, it would be taxed at the corporate tax rate applicable to such profits as if theCompany had not elected the alternative tax benefits track (currently – 25%), and an income tax liability would be incurred ofapproximately $173,585 as of December 31, 2012. 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 exempt income attributable to the companies’ “Approved Enterprises”and “Privileged Enterprise”, as such retained earnings are essentially permanent in duration. In Israel, income from sources other than the “Approved Enterprise” and “Privileged Enterprise” during the benefit period will besubject to tax at the regular corporate tax rate. Since the Company and its Israeli subsidiaries are operating under more than one approval, and since part of their taxable income isnot entitled to tax benefits under the Law and is taxed at the regular tax rates, the effective tax rate is the result of a weightedcombination of the various applicable rates and tax exemptions, and the computation is made for income derived from each approvalon the basis of formulas specified in the law and in the approvals. In January 2011, the Knesset enacted a reform to the Law, effective January 2011. According to the reform a flat rate tax would applyto companies eligible for the “Preferred Enterprise” status. In order to be eligible for a Preferred Enterprise status, a company must meetminimum requirements to establish that it contributes to the country’s economic growth and is a competitive factor for the GrossDomestic Product (a competitive enterprise). Israeli companies which currently benefit from an Approved or Privileged Enterprise status and meet the criteria for qualification as aPreferred Enterprise can elect to apply the new Preferred Enterprise benefits by waiving their benefits under the Approved andPrivileged Enterprise status. Benefits granted to a Preferred Enterprise include reduced and gradually decreasing tax rates. In peripheral regions (Development AreaA) the reduced tax rate will be 10% in 2012, 7% in 2013 and 2014 and 6% starting from 2015. In other regions the tax rate will be15% and 2012, 12.5% in 2013 and 2014 and 12% starting from 2015. Preferred Enterprises in peripheral regions will be eligible forInvestment Center grants, as well as the applicable reduced tax rates. F - 47 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 18 - TAXES ON INCOME (Cont.) A.APPLICABLE TAX LAWS (Cont.) A distribution from a Preferred Enterprise out of the “Preferred Income” would be subject to 15% withholding tax for Israeli-residentindividuals and non-Israeli residents (subject to applicable treaty rates). A distribution from a Preferred Enterprise out of the “PreferredIncome” would be exempt from withholding tax for an Israeli-resident company. A company electing to waive its Privileged Enterpriseor Approved Enterprise status through June 30, 2015 may distribute “Approved Income” or “Privileged Income” subject to 15%withholding tax for Israeli resident individuals and non-Israeli residents (subject to applicable treaty rates) and exempt fromwithholding tax for an Israeli-resident company. Nonetheless, a distribution from income exempt under Privileged Enterprise andApproved Enterprise programs will subject the exempt income to tax at the reduced corporate income tax rates pertaining to thePrivileged Enterprise and Approved Enterprise programs upon distribution, or complete liquidation in the case of a PrivilegedEnterprise’s exempt income. In November 2012, the Knesset passed Amendment No. 69 to the Investment Law (the “Trapped Earnings Law”) which provides atemporary, partial, relief from taxation on a distribution from exempt income for companies which elect the relief through November2013. The Trapped Earnings Law allows a company to qualify a portion of its exempt income (“Elected Earnings”) for a reduced taxrate ranging between 17.5% and 6%. While the reduced tax is payable within 30 days of election, an electing company is not requiredto actually distribute the Elected Earnings within a certain period of time. The applicable rate is based on a linear formula involving theportion of Elected Earnings to exempt income and the applicable tax rate prescribed in the Investment Law. A company electing toqualify its exempt income must undertake to make designated investments in productive fixed assets, research and development, orwages of new employees (“Designated Investment”). The Designated Investment amount is defined by a formula which considers theportion of Elected Earnings to the exempt income and the applicable tax rate prescribed by the Investment Law. In addition to the reduced tax rate, a distribution of Elected Earnings would be subject to a 15% withholding tax. The TrappedEarnings Law provides an exemption from the 15% withholding tax for a distribution to an Israeli resident company for companieswhich have elected the Privileged Enterprise status and waived their Approved Enterprise and privileged Enterprise Status through June2015. The Company is currently evaluating the implications of an election under the Trapped Earnings Law on the Company and its Israelisubsidiaries. B.NON – ISRAELI SUBSIDIARIES Non-Israeli subsidiaries are taxed based on tax laws in their countries of residence. C.INCOME FROM CONTINUING OPERATIONS BEFORE TAXES ON INCOME Year ended December 31, 2012 2011 2010 Income before taxes on income: Domestic $159,330 $95,226 $160,749 Foreign 17,712 8,778 38,612 $177,042 $104,004 $199,361 F - 48 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 18 - TAXES ON INCOME (Cont.) D.TAXES ON INCOME FROM CONTINUING OPERATIONS Year ended December 31, 2012 2011 2010 Current taxes: Domestic $12,957 $13,896 $26,842 Foreign 6,454 1,328 16,616 19,411 15,224 43,458 Adjustment for previous years: Domestic (4,898) 2,009 (3,889) Foreign (633) (2,308) 1,885 (5,531) (299) (2,004)Deferred income taxes: Domestic 6,686 (2,861) (10,303) Foreign (3,467) 1,560 (7,114) 3,219 (1,301) (17,417)Total taxes on income from continuing operation $17,099 $13,624 $24,037 Total: Domestic $14,745 $13,044 $12,650 Foreign 2,354 