`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

[_]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                                       OR

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the fiscal year ended December 31, 2007

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the transition period from      to      .

                                       OR

[_]  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     Date of event requiring this shell company report

                         Commission file number 2-16830

                  INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
             (Exact name of Registrant as specified in its charter)

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

                 82 Menachem Begin Road, Tel Aviv, Israel 67138
                    (Address of principal executive offices)

     SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO 12(B) OF THE ACT:

     TITLE OF EACH CLASS             NAME OF EACH EXCHANGE ON WHICH REGISTERED
     None                            None

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      None
                                (Title of Class)

        SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO
                           SECTION 15(D) OF THE ACT:
                6% Cumulative Participating Preference "C" Shares
               6% Cumulative Participating Preference "CC" Shares
               7-1/2% Cumulative Redeemable Preference "D" Shares
               7-1/2% Cumulative Redeemable Preference "DD" Shares
              7-1/2% Registered Subordinated Capital Notes due 1998

                                                                  NUMBER OF SHARES OUTSTANDING AS
              TITLE OF CLASS                                           OF DECEMBER 31, 2007
              --------------                                           --------------------

Ordinary "A" Shares, par value NIS 0.10 (the "Ordinary A Shares")               15,100
Ordinary "B" Shares, par value NIS 0.10 (the "Ordinary B Shares")              134,899
Ordinary "B1" Shares, par value NIS 0.10 (the "Ordinary B1 Shares")                  1
8% Cumulative Participating Preferred Ordinary Shares, par value
NIS 0.001(the "Preferred Ordinary Shares")                                   1,000,000`

`NUMBER OF SHARES
                                                                                       OUTSTANDING AS OF
               TITLE OF CLASS                                                          DECEMBER 31, 2006
               --------------                                                          -----------------

6% Cumulative Participating Preference "C" Shares, par value
NIS 0.00018 (linked to the U.S.dollar at the rate of $1 = NIS 0.00018) (the "C Shares")    17,000,000
6% Cumulative Participating Preference "CC" Shares, par value
NIS 0.003 (linked to the U.S.dollar at the rate of $1 = NIS 0.0003) (the "CC Shares")         999,998
6% Cumulative Participating Preference "CC1" Shares, par value
NIS 0.003 (linked to the U.S.dollar at the rate of $1 = NIS 0.0003) (the "CC1 Shares")      1,734,779
7-1/2% Cumulative Redeemable Preference "D" Shares, par value
NIS 0.03 (linked to the U.S.dollar at the rate of $1 = NIS 0.0003) (the "D Shares")           163,477
7-1/2% Cumulative Redeemable Preference "DD" Shares, par value
NIS 2.10 (linked to the U.S.dollar at the rate of $1 = NIS 0.0021) (the "DD Shares")           55,409
Unclassified Shares, par value NIS.0.10                                                            --

     Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.

                               Yes [_]     No [X]

     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 [_]     No [X]

     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 of
1934 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
filing requirements for the past 90 days.

                               Yes [X]     No [_]

     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer , or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):

   Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]

     Indicate by check mark which financial statement item the registrant has
elected to follow:

                           Item 17 [X]     Item 18 [_]

If this is an annual report, inducate by check mark whether the registrant is a
shell company (as defined in (Rule 12b-2 of the Securities Exchange Act)).

                               Yes [_]     No [X]

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                               Yes [_]     No [_]`

`TABLE OF CONTENTS

Explanatory Notes                                                                               (ii)
Forward-Looking Statements                                                                      (ii)
Industry and Market Data                                                                       (iii)
Presentation of Financial Information                                                          (iii)
Exchange Rate Information                                                                       (iv)
                                     PART I
Item 1 --    Identity of Directors, Senior Management and Advisers                                 1
Item 2 --    Offer Statistics and Expected Timetable                                               1
Item 3 --    Key Information                                                                       1
Item 4 --    Information on the Company                                                           22
Item 5 --    Operating and Financial Review and Prospects                                         50
Item 6 --    Directors, Senior Management and Employees                                           71
Item 7 --    Major Shareholders and Related Party Transactions                                    86
Item 8 --    Financial Information                                                                91
Item 9 --    The Offer and Listing                                                                96
Item 10 --   Additional Information                                                               97
Item 11 --   Quantitative and Qualitative Disclosures About Market Risk                          116
Item 12 --   Description of Securities Other than Equity Securities                              123
                                     PART II
Item 13 --   Defaults, Dividend Arrearages and Delinquencies                                     124
Item 14 --   Material Modifications to the Rights of Security Holders and Use of Proceeds        131
Item 15 --   Controls and Procedures                                                             131
Item 16A --  Audit Committee Financial Expert                                                    133
Item 16B --  Code of Ethics                                                                      133
Item 16C --  Principal Accountant Fees and Services                                              133
Item 16D --  Exemptions from the Listing Standards for Audit Committees                          134
Item 16E --  Purchases of Equity Securities by the Issuer and Affiliated Purchasers              134
                                    PART III
Item 17 --   Financial Statements                                                                135
Item 18 --   Financial Statements                                                                135
Item 19 --   Exhibits                                                                            135


                                       i`

`EXPLANATORY NOTES

     All references in this annual report on Form 20-F for the period ended
December 31, 2007 (this "Annual Report on Form 20-F") to "Industrial Development
Bank" or "the Bank" as well as use of the terms "we," "us," "our" or similar
terms, are references to Industrial Development Bank of Israel Limited, a
company incorporated under the laws of the State of Israel on October 7, 1957.

                           FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 20-F, including the exhibits incorporated by
reference herein, contains both historical and forward-looking statements within
the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are not historical facts, but only predictions, and
generally can be identified by the use of statements that include phrases such
as "believe," "expect," "anticipate," "intend," "plan," "foresee" or other words
or phrases of similar import. Similarly, statements that describe our
objectives, plans or goals are also forward-looking statements. These
forward-looking statements are based on our current expectations and are subject
to risks and uncertainties that could cause actual results to differ materially
from those currently anticipated. The forward-looking statements included in
this annual report are made only as of the date hereof and we undertake no
obligation to publicly update these forward-looking statements to reflect new
information, future events or otherwise.

     Our actual results, performance and achievements could differ materially
from any future results, performance or achievements expressly predicted or
implied by these forward looking statements. The important factors which may
cause actual results to differ from the forward-looking statements contained
herein include, but are not limited to, the following: general economic and
business conditions; the implementation of the government's resolution to
privatize the Bank; the shareholders vote in favor, and the Court approval of
the arrangement and compromise scheme between the Bank and its shareholders
regarding the sale of the shares of the Bank and in the alternative; the payment
of a partial dividend to the holders of the C Shares , CC Shares and CC1 Shares;
the finding of a purchaser for the shares of the Bank within the framework of
the above scheme until the final date so established in the scheme (December 31,
2009); the continued availability of the Special Line of Credit (as defined
below); our ability to collect on existing loans; operating costs for our
remaining business activities; and the ability to retain employees for our
remaining business activities. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and expectations
will be achieved.

     Potential investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements, including the factors
described below in "Item 3. Key Information-Risk Factors," and are cautioned not
to place undue reliance on these forward-looking statements. In light of these
risks, uncertainties and assumptions, the forward-looking events might or might
not occur. We cannot assure you that projected results or events will be
achieved.


                                       ii`

`INDUSTRY AND MARKET DATA

     Industry statistics and market data used in this Annual Report on Form 20-F
were obtained from publicly available information and industry publications.
Industry publications generally state that the information contained in them has
been obtained from sources believed to be reliable, but that the accuracy and
completeness of this information is not guaranteed. Similarly, industry and
market data, while believed to be reliable, have not been independently
verified, and we make no representation as to the accuracy of this information.