580 11,387 Total taxes on income from continuing operation $17,099 $13,624 $24,037 E.UNCERTAIN TAX POSITIONS A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 2012 2011 Balance at the beginning of the year $53,183 $48,791 Additions related to interest and currency transaction 3,695 405 Additions based on tax positions taken during a prior period 5,925 5,336 Reduction related to tax positions taken during a prior period (8,660) (3,746) Reductions related to settlement of tax matters (117) (4,684) Additions based on tax positions taken during the current period 5,998 8,305 Reduction related to a lapse of applicable statute of limitation (7,426) (1,224) Balance at the end of the year $52,599 $53,183 At December 31, 2012 and 2011, the Company had a liability for unrecognized tax benefits of $52,599 and $53,183, respectively,including an accrual of $8,449 and $5,916 for the payment of related interest and penalties, respectively. The Company recognizesinterest and penalties related to unrecognized tax benefits in the provision for income taxes. During 2011 and 2010, the Company settled certain income tax matters in Israel and the United States covering multiple years. As aresult of the settlement of the tax matters, the Company recorded a reduction in “other income tax liabilities” of $4,684 and $1,508,respectively, related to settlement of tax matters of which income of $0 and $800, respectively, were recorded in the statements ofincome in “taxes on income.” The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to reviewby both domestic and foreign authorities. F - 49 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 18 - TAXES ON INCOME (Cont.) E.UNCERTAIN TAX POSITIONS (Cont.) During 2012, Elbit Systems and its subsidiaries were subject to examination by various tax authorities in jurisdictions such as Israel,the United States and various countries in Europe. As a result of ongoing examinations, tax proceedings in certain countries, and additions to unrecognized tax benefits for positionstaken and interest and penalties, if any, arising in 2012, it is not possible to estimate the potential net increase or decrease to theCompany’s unrecognized tax benefits during the next twelve months. F.DEFERRED INCOME TAXES Significant components of net deferred tax assets and liabilities are based on separate tax jurisdictions as follows: Deferred (1) Tax Asset (Liability) Total Current Non-current As of December 31, 2012 Deferred tax assets: Reserves and allowances $41,190 $10,451 $30,739 Inventory allowances 6,345 6,345 - Property, plant and equipment 7,414 1,317 6,097 Other assets 17,819 6,899 10,920 Net operating loss carry-forwards 18,989 7,399 11,590 91,757 32,411 56,346 Valuation allowance (3,527) (610) (2,917)Net deferred tax assets 88,230 31,801 56,429 Deferred tax liabilities: Intangible assets (33,064) - (33,064)Property, plant and equipment (18,882) (18) (18,864)Reserves and allowances (4,134) (461) (3,673) (56,080) (479) (55,601)Net deferred tax assets $32,150 $31,322 $828 As of December 31, 2011 Deferred tax assets: Reserves and allowances $45,069 $15,939 $29,130 Inventory allowances 6,328 6,328 - Property, plant and equipment 4,134 1,087 3,047 Other 22,415 10,242 12,173 Net operating loss carry-forwards 20,881 1,667 19,214 98,827 35,263 65,564 Valuation allowance (1,302) - (1,302)Net deferred tax assets 97,525 35,263 63,564 Deferred tax liabilities: Intangible assets (40,386) - (40,386)Property, plant and equipment (17,737) - (17,737)Reserves and allowances - - - (58,123) - (58,123)Net deferred tax assets $39,402 $35,263 $4,139 F - 50 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands, except share data) Note 18 - TAXES ON INCOME (Cont.) F.DEFERRED INCOME TAXES (Cont.) The deferred taxes, net are reflected in the balance sheet as follows: December 31, 2012 2011Current deferred income tax assets (Note 4) $31,801 $35,263 Current deferred income tax liabilities (Note 13) $479 $- Non-current deferred income tax assets $31,465 $36,130 Non-current deferred income tax liabilities $30,639 $31,991 G.As of December 31, 2012, Elbit Systems’ Israeli subsidiaries had estimated total available carry-forward tax losses of approximately$163,812 and its non-Israeli subsidiaries had estimated available carry-forward tax losses of approximately $43,526. H.Reconciliation of the actual tax expense as reported in the statements of operations to the amount computed by applying the Israelistatutory tax rate is as follows: Year ended December 31, 2012 2011 2010 Income before taxes as reported in the consolidated statements of income $177,042 $104,004 $199,361 Statutory tax rate 25% 24% 25%Theoretical tax expense $44,261 $24,961 $49,840 Tax benefit arising from reduced rate as an “Approved and Privileged Enterprise” andother tax benefits (*) (26,098) (11,451) (20,528)Tax adjustment in respect of different tax rates for Foreign subsidiaries 5,469 2,721 5,382 Changes in carry-forward losses and valuation Allowances 1,643 (125) (8,006)Increase in taxes resulting from non-deductible expenses 1,426 1,105 3,020 Difference in basis of measurement for financial reporting and tax return purposes (3,240) (2,375) (3,370)Taxes in respect of prior years (5,531) (299) (2,004)Other differences, net (831) (913) (237)Actual tax expenses $17,099 $13,624 $24,037 Effective tax rate 9.66% 13.10% 12.06%(*) Net earnings per share – amounts of the benefit resulting from the Approved and Privileged Enterprises Basic $0.62 $0.27 $0.48 Diluted $0.62 $0.27 $0.47 I.Final tax assessments have been received by the Company up to and including the tax year ended December 31, 2005 and by certainsubsidiaries, for the years 2004 – 2007. F - 51 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands, except share data) Note 19 - DERIVATIVE FINANCIAL INSTRUMENTS A.Derivative financial instruments are presented as other assets or other payables. For asset derivatives and liability derivatives, the fairvalue of the Company’s outstanding derivative instruments as of December 31, 2012 and December 31, 2011 is summarized below: Asset Derivatives (*) Liability Derivatives (**) December31,2012 December31,2011 December 31,2012 December31,2011 Derivatives designated as hedging instruments Foreign exchange contracts $21,100 $9,908 $3,095 $23,914 Cross-currency interest rate swaps 22,415 8,877 - - 43,515 18,785 3,095 23,914 Derivatives not designated as hedging instruments Foreign exchange contracts 3,638 4,847 1,897 1,363 Options exchange contracts - - - 677 $3,638 $4,847 $1,897 $2,040 (*) Presented as part of other assets receivables and long term other receivables.(**) Presented as part of other payables and long term other payables. B.The effect of derivative instruments on cash flow hedging and the relationship between income and other comprehensive income for theyears ended December 31, 2012 and December 31, 2011 is summarized below: Gain (Loss) Recognizedin Other ComprehensiveIncome on Effective-Portion of Derivative, net Gain (loss) on Effective Portionof Derivative Reclassifiedfrom Accumulated OtherComprehensive Income (*) Ineffective Portion of Gain ofDerivative and Amount Excludedfrom Effectiveness TestingRecognized in Income (**) December 31,2012 December 31,2011 December 31,2012 December 31,2011 December 31,2012 December 31,2011 Derivatives designated as hedginginstruments: Foreign exchange contracts $12,277 $(13,914) $(15,831) $7,438 $180 $585 Derivatives not designated as hedginginstruments: Foreign exchange Contracts $- $- $- $- $150 $461 (*) Presented as part of revenues/cost of sales(**) Presented as part of financial income (expenses), net F - 52 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands, except share data)Note 19 - DERIVATIVE FINANCIAL INSTRUMENTS (Cont.) C.The net effect of the cross-currency swaps was approximately $11,981 of gain, of which approximately $2,900 was offset againstexchange rate difference, related to Series A Notes and approximately $9,081 was offset against interest expenses. D.The notional amounts of outstanding foreign exchange forward contracts at December 31, 2012 and December 31, 2011, issummarized below: Forward contracts Buy Sell December 31, December 31, 2012 2011 2012 2011 Euro $60,665 $57,022 $131,696 $154,251 GBP 45,262 30,868 28,268 45,095 NIS 386,017 654,105 - - Other 4,344 14,073 14,871 34,120 $496,288 $756,068 $174,835 $233,466 Note 20 - COMMITMENTS AND CONTINGENT LIABILITIES A.ROYALTY COMMITMENTS Elbit Systems and certain Israeli subsidiaries partially finance their research and development expenditures under grant programssponsored by the OCS for the support of research and development activities conducted in Israel. At the time the grants were receivedfrom the OCS, successful development of the related projects was not assured. In exchange for participation in the programs by the OCS, Elbit Systems and the subsidiaries agreed to pay 2% - 5% of total sales ofproducts developed within the framework of these programs. The royalties will be paid up to a maximum amount equaling 100% to150% of the grants provided by the OCS, linked to the dollar and for grants received after January 1, 1999, also bearing annualinterest at a rate based on LIBOR. The obligation to pay these royalties is contingent on actual sales of the products, and in the absenceof such sales payment of royalties is not required. In some cases, the Government of Israel’s participation (through the OCS) is subject to export sales or other conditions. The maximumamount of royalties is increased in the event of production outside of Israel. Elbit Systems and certain of its subsidiaries may also be obligated to pay certain amounts to the Israeli Ministry of Defense and otherson certain sales including sales resulting from the development of certain technologies. Royalties' expenses amounted to $2,976, $2,524 and $3,012 in 2012, 2011 and 2010, respectively. F - 53 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 20 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) B.COMMITMENTS IN RESPECT OF LONG-TERM PROJECTS In connection with projects in certain countries, Elbit Systems and some of its subsidiaries have entered and may enter in the futureinto “buy-back” or “offset” agreements, required by a number of the Company’s customers for these projects as a condition to theCompany obtaining orders for its products and services. These agreements are customary in the Company’s industry and are designedto facilitate economic flow back (buy-back) and/or technology transfer to businesses or government agencies in the applicable country. These commitments may be satisfied by the Company’s placement of direct work or vendor orders for supplies and/or services,transfer of technology, investments or other forms of assistance in the applicable country. The buy-back rules and regulations, as wellas the underlying contracts, may differ from one country to another. The ability to fulfill the buy-back obligations may depend,among other things, on the availability of local suppliers with sufficient capability to meet our requirements and which are competitivein cost, quality and schedule. In certain cases, the Company’s commitments may also be satisfied through transactions conducted byother parties. The Company does not commit to buy-back agreements until orders for its products or services are definitive, but in some cases theorders for the Company’s products or services may become effective only after the Company’s corresponding buy-back commitmentsare in effect. Buy-back programs generally extend at least over the relevant commercial contract period and may provide for penalties in the event theCompany fails to perform in accordance with buy-back requirements. In some cases the Company provides guarantees in connectionwith the performance of its buy-back obligations. Should the Company be unable to meet such obligations it may be subject to contractual penalties, and its chances of receivingadditional business from the applicable customers could be reduced or, in certain cases, eliminated. At December 31, 2012, the Company had outstanding buy-back obligations totaling approximately $748,000 that extend through2020. C.LEGAL CLAIMS