                      PRESENTATION OF FINANCIAL INFORMATION

     We state our financial statements in New Israeli Shekels. In this Annual
Report on Form 20-F, references to New Israeli Shekels, NIS or shekels are to
the currency of Israel, and references to U.S. dollars, $ or US$ are to the
currency of the United States. Our financial statements have been prepared in
accordance with the accounting principles generally accepted in Israel, and in
accordance with the directives of the Supervisor of Banks in Israel ("Israeli
GAAP"). Unless otherwise indicated, the financial information presented is in
accordance with Israeli GAAP. For a discussion of the principal differences
between Israeli GAAP and the accounting principles generally accepted in the
United States, or U.S. GAAP, see "Item 17. Financial Statements".

     The financial statements for the year ending December 31, 2007 were
prepared in "reported amounts," as provided in Standard 12 of the Israel
Accounting Standards Board regarding discontinuance of the adjustment of
financial statements to the Consumer Price Index ("CPI"). Pursuant to this
standard and in accordance with Accounting Standard No. 17 that was published in
December 2002, the adjustment of financial statements to the CPI was
discontinued as of January 1, 2004. Until December 31, 2003, we prepared
CPI-adjusted financial statements in accordance with the directives of the
Supervisor of Banks, on the basis of the principles of Opinion No. 36 of the
Institute of Certified Public Accountants in Israel. The adjusted amounts
presented in the financial statements as of December 31, 2003 are the basis for
the financial statements in reported amounts. Any additions made during the
period are included according to their nominal values. For a further discussion
of the amounts in our financial statements, see "Note 1.C. Financial Statements
in Reported Amounts" to our Financial Statements in Item 17 of this Annual
Report on Form 20-F.

     Unless otherwise indicated, information provided in this Annual Report on
Form 20-F, including all operating data presented, is as of December 31, 2007.


                                      iii`

`EXCHANGE RATE INFORMATION

     The following table sets forth, for the periods indicated, the average,
high, low and end of period exchange rates between the shekel and the U.S.
dollar, expressed as shekels per U.S. dollar and based upon the daily
representative rate of exchange as published by the Bank of Israel.


                            AVERAGE(1)       HIGH        LOW          PERIOD END
                            ----------       ----        ---          ----------

YEAR ENDED
December 31, 2007             4.085         4.342       3.830           3.846
December 31, 2006             4.456         4.725       4.176           4.225
December 31, 2005             4.488         4.741       4.299           4.603
December 31, 2004             4.482         4.634       4.308           4.308
December 31, 2003             4.512         4.924       4.283           4.379

                            AVERAGE(2)       HIGH        LOW          PERIOD END
                            ----------       ----        ---          ----------

MONTH ENDED
August 31, 2008               3.559         3.592       3.476           3.572
July 31, 2008                 3.371         3.489       3.230           3.470
June 30, 2008                 3.362         3.426       3.260           3.352
May 31, 2008                  3.379         3.461       3.233           3.233
April 30, 2008                3.520         3.640       3.425           3.429
March 31, 2008                3.511         3.656       3.377           3.553
February 29, 2008             3.608         3.655       3.578           3.635
January 31, 2008              3.751         3.861       3.625           3.625
December 31, 2007             3.904         4.008       3.841           3.846

----------

(1)  The average of the exchange rates on the last day of each month during the
     applicable year.

(2)  The average of the exchange rates for all days during the applicable month.

     As of September 9, 2008, the exchange rate was NIS 3.592 per U.S. dollar,
as published by the Bank of Israel.


                                       iv`

`PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

A.   SELECTED FINANCIAL DATA

     Our financial statements included in this Annual Report on Form 20-F, as
well as the selected financial data presented below, have been prepared in
accordance with Israeli GAAP, including the directives of the Supervisor of
Banks in Israel. For a discussion of the principal differences between Israeli
GAAP and U.S. GAAP, see Item 17 of this Annual Report on Form 20-F.

     Our selected financial data presented below is derived from our audited
financial statements included in Item 17 of this Annual Report on Form 20-F. Our
selected financial data presented below should be read in conjunction with the
information contained in "Item 5. Operating and Financial Review and Prospects"
and the financial statements and notes thereto contained below in "Item 17.
Financial Statements" of this Annual Report on Form 20-F.


                                       1`

`SELECTED FINANCIAL DATA
                                         ----------------------------------------------------------------
                                                                  AS AT DECEMBER 31
                                         ----------------------------------------------------------------
                                            2007          2006            2005        2004        2003
                                         ---------      ---------      ---------    ---------   ---------
                                                                                                ADJUSTED
OPERATING DATA:                                            REPORTED AMOUNTS*                    AMOUNTS
                                         ----------------------------------------------------   ---------
ISRAELI GAAP                           NIS MILLIONS   NIS MILLIONS   NIS MILLIONS NIS MILLIONS NIS MILLIONS
                                         ---------      ---------      ---------    ---------   ---------

Profit from financing
 operations before allowance
 for doubtful debts                           29.3           18.2           61.6         66.2        70.1
Allowance for doubtful debts                 (13.8)          21.7           44.2         70.2       129.8
                                         ---------      ---------      ---------    ---------   ---------
Profit (loss) from financing
 operations after allowance
 for doubtful debts                           43.1           (3.5)          17.4         (4.0)      (59.7)
                                         ---------      ---------      ---------    ---------   ---------
OPERATING AND OTHER INCOME -
Operating commissions                          1.1            1.3            2.2          4.1         6.5
Gains  from
 investments in shares                         8.7           16.4           11.3         41.5        10.3
Other income                                   1.7            3.8            4.7          4.6         5.5
                                         ---------      ---------      ---------    ---------   ---------
Total operating and other income              11.5           21.5           18.2         50.2        22.3
                                         ---------      ---------      ---------    ---------   ---------
OPERATING AND OTHER EXPENSES -
Salaries and related expenses                 18.5           17.6           18.2         19.7        33.7
Expenses (income) in respect of
 employee retirement                             -            0.5            5.5         (0.8)       (1.5)
Maintenance and depreciation
 of buildings and equipment                    2.9            2.7            3.8          5.7        11.8
Other expenses                                 9.4           14.3           16.5         20.4        20.7
                                         ---------      ---------      ---------    ---------   ---------
Total operating and other expenses            30.8           35.1           44.0         45.0        64.7
                                         ---------      ---------      ---------    ---------   ---------
Operating profit (loss)
 before taxes on income                       23.8          (17.1)          (8.4)         1.2      (102.1)
Erosions and adjustments***                      -              -              -            -        (4.5)
                                         ---------      ---------      ---------    ---------   ---------
Operating profit (loss)
 before taxes on income                       23.8          (17.1)          (8.4)         1.2   ** (106.6)
Provision for taxes on operating
   income (tax benefit)                        1.6              -              -            -   **   (2.7)
                                         ---------      ---------      ---------    ---------   ---------
Operating profit (loss) after
 taxes on income                              22.2          (17.1)          (8.4)         1.2   ** (103.9)
OTHER ITEMS
Share of Bank in losses of
 Affiliates, net of related taxes                -              -              -            -   **   (0.4)
Capital gain (loss), net                         -              -              -          0.2   **   (0.1)
                                         ---------      ---------      ---------    ---------   ---------
Total other items                                -              -              -          0.2   **   (0.5)
                                         ---------      ---------      ---------    ---------   ---------
NET EARNINGS (LOSS) FOR THE YEAR              22.2          (17.1)          (8.4)         1.4   ** (104.4)
                                         =========      =========      =========    =========   =========
NET EARNINGS (LOSS) PER SHARE IN
NIS, ORDINARY A SHARES                     1,470.2       (1,132.4)        (556.3)        92.7    (6,913.9)
                                         =========      =========      =========    =========   =========

*    For 2004 and thereafter - discontinuance of inflationary adjustment on the
     basis of the Index of December 2003.

     For 2003 - discontinuance of inflationary adjustment on the basis of the
     Index of December 2002.

**   Amounts adjusted for inflation based on Index of December 2003.

***  Erosions and inflationary adjustments based on the Index of December 2003
     of income and expenses that were included in the operating profit before
     taxes, in reported amounts.


                                       2`

`2007         2006         2005          2004           2003
                                                            ------      --------     ---------     ---------     ----------
                                                     (IN MILLIONS OF NIS, EXCEPT PER SHARE DATA AND EXCEPT AS OTHERWISE INDICATED)
                                                            ---------------------------------------------------------------
                                                                                                                   ADJUSTED
                                                                            REPORTED AMOUNTS                       AMOUNTS
                                                            ------------------------------------------------     ----------

U.S. GAAP
Net profit (loss) for the year                               (22.4)        (64.9)         17.1         (20.0)       (157.2)

                                                                           NIS          NIS           NIS            NIS
                                                                        --------     ---------     ---------     ----------

Profit (Loss) per Ordinary A Shares                         (293.2)     (2,936.4)    (3,983.55)    (3,019.28)    (10,579.77)

BALANCE SHEET DATA:
ISRAELI GAAP

Deposits received                                            5,855         6,923         8,110         8,488         9,742
Registered Subordinated Capital Notes                           20            25            27            25            28
Total Liabilities, not including Preference shares           5,926         7,006         8,193         8,570         9,847
Non-participating Preference shares                            276           303           330           309           314
Participating Preference shares*                               171           187             -             -             -
Shareholders' equity*                                          110            20           197           199           196
Loans extended                                               5,521         6,519         7,681         7,993         9,190
Deposits with the Israeli Treasury                             853           840           853           843           835
Credit to foreign government                                     -             2             7            11            21
Amounts receivable from the Israel Treasury in
      respect of linkage increments and exchange
      differences on the Bank's liabilities                     20            25            27            25            28
Total Assets                                                 6,483         7,516         8,721         9,078        10,356


*    See Note 1D to the financial statements in

     Item 17 of this Annual Report on Form 20-F


                                       3`

`2007         2006       2005         2004        2003
                           -----       -----       -----       -----       ------
                            (IN MILLIONS OF NIS, EXCEPT PER SHARE DATA AND EXCEPT
                                           AS OTHERWISE INDICATED)
                           -------------------------------------------------------
                                                                          ADJUSTED
                                        REPORTED AMOUNTS                   AMOUNTS
                           -----------------------------------------       -------

BALANCE SHEET DATA:
U.S. GAAP
Total Assets               6,661       7,778       9,056       9,443       10,830
Total Liabilities          6,456       7,551       8,762       9,168       10,525
Shareholders' equity         204         227         294         275          305

B.   CAPITALIZATION AND INDEBTEDNESS

     Not applicable.

C.   REASONS FOR THE OFFER AND USE OF PROCEEDS

     Not applicable.

D.   RISK FACTORS

     This section describes some of the risks that could affect our business.
The factors below should be considered in connection with any forward-looking
statements in this Annual Report on Form 20-F.

     The risks below are not the only ones that we face; some risks are not yet
known to us and some that we do not currently believe to be material could later
turn out to be material. All of these risks could materially affect our
business, our revenues, operating income, net income, net assets, liquidity and
capital resources and the value of our securities.

     OUR BANKING ACTIVITIES ARE LIMITED AND SEVERELY CURTAILED.

     Pursuant to the terms of the Run-Off Plan (as defined below; see "Item 4.
Information on the Company-Business Overview-Adoption of the Run-Off Plan and
Amendment of the Special Line of Credit") that we adopted and the governmental
approval thereof, our assets are being realized in a controlled manner over a
number of years. Even though the Run-Off Plan expired on July 31, 2008, the
Government of Israel has decided and the Bank has announced that the Bank will
continue to collect its loan portfolio and operate in a similar manner after the
Run-Off Plan has expired.


                                       4`

`The terms of the Run-Off Plan under which we are currently operating
severely curtail our banking operations. We are precluded from extending new
loans to customers or undertaking new banking activities during the run-off
period; our operations during and after the run-off period will be focused on
the collection of existing loans.

     We may use the Special Line of Credit (as defied below) solely for the
bridging of our liquidity needs as required for the fulfillment of our current
and banking undertakings. The Special Line of Credit, which contains substantial
conditions affecting our operations, is discussed further below and in "Item 4.
Information on the Company - Business Overview." Our main goals are to realize
our assets and repay the Special Line of Credit.

     OUR BANKING LICENSE HAD BEEN RESTRICTED AND ITEXPIRED AS OF AUGUST 1, 2008.

     In his letter dated January 29, 2006, we were notified by the Governor of
the Bank of Israel, that the banking license that we received on June 4, 1989
will be restricted so that we cannot engage in any business we did not engage in
prior to the date of the license (until the date of the license we engaged in
financing investments) and without derogating from the generality of the
aforementioned, we will not receive new deposits and will not renew deposits
reaching their current date of maturity, other than from shareholders. The
Governor added that our banking license will be revoked as of August 1, 2008. We
expect that as a result we may lose certain benefits we enjoy today in our
capacity as a banking entity in conducting legal proceedings against our
customers.

     IF THE PLAN FOR THE SALE OF THE SHARES OF THE BANK IS IMPLEMENTED, OUR C
SHARES, OUR CC SHARES, OUR CC1 SHARES, OUR D SHARES AND OUR DD SHARES, WILL BE
PURCHASED AND/OR REDEEMED DESPITE THE OBJECTION OF SOME SHAREHOLDERS.
ALTERNATIVELY, THE HOLDERS OF OUR C SHARES, OUR CC SHARES AND OUR CC1 SHARES
WILL RECEIVE A PARTIAL DIVIDEND ONLY, FOR THE PAST PERIOD, AND, SUBJECT TO COURT
APPROVAL, SHALL BE DEEMED TO HAVE WAIVED THEIR CLAIMS AGAINST THE STATE OF
ISRAEL IN THIS REGARD.

     On April 29, 2008, the Ministerial Committee for Privatization Issues
passed a resolution regarding our privatization, given that a substantial
portion of our shares are held by the State of Israel. Pursuant to the
resolution, the privatization of the Bank will be implemented within the
framework of an arrangement and compromise scheme between our shareholders and
us. Such arrangement would require the approval of our shareholders (at meetings
of each class) and the approval of the Israeli Court. Pursuant to the proposed
scheme, the Perpetual Deposit (as defined below) with the Ministry of Finance of
the State of Israel will be returned to us upon the approval of the scheme, all
of our shares will be sold, with the exception of our D and DD shares that are
not held by the State of Israel, which will be redeemed. In the event that the
sale of our shares shall not be completed until December 31, 2009, or if prior
to that date, liquidation proceedings against us begin, then we shall pay to the
holders of our C Shares, our CC Shares and our CC1 Shares, half of the preferred
dividend (at an annual rate of 6%) on their shares for the period from July 1,
2002 until July 31, 2008, against a waiver by the shareholders of their claims
against the State of Israel to receive the balance of the dividend for the
period until the payment of the above half-preferred dividend.


                                       5`

`At its meeting on May 26, 2008, our Board of Directors approved the filing
with the Court, subject to the receipt of certain approvals and clarifications
from the Government Companies Authority (the "GCA"), of the the arrangement and
compromise scheme between our shareholders and us, based upon the above
principles.

     As of the date that this Annual Report on Form 20-F is being filed with the
SEC, no purchaser for our shares has been identified, and no agreement for such
purchase or sale has been entered into. Any such sale will be subject to the
approval of our Board of Directors, our shareholders and the Court.

     See our Notices on Form 6-K, filed on May 29, 2008 and July 6, 2008, for
additional details regarding the scheme approved by the Board of Directors for
filing with the court.

     If in fact the scheme is approved and executed, our shares will be sold
and/or redeemed even if certain shareholders object. Alternatively, the holders
of our C Shares, our CC Shares and our CC1 Shares will receive half of the
dividend for their shares and will be deemed to have waived their claims against
the State of Israel regarding the balance of the dividend.

     IF THE SCHEME FOR THE SALE AND/OR REDEMPTION OF OUR SHARES IS APPROVED AND
EXECUTED, IT IS UNCLEAR IF WE WILL CONTINUE TO OPERATE AND, IF WE DO CONTINUE TO
OPERATE, IN WHAT FORM WE WILL CONDUCT OUR OPERATIONS.