Elbit Systems and its subsidiaries are involved in legal claims arising in the ordinary course of business, including claims byemployees, consultants and others. The Company’s management, based on the opinion of its legal counsel, believes that the financialimpact for the settlement of such claims in excess of the accruals recorded in the financial statements will not have a material adverseeffect on the financial position or results of operations of the Company. (1)In November 2012, a claim in the amount of approximately $40,000 regarding a commercial dispute was filed in the DistrictCourt of Tel-Aviv – Jaffa by Dr. Baruch Aminov against the Company, a European subsidiary of the Company and two ofits officers. Based upon a preliminary review the Company believes that there is no merit to the allegations made in the claimand will respond accordingly in court. F - 54 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 20 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) C.LEGAL CLAIMS (Cont.) (2) In November 2012, Elbit Systems and its subsidiary Elop filed a lawsuit against the Government of Israel, for damages andexpenses caused in connection with the cancellation of export licenses for a project of a foreign customer. This followed theunsuccessful efforts to reach an appropriate compensatory settlement with the Government. The approximately $74,000lawsuit was filed with the District Court of the Central Region of Israel. (See also Note 1(C).) (3) In 2009, a claim in the amount of approximately $10,000 was filed in the District Court – Central District of Israel byPinpoint Advance Corporation (“Pinpoint”) and four of its founders against Elbit Systems Holdings (1997) Ltd., as well asagainst a Company officer. Pinpoint is a special purpose acquisition company that was in negotiations with the Companyand other shareholders of Kinetics, regarding the sale of shares in Kinetics during 2008. The transaction was not completedand negotiations were terminated. Pinpoint claims that the agreement was completed and thus entered into effect. Alternatively,Pinpoint claims that the Company’s decision not to complete the agreement was made in bad faith, and that under thecircumstances Pinpoint and its founders are entitled to pecuniary compensation equal to their rights and entitlements underthe alleged breached contract. The Company believes there is no merit to the allegations made in the claim and has respondedaccordingly to the court. The claim is in the preliminary proceedings stage. (4) In 2009, Elbit Systems filed a claim in the U.S. District Court for the Southern District of Illinois against Credit SuisseGroup (“CSG”). The complaint seeks to recover approximately $16,000 that Elbit Systems believes was fraudulentlyobtained by CSG and by its subsidiary Credit Suisse Securities (USA) from Tadiran Communications Ltd. (“TadiranCommunications”) in 2007 in connection with auction rate securities purchased by Tadiran Communications through CSG.In 2008, Tadiran Communication was merged into Elbit Systems, and Tadiran Communications’ activities are currentlyperformed as part of Elbit Systems’ wholly-owned Israeli subsidiary, Elbit Systems Land and C4I Ltd. CSG filed a motionto dismiss the claim based on a release signed by Tadiran Communications in 2007. In 2009, the case was moved to theU.S. District Court for the Southern District of New York. In January 2013, the court ruled in Elbit Systems’ favor on themotion to dismiss filed by CSG, and the case is proceeding to the discovery stage. (5) In 2010, a claim was filed in the Supreme Court of the State of New York, County of New York by certain minority securityholders of ImageSat International N.V ("ImageSat") against ImageSat, IAI, Elbit Systems and Elop claiming a breach of theSecurity Holders Agreement between various security holders of ImageSat, based on an alleged failure to appoint independentdirectors to the ImageSat board of directors. Elop holds approximately 14% (7% on a fully diluted basis) of ImageSat’sissued share capital and is entitled to nominate one director to ImageSat’s board. Elbit Systems and Elop believe the claim isbaseless and have filed corresponding responses to the court. In 2012, plaintiffs moved to enjoin defendants from taking anyaction to seat two specific individuals as independent directors on the ImageSat board of directors, however, this motion wasdenied by the court. Plaintiffs have filed a notice of appeal. F - 55 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 20 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) C.LEGAL CLAIMS (Cont.) In 2010, Elbit Systems and Elop were served with an Application to Approve a Derivative Action (the “Application”) filed inthe District Court of Petach Tikva, Israel, by certain minority shareholders of ImageSat. The Application named a number ofrespondents, including, among others, ImageSat, IAI, Elop, Elbit Systems and several former directors of ImageSat,including, among others, Michael Federmann, Joseph Ackerman and Joseph Gaspar (Elbit Systems, Elop and the above-named former directors are referred to as the “Elbit Defendants”). The Application requested the court to approve the filing ofa derivative action on behalf of ImageSat for alleged breaches by some of the respondents of the applicants’ rights as minorityshareholders in ImageSat. The claims contained various allegations that the defendants breached their fiduciary and/orcontractual obligations to the detriment of the plaintiffs. In 2011, the court granted the Elbit Defendants motions to dismissthe Application, and in June 2011 the Applicants filed a Notice of Appeal of the court’s ruling with the Israeli SupremeCourt. A hearing is scheduled for September 2013. The Elbit Defendants believe that there is no merit to the allegations madeagainst them in this matter.In January 2012, a group of minority shareholders of ImageSat (the “Petitioners”), provided ImageSat with a letter of notice,according to which the Petitioners intend to file a petition before the Joint Court of Justice of Aruba, Curacao, Saint Maartenand of