     If the scheme for the sale and/or redemption of our shares is approved and
executed, it is unclear if and on which terms we will operate and what would be
the nature of our activity after the sale. On the other hand, if the sale is not
approved or if it is not completed by December 31, 2009, our continued activity
will be determined by the State of Israel , and it can not be ruled out that at
some stage we might enter into liquidation proceedings.

     The financial statements included in Item 17 do not contain any changes in
the value or classification of assets or liabilities that may be required should
we cease to operate as a "going concern".

     WE HAVE SUSPENDED THE PAYMENT OF DIVIDENDS ON OUR C SHARES, OUR CC SHARES,
OUR CC1 SHARES, OUR D SHARES AND OUR DD SHARES, AS WELL AS ON OUR OTHER CLASSES
OF SHARES. THE SUSPENSION OF THE PAYMENT OF DIVIDENDS ON THOSE SHARES MAY
CONTINUE FOR AN INDEFINITE PERIOD OF TIME AND, IN THE FUTURE, WE MAY NOT BE ABLE
TO PAY ANY DIVIDENDS ON THOSE SHARES.

     According to the Companies Law, a company may distribute dividends only
from its profits (adjusted to changes in the CPI). Profits are defined as a
surplus balance or surpluses that accumulated in the last two years, whichever
is greater. Under certain circumstances, however, a company may seek court
approval to pay dividends even in the absence of profits. Pursuant to our
Articles of Association, dividends can be distributed only from profits. We
understand this restriction as permitting us to distribute a dividend also from
nominal profits, provided that there is a positive balance of accumulated
surpluses. However, under the Directives of Proper Banking Procedures, the
Supervisor of Banks has prohibited banking corporations from distributing
dividends if, among other things, such banking corporations have losses in one
or more of the previous three calendar years or if the aggregate results of
three quarters ending in the interim period for which the previous interim
financial statements were issued reflect a loss.


                                       6`

`We ended the years 2005 and 2006 with losses and the year 2007 with a
profit. While we have had surpluses during the past two years, since the second
quarter of 2002 until today, we do not have a balance of accumulated surpluses
which would permit us to distribute a dividend pursuant to our Articles of
Association. The last quarterly dividend that we paid in respect of our C
Shares, CC Shares, CC1 Shares, D Shares and DD Shares was the dividend for the
second quarter of 2002, which was made with the approval of the Court and the
Supervisor of Banks.

     We deposited the proceeds of the issuances of our C Shares, our CC Shares,
our CC1 Shares, our D Shares and our DD Shares, with the Ministry of Finance of
the State of Israel pursuant to deposit agreements (the "Perpetual Deposit") and
we refer to them as the Perpetual Deposit. According to the deposit agreements,
our Perpetual Deposit earns interest at a rate of 7.5% per annum (plus
differentials of linkage to the U.S. dollar), which interest must be paid by the
Ministry of Finance to us on the payment dates for the dividends to be paid by
us on our C Shares, our CC Shares, our CC1 Shares, our D Shares and our DD
Shares.

     When we ceased making dividend payments on our C Shares, CC Shares, CC1
Shares, D Shares and DD Shares, the Ministry of Finance also ceased making the
interest payments on the Perpetual Deposit. The last interest payment that we
have received from the Ministry of Finance was for the second quarter of 2002.
The deposit agreements do not expressly stipulate how the interest on our
Perpetual Deposit should be handled during periods in which we are prevented
from distributing dividends on our C Shares, our CC Shares, our CC1 Shares, our
D Shares and our DD Shares, and whether the interest will accrue and be paid if
we ultimately pay accrued dividends on such shares in arrears or upon
liquidation.

     If the interest due under the deposit agreements is accruing and will
ultimately be paid to us by the Ministry of Finance if we pay accrued and unpaid
dividends or if we are liquidated, then such interest will be paid to us at that
time. However, there is no assurance that the interest is accruing or that we
will have sufficient net profits to permit the payment of dividends or that if
we do have sufficient net profits, the Supervisor of Banks will permit us to
make dividend payments. Furthermore, as explained below, the originating motion
which we filed regarding the accrual of interest on our Perpetual Deposit was
denied and the Court ruled that as long as no dividend is distributed on our
preference shares, there is no accrual of interest on the Perpetual Deposit.

     The aggregate amount of the accrued and unpaid dividends in respect of our
C Shares, our CC Shares, our CC1 Shares, our D Shares and our DD Shares
(including a 1.5% participating dividend for C Shares, CC Shares and CC1 Shares)
as of December 31, 2007 is NIS 185.4 million, which amount is not recorded in
our financial statements. Of this amount, an amount of NIS 33.4 million is in
respect of the fiscal year 2007. The aggregate amount of interest that may or
may not be accruing to us pursuant to the deposit agreements as of December 31,
2007 is also NIS 185.4 million, which amount is also not recorded in our
financial statements. The non-recording of the above amounts in our financial
statements is due to the present uncertainty concerning their eventual payment.
As of March 31, 2008, the aggregate amount of the accrued and unpaid dividends
in respect of the above shares is approximately NIS 178.5 million.


                                       7`

`On September 28, 2004, various financial entities that hold our class C,
class CC and/or class CC1 Shares filed with the Tel Aviv District Court an
originating motion in which the Court was requested to instruct us to pay to our
shareholders back dividends at the same rate and relevant quarterly dates as was
paid until we last paid a dividend for the second quarter of 2002.

     Our Board of Directors was of the opinion that the aformentioned matter
relating to dividends is related to the question of whether, under the
circumstances of a non-distribution of dividends, interest on the Perpetual
Deposit accrues in favor of the Bank. Since the responses received at the time
from the Ministry of Finance in this matter have been unclear and insufficient,
we filed an originating motion with the Tel Aviv District Court seeking a
declaratory judgment against the State and the aformentioned financial entities
which would provide that the interest on the Perpetual Deposit is indeed accrued
in favor of the Bank, as was the position of our Board of Directors on this
matter. Following the motion filed by us and by the aforementioned financial
entities, the Court ordered that the hearing on the two originating motions be
consolidated. In the reply of the Minister of Finance to the originating motions
prior to a preliminary hearing that was held on January 12, 2006, the Minister
of Finance announced that his position is that the interest on the Perpetual
Deposit does not accrue in our favor when we do not distribute a dividend, and
that in any event, in light of our circumstances, there is no justification for
our distributing a dividend.

     On March 23, 2006, the Court ruled that it will first consider the issue of
the accrual of the interest on our deposits with the Treasury, since the
decision on this issue will advance the proceeding and the decisions regarding
the other relevant issues. At the time, our Board of Directors expressed its
position in principle that if it was ruled that the interest on the Perpetual
Deposit would not accumulate, our Board of Directors would reconsider the
distribution of dividends, subject to the legal and regulatory restrictions that
bound us on this matter, and in this context the need to obtain permission and
amendments to our Articles of Association. On August 5, 2007 the Tel Aviv
District Court dismissed our originating motion against the Minister of Finance
and against the abovementioned financial institutions, and ruled that so long as
no dividend was distributed to our preferred shareholders, there would be no
interest accumulated on the Perpetual Deposit.

     At its meeting on October 9, 2007, our Board of Directors discussed the
ramifications of the ruling. The Board of Directors decided that since our
originating motion referred not only to the issue of the accumulated interest on
the Perpetual Deposit in the absence of the distribution of a dividend, but also
to its accumulation and payment when the dividend in arrears is paid (including
at the time of liquidation), in order to avoid what the Board believes is an
unintended result, where our right to the accumulated interest against payment
of the dividend in arrears on the Preferred Shares are also denied, the Bank
should file an appeal on the dismissal of the claim with regard to the payment
of accumulated interest on the Perpetual Deposit against payment of the dividend
in arrears. However, our Board of Directors added in its decision that no appeal
would be filed if we were given adequate clarification by the State on its
consent to pay the accumulated interest on the Perpetual Deposit against payment
of the dividend in arrears on our Preferred Shares. This clarification was not
provided and we filed an appeal with the Supreme Court on January 6, 2008.


                                       8`

`At the abovementioned meeting on October 9, 2007, our Board of Directors
discussed the ramifications of the abovementioned ruling on the Board's
continued policy regarding the distribution of dividends on our Preferree
Shares. In view of the ruling with regard to the non-accumulation of interest on
the Perpetual Deposit at the Ministry of Finance so long as no dividend is
distributed (a ruling that we do not dispute), and since our Board of Directors
considered the interests of both our shareholders and of our creditors (who in
view of the ruling no longer benefit from the non-distribution of the dividend),
our Board of Directors concluded that we should act to renew the distribution of
dividends. In this context, our Board of Directors decided (at the
abovementioned meeting) to undertake a number of measures: 1) to recommend at
our General Meeting to amend our Articles of Association with regard to two
matters relating to the renewal of the distribution of dividends, one, to
authorize the distribution of dividends not only from profits (which do not
exist at this stage) but also from the interest that will be paid to us on the
Perpetual Deposit, and the other, to authorize the distribution of a current
preferred dividend on our preference shares even without a distribution - either
preceding or simultaneously - of preferred dividends in arrears (since, in view
of the wording of the ruling, a claim is liable to be made that we are not
entitled to the accumulated interest on the Perpetual Deposit against the
distribution of dividends in arrears, a result that will prevent us from
distributing dividends in arrears in the absence of sufficient profits); 2) to
summon a General Meeting of the bank to amend our Articles of Association as
mentioned above, and to authorize the Chairman of our Board of Directors to set
the date for this meeting; 3) to ask the Supervisor of Banks for permission for
the distribution to the preferred shareholders, subject to the above amendments
of the Articles of Association and the approval of the Court for the proposed
distribution (in accordance with the Companies Law - 5759-1999, distribution of
dividends in cases in which there are no profits suitable for distribution
requires a court approval, and on that date we had no profits suitable for
distribution). A detailed description of our Board of Directors' decisions at
the abovementioned meeting of October 9, 2007 is found in the Immediate Report
published by us on October 10, 2007. In accordance with the abovementioned
decision of our Board of Directors, a General Meeting of the bank was convened
on January 7, 2008. On the agenda were the abovementioned proposals to amend our
Articles of Association so that the Articles of Association would not continue
to constitute a hindrance to the renewal of the distribution of dividends. The
proposals for amending the Articles of Association were submitted to a vote, but
were rejected by the majority of voters. On February 5, 2008, the financial
institutions that had filed the abovementioned originating motion against us,
motioned the court to attach the State as an additional respondent, in part
because of the vote of the State at our General Meeting against the proposals to
amend our Articles of Association as mentioned above.

     The "agreement document" signed between the State and the financial
institutions that filed the originating motion against us, which follows the
document of principles of March 18, 2008 signed between the State, the
abovementioned financial institutions, and some of our holders of Preferred
Ordinary Shares and which states the undersigned parties' consent to implement a
blueprint for the sale of our shares and to cooperate in its implementation, the
abovementioned financial institutions and the State agreed that in the framework
of the Section 350 Arrangement, which would be filed with the Court as part of
the sale blueprint would include, among other things, the following
stipulations:

     o    The State and the abovementioned financial institutions will not
          object to the return to us of the Perpetual Deposit on July 31, 2008
          or on the date that the arrangement is approved, whichever comes
          later.


                                       9`

`o    If the sale of the bank is not completed by December 31, 2009 or if an
          order for liquidation against us is issued before then or if our
          General Meeting decides to voluntarily liquidate it (all of these
          "liquidation of the bank"), the following provisions will apply:

          A)   The State will pay us 50% of the interest at 6% a year
               accumulated on the Perpetual Deposit with regard to C Shares, CC
               Shares, and CC1 Shares for the period from July 1, 2002 through
               July 31, 2008. This amount will be paid on the date that the bank
               is liquidated, or on December 31, 2009, whichever comes first
               ("the Payment Date").

               This amount will bear the linkage and interest differentials in
               accordance with the Adjudication of' Interest and Linkage Law
               5721-1961 beginning on July 31, 2008 and until the Payment Date,
               which will be paid by the State on the Payment Date. The payment
               by the State will be grossed-up in accordance with the Perpetual
               Deposit agreements.

          B)   We will pay holders of C Shares, CC Shares, and CC1 Shares on the
               Payment Date a dividend at the rate of 50% of the preferred
               dividend accumulated at a rate of 6% a year for the period from
               July 1, 2002 through July 31, 2008 plus linkage and interest
               differentials in accordance with the Adjudication of' Interest
               and Linkage Law 5721-1961 beginning on July 31, 2008 and until
               the Payment Date.

          C)   The State will forego its demands and claims against us and/or
               our liquidator with regard to payment of 50% of the dividend to
               the State, as the shareholder of preferred D Shares and DD
               shares, for the period beginning on July 1, 2002 and ending on
               July 31, 2008.

          D)   Subject to full payment accruing to them in accordance with
               section B) above, the shareholders of C Shares, CC Shares, and
               CC1 Shares will have no claims with regard to the non
               distribution of dividends during the period beginning on July 1,
               2002 and ending on the Payment Date. To remove all doubt, nothing
               stated above derogates from the rights of the abovementioned
               shareholders to the accumulated preferred dividends on their
               shares in accordance with our Articles of Association, including
               with regard to the abovementioned period.

     o    Subject to payment of the amounts owed to them from the proceeds of
          the sale of our shares, or - if the sale is not executed - subject to
          the payment of 50% of the abovementioned dividend, the shareholders of
          C Shares, CC Shares, and CC1 Shares will forego their demands and
          claims towards the State with regard to the payment of the dividend
          for any past period or future period or with regard to the perpetual
          deposit and the return of its proceeds to us.

     o    Upon approval of the arrangement by the court, the originating motion
          filed by the abovementioned financial institutions and the appeal
          filed by us on January 6, 2008 to the Supreme Court will be dismissed.
          Dismissal of the appeal will be binding on us and on the State only
          for the relations between them with regard to the part of the
          Perpetual Deposit for the various C type shares.

     On April 29, 2008, the Ministerial Committee for Privatization Issues made
its decision regarding the privatization of the bank. This decision stipulated,
among other things, that on the basis of the document of principles of March 18,
2008 signed between our shareholders (and for the abovementioned subsequent
agreement document), we will submit the Section 350 Arrangement for approval.


                                       10`

`At the meeting on May 26, 2008, our Board of Directors approved the
submission of the Section 350 Arrangement.

     See Notes 16 and 21 to the financial statements in Item 17 of this Annual
Report on Form 20-F for additional details regarding this originating motion,
the cessation of dividend distribution and the matter of the accrued interest on
the Perpetual Deposit.

     Under the circumstances, it is unclear when or if the payment of dividends
will be resumed.

     TO CONTINUE OUR LIMITED OPERATIONS, WE ARE DEPENDENT ON A SPECIAL LINE OF
CREDIT EXTENDED BY THE BANK OF ISRAEL.

     In August 2002, as a result of the liquidity crisis we experienced at that
time, we started drawing on our account with the Bank of Israel. The Governor of
the Bank of Israel had notified us on September 9, 2002 of his decision to
extend to us a Special Line of Credit (the "Special Line of Credit"), in order
to permit us to continue our ongoing operations, and the line was actually
granted on November 14, 2002. In connection with the governmental approval of
the Run-Off Plan in July 2003 and its extension of the plan in October 2005, the
Special Line of Credit was amended and restated to provide funding for us
throughout the run-off period, subject to certain covenants and commitments. In
accordance with the governmental approval of the Run-Off Plan, the Government of
Israel has: (1) assumed responsibility for the repayment of the Special Line of
Credit as of July 1, 2005, subject to the condition that the interest on the
Special Line of Credit will not exceed, until the expiration of the Run-Off
Plan, the "Bank of Israel's Interest Rate"; and (2) undertaken that if upon the
expiration of the Run-Off Plan, there shall remain an unpaid balance of the
Special Line of Credit, the government will repay such balance to the Bank of
Israel by July 31, 2008. On April 13, 2008, the Governor of the Bank of Israel
announced the extension of the Special Line of Credit, until the earlier of (i)
December 31, 2008, and (ii) or the Court approval of a compromise (the "Section
350 Arrangement") among the Bank's shareholders, the State of Israel and the
Bank pursuant to Section 350 of the Companies Law-1999 (the "Companies Law").
The extension of the Special Line of Credit after July 31, 2008 is subject to
several conditions, including an appropriate government resolution, extension of
the State guarantee to repay the full amount of the Special Line of Credit,
execution of the necessary amendments and additions to the debenture provided by
the Bank for the benefit of the Bank of Israel on November 14, 2002 and amended
on December 29, 2005, and the incorporation of the comments of the Bank of
Israel into the arrangement application. See "Item 4.- "Information on the
Company-Business Overview" below, for a discussion of the terms of the Special
Line of Credit..