Bonaire, St. Eustatia, and Sabato to make inquiry as to the policy and course of affairs at ImageSat and for otherremedies authorized under the Civil Code of Curacao (the “Letter of Notice”). Although the Letter of Notice is directed atImageSat, it contains various allegations against, among others, the Elbit Defendants (as described above in connection withthe Israeli proceedings). The nature of the allegations is substantially similar to previously made in the Israeli action asdescribed above. In March 2013, the court denied the Petitioners' request in the Letter of Notice. The Petitioners have the rightto appeal the court's ruling. IAI has agreed to indemnify Elbit Systems, Elop and the directors nominated by Elop to ImageSat’s board, for any lossesarising out of any of the foregoing claims or legal proceedings, net of insurance proceeds received from ImageSat’s insurancepolicies and any indemnification proceeds received from ImageSat. (6)The Company is involved in other legal proceedings from time to time. Based on the advice of legal counsel, managementbelieves such current proceedings will not have a material adverse effect on the Company’s financial position or results ofoperations. F - 56 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 20 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) D.LEASE COMMITMENTS The future minimum lease commitments of the Company under various non-cancelable operating lease agreements in respect ofpremises, motor vehicles and office equipment as of December 31, 2012 are as follows:2013 $34,084 2014 29,197 2015 21,045 2016 18,698 2017 13,800 2018 and thereafter (*) 93,083 $209,907 Lease expenses for the years ended December 31, 2012, 2011 and 2010 amounted to $16,466, $17,837 and $15,233, respectively. (*) During 2012 the Company entered into lease agreement for a new complex with OgenYielding Real Estate Ltd. The leaseperiod of the new complex is 15 years that will begin after the conclusion of the construction during 2015. The expected leasefee will be approximately $3,000 per annum. E.GUARANTEES (1)As of December 31, 2012, guarantees in the amount of approximately $1,069,700 were issued by banks on behalf ofCompany’s entities mainly in order to secure certain advances from customers and performance bonds. (2)Elbit Systems has provided, on a basis proportional basis to its ownership interest, guarantees for three of its investees inrespect of credit lines granted to them by banks amounting to $7,514 as of December 31, 2012 (2011 - $7,656). Theguarantees will exist as long as the credit lines are in effect. Elbit Systems would be liable under the guarantee for any debt forwhich the investees would be in default under the terms of the credit lines. The fair value of such guarantees, as of December31, 2012, was not material. In 2012, the Company has recorded an accrual for a contingent liability of $2,100, regarding a guarantee that was providedon a basis proportional to the company's ownership interest, in respect of a credit line of one of our investees. F - 57 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 20 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) F.COVENANTS In connection with bank credits and loans, including performance guarantees issued by banks and bank guarantees in order to securecertain advances from customers, the Company and certain subsidiaries are obligated to meet certain financial covenants. Suchcovenants include requirements for shareholders’ equity, current ratio, operating profit margin, tangible net worth, EBITDA, interestcoverage ratio and total leverage. As a result of recognition of the expense due to the cessation of a program with a foreign customer inDecember 2011 (See Note 1(C)), as of December 31, 2011, the Company did not meet one of its covenants. Subsequent to the balancesheet date, in March 2012, the banks waived such covenant through March 31, 2013, and accordingly the Company’s bank creditsand loans were not negatively affected as of December 31, 2011. As of December 31, 2012, the Company met all financial covenants. G.CONTINGENT LIABILITIES AND GUARANTEES As of December 31, 2012, one of the Company's subsidiaries had a project in a total amount of approximately $11,500. Thesubsidiary provided the Customer advance and performance guarantees related to the abovementioned project in the amount ofapproximately $2,700. The Company’s management, based on the opinion of legal counsel, believes that termination of the aboveproject will not have a material adverse effect on the financial position or results of operations of the Company. H.CONTRACTUAL OBLIGATIONS Substantially all of the Company’s purchase commitments relate to obligations under purchase orders and subcontracts entered intoby the Company. These purchase orders and subcontracts are typically in standard formats proposed by the Company, with thesubcontracts and purchase orders also reflecting provisions from the Company’s applicable prime contract that apply on a flow downbasis to subcontractors and vendors. The terms typically included in these purchase orders and subcontracts are consistent withUniform Commercial Code provisions in the United States for sales of goods, as well as with specific terms called for by itscustomers in international contracts. These terms include the Company’s right to terminate the purchase order or subcontract in theevent of the vendor’s or subcontractor’s default, as well as the Company’s right to terminate the order or subcontract for theCompany’s convenience (or if the Company’s prime contractor has so terminated the prime contract). Such purchase orders andsubcontracts typically are not subject to variable price provisions. As of December 31, 2012 and 2011, the purchase commitmentswere $949,000 and $1,026,000, respectively. I.In order to secure bank loans and bank guarantees in the amount of $1,069,700 as of December 31, 2012, certain Company entitiesrecorded fixed liens on most of their machinery and equipment, mortgages on most of their real estate and floating charges on most oftheir assets. J.A lien on the