     Our failure to comply with the covenants contained in our Special Line of
Credit could result in an event of default or a termination of the Special Line
of Credit, either of which could materially and adversely affect our operating
results and our financial condition.


                                       11`

`If the Special Line of Credit from the Bank of Israel were to be terminated
prior to the date when the Perpetual Deposit with the Ministry of Finance will
be returned to us, then, in the absence of any alternative liquidity source, we
would have difficulty in our operations.

     WE ARE SUBJECT TO CREDIT RISK.

     We are subject to credit risk, I.E., the risk that our borrowers and other
counterparties may become unable to meet their payment obligations to us. Risks
arising from changes in credit quality and the recoverability of loans and
amounts due from counterparties are inherent in a wide range of our businesses.
Adverse changes in the credit quality of our borrowers and counterparties or a
general deterioration in Israeli or global economic conditions, or arising from
systemic risks in the financial systems, could affect the recoverability and
value of our assets and require an increase in the provision for bad and
doubtful debts and other provisions.

     Although we regularly review our exposure to specific borrowers and other
counterparties whom we believe present special concerns, defaults may arise from
events and circumstances that are difficult or impossible to predict or detect.
In addition, the value of any collateral we hold may deteriorate, for example,
as a result of sudden market declines. Accordingly, if a major borrower or other
counterparty were to default on its obligations, our results of operations and
financial condition could suffer.

     As stated above, our main remaining operations relate to the collection of
existing loans. Credit risk is, therefore, a substantial risk for us because our
ability to collect on existing loans will affect our financial results.

     BECAUSE OF OUR PRESENT SITUATION, IT IS POSSIBLE THAT OUR CREDIT RISK MAY
BE INCREASED; WE ARE SPENDING MORE ON COLLECTION OF DEBTS AND LITIGATION
RELATING TO SUCH COLLECTION.

     We believe that some borrowers and other counterparties may try to avoid
honoring their obligations to us because of our present financial situation.
Borrowers and counterparties do not expect to have a long-term relationship with
us and they may be more likely to seek concessions from us with respect to their
debts. In addition, borrowers and counterparties may believe that due to our
situation, we will not aggressively collect on our existing loans. As a result,
borrowers and counterparties may be less likely to pay their debts to us and
there is an increased credit risk for us.

     We intend to diligently collect our existing loans and, in connection
therewith, we may commence litigation with respect to those collections if
necessary. As a result, we may have more expenses in connection with collecting
existing loans.

     WE MAY SUFFER ADDITIONAL LOSSES IN THE FUTURE DUE TO PROBLEM LOANS.

     We have a substantial volume of problem loans and loans that may become
problem loans. Some of our borrowers may face increasingly challenging
circumstances. Our problem loans and credit-related expenses could increase if:
(a) economic conditions in Israel deteriorate; (b) real estate prices or stock
prices in Israel decline; (c) the rate of corporate bankruptcies in Israel
rises; (d) our large borrowers become insolvent or must be restructured; (e)
additional economic problems arise elsewhere in the world; or (f) the global
economic environment deteriorates generally.


                                       12`

`An increase in problem loans and credit-related expenses would adversely
affect our remaining operations, would weaken our financial condition and would
erode our capital base.

     OUR ALLOWANCE FOR DOUBTFUL DEBTS MAY BE INSUFFICIENT TO COVER LOSSES
INHERENT IN THE LOAN PORTFOLIO.

     Our allowance for doubtful debts in our loan portfolio is based, among
other things, on assumptions and estimates about our customers, the value of
collateral we hold and the economy as a whole and provides a reserve against
losses inherent in loans. Estimating losses, however, is inherently uncertain
and depends on many factors, including general economic conditions, changes in
our appraisal of the financial standing of our borrowers and other
counterparties, structural changes in industries that alter the competitive
positions of the companies operating in these industries as well as other
external factors, such as legal and regulatory requirements.

     Our actual loan losses could prove to be materially different from our
estimates and could materially exceed our allowance. If our actual loan losses
are higher than we currently expect, our current allowance for doubtful debts
will be insufficient. If general economic conditions deteriorate, causing us to
change some of our assumptions and estimates, if the value of collateral we hold
declines or if we are adversely affected by other factors to an extent that is
worse than anticipated, we may have to provide for additional allowance for
doubtful debts.

     OUR RECOVERIES FROM TROUBLED BORROWERS MAY BE LOWER THAN EXPECTED.

     We may forbear from exercising some or all of our rights as a creditor
against troubled borrowers, and we may forgive loans to them in conjunction with
their debt restructuring. Even when our legal rights might permit us to take
stronger action against the borrower and even when others might take stronger
action against the borrower, we may take other steps in order to maximize
recovery or to reduce exposure in the short term.

     WE MAY EXPERIENCE LOSSES BECAUSE OUR REMEDIES FOR CREDIT DEFAULTS BY OUR
BORROWERS ARE LIMITED.

     We may not be able to realize the value of collateral we hold or enforce
our rights against defaulting customers because of the difficulty of foreclosing
on collateral and/or the depressed value of collateral.

     SINCE OUR LOAN PORTFOLIO IS CONCENTRATED IN ISRAEL, ADVERSE CHANGES
AFFECTING THE ISRAELI ECONOMY COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

     Our loan portfolio is concentrated in Israel. As of December 31, 2007,
nearly 100% of our loans were made to Israeli resident borrowers. Therefore,
adverse changes affecting the Israeli economy would likely have a significant
adverse impact on our loan portfolio and, as a result, on our financial
condition, cash flows and results of operations.


                                       13`

`THE ISRAELI ECONOMY CAN BE DIRECTLY AND NEGATIVELY AFFECTED BY ADVERSE
DEVELOPMENTS IN OTHER COUNTRIES.

     Financial and securities markets in Israel are, to varying degrees,
influenced by geopolitical, economic and market conditions in other countries.
Negative developments in the geopolitical environment, the economy or securities
markets in other countries may have a negative impact on the Israeli economy.
These developments may adversely affect our remaining business, financial
condition and operating results.

     EVEN WITH OUR LIMITED ACTIVITIES, WE ARE SUBJECT TO CERTAIN RISKS TYPICAL
OF BANKING ACTIVITIES, SUCH AS MARKET RISK, INTEREST RATE RISK AND CURRENCY
RISK.

     We are subject to the risks typical of banking activities, such as
fluctuations in the prevailing levels of interest rates and exchange rates and
capital market volatility. For more information on these risks, see "Item 11.
Quantitative and Qualitative Disclosures About Market Risk" below.

     DIFFERENT DISCLOSURES AND ACCOUNTING PRINCIPLES BETWEEN ISRAEL AND THE
UNITED STATES MAY PROVIDE YOU WITH DIFFERENT OR LESS INFORMATION ABOUT US THAN
YOU EXPECT.

     There may be less publicly available information about us than is regularly
published about companies in the United States. While we are subject to the
periodic reporting requirements of the U.S. Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the disclosure required from foreign issuers under
the Exchange Act is more limited than the disclosure required from U.S. issuers.
Additionally, we present our financial statements under Israeli GAAP which
differs from U.S. GAAP. For the discussion of the differences between Israeli
GAAP and U.S. GAAP, see "Item 17. Financial Statements."