Company’s Approved Enterprises has been registered in favor of the State of Israel (see Note 18(A) (3) above). F - 58 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands, except share and share data) Note 21 - SHAREHOLDERS’ EQUITY A.SHARE CAPITAL Ordinary shares confer upon their holders voting rights and the right to receive dividends. B.2007 STOCK OPTION PLAN In January 2007, Elbit Systems’ shareholders approved Elbit Systems’ 2007 Option Plan (the “Plan”). The purpose of the Plan is toprovide the benefits arising from ownership of share capital by Elbit Systems’ and certain of its subsidiaries’ employees, who areexpected to contribute to the Company’s future growth and success. The options were allocated, subject to the required approvals, intwo tracks as follows: (i) Regular Options - up to 1,250,000 options exercisable into 1,250,000 shares of Elbit Systems inconsideration for the exercise price, all or any portion of which may be granted as Incentive Stock Options (“Regular Options”) and (ii)Cashless Options - up to 1,250,000 options, which entitle the participant to exercise options for an amount reflecting only the benefitfactor (“Cashless Options”). Each of the participants is granted an equal amount of Regular Options and Cashless Options. Theexercise price for Israeli participants is the average closing price of an Elbit Systems share during 30 trading days preceding the optionsgrant date. The exercise price of options granted to a non-Israeli participant residing in the United States is the fair market value of theshare on the day the options were granted. According to the Plan, the options granted on a certain date (the “Commencement Date”) will become vested and exercisable inaccordance with the following vesting schedule: (1)Fifty percent (50%) of the options will be vested and exercisable from the second anniversary of the Commencement Date; (2)An additional twenty-five percent (25%) of the options will be vested and exercisable from the third anniversary of theCommencement Date; and (3)The remaining twenty-five (25%) of the options will be vested and exercisable from the fourth anniversary of theCommencement Date. The options expire no later than five years from the date of grant, subject to the 2011 and 2012 amendments described below. Elbit Systems granted options to Israeli participants in accordance with the provisions of Section 102 of the Israel Tax Ordinance. As of December 31, 2012, 58,626 Options are available for future grant under the Plan (regular and cashless). On November 15, 2011, pursuant to an amendment to the Plan, the Company extended the expiration date of certain fully vestedoptions granted under the Plan for one additional year. Such options granted during 2007 will expire during 2013, no longer than sixyears from the date of grant. As a result of the amendment, the Company recorded one-time compensation expenses of approximately$980. On November 13, 2012, pursuant to an amendment to the Plan, the Company extended the expiration date of certain fully vestedoptions granted under the plan for one additional year, and recorded a one-time compensation expense of approximately $2,400. F - 59 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands, except share and per share data) Note 21 - SHAREHOLDERS’ EQUITY (Cont.) C.A summary of Elbit Systems’ share option activity under the stock option plan is as follows: 2012 2011 2010 Numberofoptions Weightedaverageexerciseprice Numberofoptions Weightedaverageexerciseprice Numberofoptions Weightedaverageexerciseprice Outstanding – beginning of the year 1,450,890 $37.07 1,635,305 $35.96 1,858,250 $35.24 Granted 30,000 35.21 63,300 50.74 28,000 52.23 Exercised (69,898) 33.19 (226,965) 32.41 (223,020) 32.53 Forfeited (25,500) 51.83 (20,750) 42.33 (27,925) 31.91 Outstanding – end of the year 1,385,492 $36.95 1,450,890 $37.07 1,635,305 $35.96 Options exercisable at the end of the year 1,271,266 $ 36.07 1,292,806 $35.17 963,289 $34.70 The aggregate intrinsic value represents the total intrinsic value (the difference between Elbit Systems’ closing stock price on the lasttrading day of the fourth quarter of the applicable fiscal year and the exercise price, multiplied by the number of in-the-money options)that would have been received by the option holders had all option holders exercised their options on December 31, of that year. Thisamount changes, based on the fair market value of the Company’s stock. Aggregate intrinsic value of outstanding options as ofDecember 31, 2012 and 2011 amounted to $4,294 and $5,605, respectively. In addition, the total intrinsic value of options exercisedfor the year ended December 31, 2012 was $480. As of December 31, 2012, there was $982 of total unrecognized compensation costrelated to share-based compensation arrangements granted under Elbit Systems’ stock option plan. That cost is expected to berecognized over a weighted average period of two years. As of December 31, 2012, 1,384,852 options were vested and expected to be vested at a weighted average exercise price of $36.95 pershare. The weighted average remaining contractual life of exercisable options as of December 31, 2012 is approximately one year andtheir aggregate intrinsic value is approximately $4,299. D.The options outstanding as of December 31, 2012, have been separated into ranges of exercise prices, as follows: Options outstanding Options exercisable Exercise price Numberofoptions Weightedaverageremainingcontractuallife (years) Weightedaverageexercisepriceper share Numberofoptions Weightedaverageexercisepriceper share $33.10 - $63.85 1,385,492 1.24 $36.95 1,271,266 $36.07 F - 60 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands, except share and per share data) Note 21 - SHAREHOLDERS’ EQUITY (Cont.) Compensation expense amounting to $3,326, $1,996 and $5,211 was recognized during the years ended December 31, 2012, 2011 and 2010,respectively. The expenses before tax were recorded as follows: Year ended December 31, 2012 2011 2010 Cost of revenues $1,785 $924 $2,353 R&D and marketing expenses 425 458 954 General and