     OUR MANAGEMENT HAS IDENTIFIED CERTAIN ISSUES RELATING TO THE PROCESSING AND
REPORTING OF INFORMATION AS REQUIRED BY THE RULES AND REGULATIONS OF THE U.S.
SECURITIES AND EXCHANGE COMMISSION, AS DESCRIBED MORE FULLY IN ITEM 15.

     Our management has concluded that our disclosure controls and procedures
were, as of the end of the period covered by this Annual Report on Form 20-F,
effective to provide reasonable assurance that information required to be
disclosed by us is recorded, processed, summarized, reported and communicated to
our management as appropriate to allow timely decisions regarding required
disclosure. In reaching that conclusion, our management identified certain
issues relating to the processing and reporting of information, as discussed
below in Item 15. One of those issues mentioned in Item 15 is that our system of
financial reporting was not designed to reconcile our financial statements
(which are prepared in accordance with Israeli GAAP) with U.S. GAAP in
accordance with the requirements of Form 20-F. To address this issue, our
accounting personnel have outlined the issues relevant to the reconciliation of
our financial statements to U.S. GAAP and the methods of preparing such a
reconciliation. In addition, we have retained U.S. counsel to advise us as to
the requirements of Form 20-F and related U.S. Securities and Exchange
Commission ("SEC") rules and regulations. In preparing the reconciliation of our
financial statements, our accounting personnel are guided by the experience they
acquired in the reconciliation of previous annual reports. Our accounting
personnel regularly consult with, and seek the assistance of, outside advisors
in connection with the required reconciliation of our financial statements to
U.S. GAAP. Moreover, they periodically seek from such outside advisors relevant
updates regarding SEC and PCAOB rules and regulations relating to reconciliation
to U.S. GAAP. A discussion of these and other issues can also be found in Item
15.


                                       14`

`However, we cannot assure you that the measures we have taken to date or
any future measures will remediate the above issues or those identified in Item
15 of our Annual Report on Form 20-F. In addition, we cannot assure you that
additional issues will not be discovered in the future. Any failure to remediate
the above issues or those identified in Item 15 could cause us to fail to meet
our reporting obligations.

OUR ABILITY TO CONTROL THE DIVERSIFICATION OF OUR CREDIT RISKS IS ALMOST
NONEXISTENT.

     As aforementioned, we no longer provide credit. We presently engage in
collecting credit provided in the past, and we are working on reaching debt
arrangements as part of this process.

     The ability to collect credit is also affected by matters that are external
to the Bank, such as the condition of the economy in general and of the
borrowers in particular, and the policy of other banks with respect to the
provision of credit to customers.

     As of December 31, 2007, the balance of credit to the public amounts to NIS
5,521 million. This credit includes credit in the amount of NIS 4,963 million to
the Israel Electric Corporation Ltd. for which a State guarantee was received as
collateral. (Except as otherwise indicated, the data provided below excludes the
credit to Israel Electric Corporation Ltd.) Net of this credit the balance of
credit to the public amounts to NIS 558 million. The fact that we have refrained
from providing new credit for more than five years has reduced our ability to
diversify our credit risks in accordance with credit risk diversification
accepted parameters to a minimum as described below:

     DIVERSIFICATION OVER ECONOMIC SECTORS - Our industrial credit constitutes
47% of the balance sheet credit balance compared with 14% of the total
industrial credit of the five largest Israeli banking groups. Our balance sheet
credit to various commerce sectors constitutes 2.6% of the credit compared with
8.9% of the credit to various commerce sectors of ordinary banks. Our credit to
private households amounts to an insignificant rate of 0.6% compared with 31.9%
of the credit to private households of the five largest Israel banking groups..
The comparative data of the banking system is for December 31, 2006.

     The aforementioned shows that the rate of our industrial credit is
significantly higher than the accepted rate of the banking system and that the
level of diversification of credit over economic sectors is lower than that
accepted in the banking system, with this being particularly prominent in
respect of the credit to private households.

     DIVERSIFICATION OF CREDIT ACCORDING TO SIZE OF BORROWER - As of December
31, 2007, the overall credit risk of the borrowers, net of the credit to the
Israel Electric Corporation Ltd., which is guaranteed by the State of Israel,
amounts to NIS 722 million. The overall credit risk in respect of our fifteen
largest borrowers amounts to NIS 413 million and constitutes 57% of the credit
balance.


                                       15`

`Pursuant to data for the year-end 2006, the weight of the fifteen largest
borrowers in the five largest banking groups in Israel constitutes 2.7% of the
overall credit risk of these banking groups. Hence, compared to the norm in the
banking system, we have a higher degree of concentration of credit to large
borrowers.

     CREDIT TO PROBLEMATIC BORROWERS - The total balance sheet credit of the
borrowers whose debt is classified as problematic amounts to NIS 309 million,
constituting 51% of the balance sheet credit, compared with 8.4% in the five
largest banking groups (as at December 2006). The balance of the debt classified
as non-income bearing amounts to NIS 70 million, about 11.6% of the balance
sheet credit, compared with 1.9% in the five largest banking groups. The high
weight of our problematic debts compared with that of the five largest banking
groups is due to, among other reasons, our being engaged in the collection of
credit for more than five years and not providing any new credit. Also, because
collecting credit from problematic customers is slower than collecting from
other customers, the weight of the problematic debts has risen over the years.

     As aforementioned, our ability to control the diversification of the credit
risks described above is almost nonexistent.

     VOLATILITY IN THE PRICES OF MARKETABLE SHARES, PARTICULARLY OF ONE COMPANY,
MAY NEGATIVELY AFFECT OUR INVESTMENT PORTFOLIO.

     The volume of our investment in securities, as of December 31, 2007,
amounted to NIS 46 million, of which NIS 34 million is invested in marketable
securities. This value is based on the market price of the securities as of the
balance sheet date. The value is subject to the volatility of the prices of the
shares included in this item. Most of the investment in marketable securities
(NIS 32.9 million) is in shares of one company which is included in the Tel Aviv
25 Index.

     VARIOUS LEGAL RISKS ARE INHERENT IN OUR BUSINESS

     In the course of our activities we are exposed to legal risks, including
the risk of incurring a loss as a result of there being no possibility of
legally enforcing the execution or performance of an agreement. These risks are
handled on a regular basis by our legal department, but this cannot ensure that
all the risks were taken into account or that identified risks will not
materialize in the future.

     VOLATILITY IN INTEREST RATES MAY NEGATIVELY AFFECT OUR NET INTEREST INCOME
AND INCREASE OUR NON-PERFORMING LOAN PORTFOLIO.

     Changes in market interest rates could affect the interest rates charged on
the interest-earning assets differently than the interest rates paid on
interest-bearing liabilities. Our Special Line of Credit, which is our main
source of liquidity, bears interest at the Bank of Israel rate. Any increases in
the Bank of Israel rate would result in an increase in our interest expenses
relative to interest income, which would result in a reduction in our net
interest income. Since a substantial part of our loan portfolio reprices in less
than one year, rising interest rates may also bring about an increase in the
volume of problem loans. Interest rates are highly sensitive to many factors
beyond our control, including deregulation of the financial sector, monetary
policies, domestic and international economic and political conditions and other
factors.


                                       16`

`OUR REMAINING OPERATIONAL RISKS ARE INHERENT IN OUR BUSINESS.

     Our remaining business activities are dependent on the ability to process
transactions efficiently and accurately. Operational risks and losses can result
from fraud, errors by employees, failure to document transactions properly or to
obtain proper internal authorization, failure to comply with regulatory
requirements and rules, equipment failures, natural disasters or the failure of
external systems, of our suppliers or counterparties. Although we have
implemented risk controls and we devote substantial resources to developing
efficient procedures, we cannot be absolutely certain that such procedures will
be effective in controlling each of the operational risks we face.

     THERE IS CURRENTLY NO ESTABLISHED TRADING MARKET IN THE UNITED STATES FOR
ANY OF OUR SECURITIES.