administration expenses 1,116 614 1,904 $3,326 $1,996 $5,211 E.The weighted average exercise price and fair value of options granted during the years ended December 31, 2012, 2011 and 2010 were: Less than market price Year ended December 31, 2012 2011 2010 Weighted average exercise price per share $35.21 $50.74 $52.23 Weighted average fair value per share on grant date $ 8.45 $12.12 $11.99 F.Computation of basic and diluted net earnings per share: Year endedDecember 31, 2012 Year endedDecember 31, 2011 Year endedDecember 31, 2010 Net incometoshareholdersof ordinaryshares Weightedaveragenumberofshares (*) PerShareamount Net incometoshareholdersof ordinaryshares Weightedaveragenumberofshares (*) PerShareamount Net incometoshareholdersof ordinaryshares Weightedaveragenumberofshares (*) PerShareamount Basic net earnings $167,879 42,190 $3.98 $90,288 42,764 $2.11 $183,498 42,645 $4.30 Effect of dilutive securities: Employee stock options - 87 - 367 - 572 Diluted net earnings $167,879 42,277 $3.97 $90,288 43,131 $2.09 $183,498 43,217 $4.25 (*) In thousands G.SHARE REPURCHASE PROGRAM In September 2011, the Board of Directors authorized the Company to repurchase up to one million of its ordinary shares over the next12 months. The repurchases were to be made from time to time in the open market on the TASE. The repurchase activity depended onfactors such as the Company’s working capital needs, its cash requirements, its stock price and economic and market conditions.The share repurchases were to be effected from time to time through open market purchases. In 2012, the Company repurchased759,632 ordinary shares (240,368 in 2011) for approximately $26,006 ($10,101 in 2011). F - 61 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands, except share and per share data) Note 21 - SHAREHOLDERS’ EQUITY (Cont.) H.In December 2007, Elbit Systems U.S. Corp (“ESC”), a wholly-owned U.S. subsidiary of Elbit Systems, adopted a StockAppreciation Rights Plan (the “SAR Plan”), for non-employee directors of ESA. A SAR may only be exercised after it becomes vested. 25% of any SAR granted are exercisable on the first anniversary from the grantdate and an additional 25% on each of the three subsequent anniversaries. The maximum term of a SAR is five years from the grantdate. SAR’s do not provide any rights as a shareholder in the Stock. SARs are considered liabilities under ASC 718 and as such compensation cost for each period until settlement is based on the change(or a portion of the change, depending on the percentage of the requisite service that has been rendered) in the fair value of the SARs foreach reporting period. As of December 31, 2012, there were 30,000 outstanding SARs, of which 27,750 were fully vested at a weighted average exercise priceper share of $59.36. I.2012 PHANTOM OPTION RETENTION PLAN In August 2012, the Company’s Board of Directors approved a “Phantom Option Retention Plan” for Senior Officers (the “Plan”). The Plan provides for phantom options which entitle the recipients to receive payment in cash of an amount reflecting the “benefitfactor”, which is linked to the performance of Elbit Systems’ stock price over the applicable periods (tranches) under the Plan. As ofDecember 31, 2012, the Board of Directors approved a grant of 325,000 units with a basic price per unit, as defined in the Plan, of$33.00. The benefit earned for each year of a tranche will be the difference between the basic price and the closing price of the Company’sshares for that year, as defined in the Plan, not to exceed an increase of 100% in the Company's share price from the basic price of thefirst year of a tranche. The Company recorded an amount of approximately $312 in 2012 as compensation costs related to the phantom options granted in2012 to senior officers under the Plan. J.DIVIDEND POLICY Dividends declared by Elbit Systems are paid subject to statutory limitations. Elbit Systems’ Board of Directors has determined not todeclare dividends out of tax exempt earnings. F - 62 ELBIT SYSTEMS LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands) Note 22 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). A.Revenues are attributed to geographic areas based on location of the end customers as follows: 2012 2011 2010 Europe $561,142 $552,379 $541,749 North America. 909,395 890,686 843,985 Israel 519,852 697,261 650,956 Latin America 258,761 165,516 152,147 Asia Pacific 568,458 459,952 459,572 Other 70,999 51,671 21,724 $2,888,607 $2,817,465 $ 2,670,133 B.Revenues are generated by the following areas of operations: Year ended December 31, 2012 2011 2010 Airborne systems $1,054,468 $969,446 $791,111 Land vehicles systems 374,487 405,294 363,245 C4ISR systems 1,017,638 996,382 1,019,068 Electro-optic systems 324,135 300,158 368,808 Other (*) 117,879 146,185 127,901 $2,888,607 $2,817,465 $2,670,133 (*)Mainly non-defense engineering and production services. C.Major customer data as a percentage of total revenues: Year ended December 31, 2012 2011 2010 Israeli Ministry of Defense 15% 23% 23%U.S. Government 8% 8% 7% D.Long-lived assets by geographic areas: Year ended December 31, 2012 2011 2010 Israel $863,945 $875,935 $985,953 U.S. 208,309 208,640 225,217 Other 144,594 196,105 89,345 $1,216,847 $1,280,680 $1,300,515 Note 23 - RESEARCH AND DEVELOPMENT EXPENSES, NET Year ended December 31, 2012 2011 2010 Total expenses $276,458 $288,668 $268,578 Less – grants and participations (43,071) (47,576) (34,447) $233,387 $241,092 $234,131 F - 63 ELBIT SYSTEMS LTD. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)U.S. dollars (In thousands ) Note 24 - FINANCIAL EXPENSES, NET Year ended December 31, 2012 2011 2010 Expenses: Interest on long-term bank debt $(7,148) $(7,214) $(6,968)Interest on Series A Notes (10,787) (5,753) (4,395)Interest on short-term bank credit and loans (2,528) (3,802) (1,699)Loss on marketable securities - (2,464) - Gain (loss) from exchange rate differences, net 126 7,565 (9,094)Other (9,922) (10,839) (4,330) (30,259) (22,507) (26,486)Income: Interest on cash, cash equivalents and bank deposits 1,821 2,579 3,224 Other 2,353 6,359 2,011 4,173 8,938 5,235 $(26,086) $(13,569) $(21,251) Note 25 - OTHER INCOME, NET Year ended December 31, 2012 2011 2010 Gain from sale of Mediguide shares (*) $- $- $12,809 Other 78 1,909 450 $78 $1,909 $13,259 (*)Gain from the sale of Mediguide Inc. shares to St. Jude Medical in 2008, recognized during 2010. Note 26 - RELATED PARTIES TRANSACTIONS AND BALANCES Transactions: Year ended December 31, 2012 2011 2010 Income - Sales to affiliated companies (*) $98,884 $53,490 $33,124 Participation in expenses $- $3,923 $3,955 Cost and expenses - Supplies from affiliated companies (**) $10,908 $44,840 $57,339 Balances: December 31, 2012 2011 Trade receivables and other receivables (*) $24,121 $21,696 Trade payables and advances(**) $18,475 $17,767 The purchases from related parties are made at arm’s length. The sales to the Company’s related parties in respect of U.S. government defensecontracts are made on the basis of cost. (*)The significant sales and balances 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 theCompany from Opgal. F - 64 ELBIT SYSTEMS LTD. AND SUBSIDIARIESSchedule II – Valuation and Qualifying Accounts(In thousands of U.S. dollars) Column A Column B Column C Column D Column E Description Balance atBeginning ofPeriod Additions(Charged toCosts andExpenses) Deductions(Write-Offsand ActualLossesIncurred) AdditionsResultingfromAcquisitions Balance atEnd of Period Year Ended December 31, 2012: Provisions for Losses on Long-Term Contracts (*) 196,980 32,996 100,761 – 129,215 Provisions for Claims and Potential Contractual Penalties and Others 8,236 648 2,038 – 6,846 Allowance for Doubtful Accounts 6,861 2,865 598 – 9,128 Valuation Allowance on Deferred Taxes 1,302 3,395 1,169 – 3,528 Year Ended December 31, 2011: Provisions for Losses on Long-Term Contracts (*) 136,070 104,560 43,650 – 196,980 Provisions for Claims and Potential Contractual Penalties and Others 6,618 2,160 542 – 8,236 Allowance for Doubtful Accounts 11,215 56 4,410 – 6,861 Valuation Allowance on Deferred Taxes 160 1,302 160 – 1,302 Year Ended December 31, 2010: Provisions for Losses on Long-Term Contracts (*) 136,341 35,443 36,360 646 136,070 Provisions for Claims and Potential Contractual Penalties and Others 5,864 1,262 1,103 595 6,618 Allowance for Doubtful Accounts 7,885 904 349 2,775 11,215 Valuation Allowance on Deferred Taxes (**) 34,776 – 34,616 – 160 __________________ *An amount of $74,407, $74,509 and $64,065 as of December 31, 2010, 2011 and 2012, respectively, is presented as a deduction frominventories, and an amount of $61,663, $122,471 and $65,150 as of December 31, 2010, 2011 and 2012, respectively, is presented as part ofother accrued expenses in the category of “Cost Provisions and Other.” An amount of $57,189 and $18,467 as of December 31, 2011 and 2012,respectively, is presented as other accrued expenses and is related to the cessation of a program with a foreign customer, of which $13,300 wasincluded in long-term liabilities.**An amount of $21,500 was deducted as a result of a prior year adjustment. S - 1EXHIBIT 8 Primary Operating Subsidiaries of Elbit Systems Ltd. (*)As of February 28, 2013, Tor was owned 100% by the Company, but we are in process of transferring 50% of the ownership interest to IsraelAerospace Industries Ltd. Exhibit 12.1 Certification by Chief Executive Officer Pursuant to Section 302 of theSarbanes-Oxley Act of 2002 I, Joseph Ackerman, certify that: 1.I have reviewed this annual report on Form 20-F of Elbit Systems Ltd. 2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this annual report. 3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by theannual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting. 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 13, 2013 By:/S / JOSEPH ACKERMAN Joseph Ackerman President and Chief Executive Officer (Principal Executive Officer)Exhibit 12.2 Certification by Chief Financial Officer Pursuant to Section 302 of theSarbanes-Oxley Act of 2002 I, Joseph Gaspar, certify that: 1.I have reviewed this annual report on Form 20-F of Elbit Systems Ltd. 2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this annual report. 3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered bythis annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting. 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 13, 2013 By:/S / JOSEPH GASPAR Joseph Gaspar Executive Vice President and ChiefFinancial Officer (Principal Financial and AccountingOfficer) Exhibit 13.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report on Form 20-F of Elbit Systems Ltd. (the “Company”) for the year ended December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned, Joseph Ackerman, Chief Executive Officer (Principal ExecutiveOfficer) of the Company, certifies, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of theCompany. Date: March 13, 2013 By:/S / JOSEPH ACKERMAN Joseph Ackerman Chief Executive Officer (Principal Executive Officer) Exhibit 13.2 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report on Form 20-F of Elbit Systems Ltd. (the “Company”) for the year ended December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned, Joseph Gaspar, Chief Financial Officer (Principal Financial andAccounting Officer) of the Company, certifies, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of theCompany. Date: March 13, 2013 By:/S / JOSEPH GASPAR Joseph Gaspar Chief Financial Officer (Principal Financial and Accounting Officer) Exhibit 15.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-139512) pertaining to employee stock option plansof Elbit Systems Ltd. of our reports dated March 12 2013, with respect to the consolidated financial statements and schedule of Elbit Systems Ltd. and theeffectiveness of internal control over financial reporting of Elbit Systems Ltd. included in this Annual Report on Form 20-F for the year ended December 31,2012. By:/s/ Kost Forer Gabbay & Kasierer Kost Forer Gabbay & KasiererA member of Ernst & Young Global Tel-Aviv, Israel, March 12, 2013 

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