     There can be no assurance as to (a) the liquidity of any market that may
develop for our securities in the United States or elsewhere, (b) the ability of
the holders of the securities to sell them in the United States or elsewhere or
(c) the prices at which any sales of our securities may be made. Some of our
securities are listed on the Tel Aviv Stock Exchange (the "TASE").

     WE HAVE DRAMATICALLY REDUCED THE NUMBER OF OUR EMPLOYEES; WE RELY ON OUR
REMAINING EMPLOYEES TO ASSIST US IN CONDUCTING OUR OPERATIONS.

     In accordance with the terms of the Run-Off Plan, we have dramatically
reduced the number of our employees. Our ability to continue operating depends
to a large extent upon the continued services of our remaining senior management
and employees. The loss of the services of our remaining personnel could have a
material adverse effect on our business, financial condition or results of
operations and our ability to function in the future.

     OUR INDEBTEDNESS FOR OUR CAPITAL NOTES IS SUBORDINATED AND UNSECURED .

     In 1974, we issued U.S.$ 50 million subordinated capital notes bearing
interest at an annual rate of 7.5%. Under their terms, subject to the provisions
of the following paragraph, the capital notes are redeemable at the election of
the holder beginning on December 31, 1998 and, thereafter, every 18 months, and
at our election at any time after January 1, 1981.

     The capital notes are perpetual. The outstanding principal amount of the
capital notes is payable at certain enumerated times at the option of the
holder. The holder of capital notes, in order to receive payment of the
outstanding principal amount of the capital notes, must deliver the capital
notes for cancellation to the agent designated by us together with a written
demand for payment. The first date on which the outstanding principal amount
could be paid to holders who submitted the notes and the written demand was
December 31, 1998. After December 31, 1998, the holders of capital notes are
able to submit notes and written demands to obtain payment of the outstanding
principal amount every 18 months until all of the capital notes are paid off.
The holders must deliver their notes and written demands at least 30 days prior
to the date of payment.


                                       17`

`The principal amount of our outstanding capital notes as of June 30, 2008
was $5,245,245.

     We deposited the proceeds of the issuance of the capital notes with the
Ministry of Finance of the State of Israel pursuant to a deposit agreement.
According to the deposit agreement, the deposit earns interest at the annual
rate of 7.5%, payable to us on the payment dates for the interest on the capital
notes, and the Government undertook to repay the deposit to us upon the
redemption of the capital notes (together with premium, if any, paid on them) or
upon the winding up of our bank, whichever is earlier. According to a letter
addressed to us from the General Comptroller of the Treasury, the payment of
interest on the deposit and the return of the principal amount of the deposit
will be effected together with linkage increments to the U.S. dollar.

     According to the terms of the capital notes, our indebtedness under the
notes is subordinated in right of payment to all our secured indebtedness and
obligations and to all our future indebtedness and obligations, secured or
unsecured, which by their terms shall be senior in right of payment to the
notes, and rank equally to all our other unsecured indebtedness and obligations.
We have pledged (by a floating charge) a substantial portion of our assets in
favor of the Bank of Israel, as collateral for the repayment of the Special Line
of Credit. We have also pledged in favor of some other Israeli banks certain
deposits we have deposited with them, in order to secure our obligations to
them. We are not aware of any unsecured indebtedness or obligations which by
their terms are senior in right of payment to the capital notes. However, under
Israeli law, certain types of indebtednesses of a company are deemed to have
priority, in the event of winding up or receivership proceedings, over regular
unsecured debts, such as indebtedness to employees, indebtedness to the income
tax authorities, and rental obligations. The amount of the secured debt ranking
prior to the right of payment to the notes, as of December 31, 2007, was NIS 485
million.

     Even though the Government has undertaken to pay us interest back-to-back
with the payment of interest on the capital notes and to pay us the outstanding
principal amount of the capital notes upon their redemption or upon our winding
up, the Government's obligation inures to our favor and not to the favor of the
holders of the capital notes and, therefore, in the event of our insolvency, the
Government's obligation does not guarantee that the payment due to the holders
of the capital notes will be made.

     THE TRADING ON THE TEL AVIV STOCK EXCHANGE IN OUR SECURITIES MAY BE
RESTRICTED AND THESE SECURITIES MAY EVENTUALLY BE DELISTED.

     Our Preferred Ordinary Shares, our C Shares, CC Shares, CC1 Shares and our
capital notes are traded on the TASE. Pursuant to the rules and procedures
adopted by the TASE, securities of a company which are traded on the exchange
must abide by certain preservation requirements concerning the minimum value of
the public's holdings in such class of securities and the minimum capital of the
company. Securities are reviewed every six months to see if they comply with the
preservation requirements. If a class of securities fails to comply with the
preservation requirements on two consecutive reviews, it is moved to a special
list (the "preservation list") and, thereafter, is traded on a limited basis. If
within 12 months of being placed on the preservation list the securities do not
fulfill the conditions to enable their return to regular trading, then (subject
to certain provisions which allow an extension of the above 12 month time
frame), the class of securities will be de-listed from trading.


                                       18`

`While we believe that we are currently in compliance with the preservation
requirements, there can be no assurance that, as a result of a decrease in the
value of the public's holdings or otherwise, we will continue to be in
compliance with those requirements. If our shares or our capital notes traded on
the TASE were to be moved to the preservation list or delisted, their liquidity
would be adversely affected.

     On August 12, 2007, the TASE launched a new list for lightly-traded shares.
Trading in such shares takes place only twice a day, at the start and end of the
trading session. Trading is carried out by a call-auction and there is no
continuous trading in these shares. A share is included in this list if the
median daily trading volume during the six month period prior to the
"determining date" is below NIS 2,000 and if the average turnover in the share
is below NIS 20,000. The "determining date" to be included in the list is June
15, 2007. The list will be updated twice a year, on June 15 and December 15 of
each year. On June 24, 2007, the TASE advised us that according to
trading-volume data for the six month period ending on June 15, 2007, our
Preferred Ordinary Shares and our C Shares, CC Shares and and CC1 Shares were
marked for inclusion in the new list. On December 25, 2007, the TASE advised us
that our Preferred Ordinary Shares and our C Shares would be removed from this
list, while our CC Shares and CC1 Shares would remain on the lightly-traded
sharse list. On June 29, 2008, the TASE advised us that our Preferred Ordinary
Shares and our C Shares would again be included in the list.

     YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE UNITED STATES
AGAINST OUR OFFICERS AND DIRECTORS.

     All of our directors and executive officers are non-residents of the United
States. A significant portion of our assets and the personal assets of our
directors and executive officers are located outside the United States.
Therefore, it may be difficult to effect service of process upon any of these
persons within the United States. In addition, a judgment obtained in the United
States against us, and most of our directors and executive officers, including
but not limited to judgments based on the civil liability provisions of the U.S.
federal securities laws, may not be collectible in the United States.

     Generally, it may also be difficult to bring an original action in an
Israeli court to enforce liabilities based upon the U.S. federal securities laws
against us and most of our directors and executive officers. Subject to
particular time limitations, executory judgments of a United States court for
liquidated damages in civil matters may be enforced by an Israeli court,
provided that:

     (1)  the judgment was obtained after due process before a court of
          competent jurisdiction, that recognizes and enforces similar judgments
          of Israeli courts, and according to the rules of private international
          law currently prevailing in Israel;


                                       19`

`(2)  adequate service of process was effected and the defendant had a
          reasonable opportunity to be heard;

     (3)  the judgment and its enforcement are not contrary to the law, public
          policy, security or sovereignty of the State of Israel;

     (4)  the judgment was not obtained by fraud and does not conflict with any
          other valid judgment in the same matter between the same parties;

     (5)  the judgment is no longer appealable; and

     (6)  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
          foreign court.

     POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL MAY LIMIT OUR ABILITY TO
CONTINUE OUR OPERATIONS. THIS COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR
REMAINING OPERATIONS AND BUSINESS.

     We are incorporated under the laws of the State of Israel, where we also
maintain our offices. Political, economic and security conditions in Israel
directly influence us. Since the establishment of the State of Israel in 1948,
Israel and its Arab neighbors have engaged in a number of armed conflicts. A
state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Major hostilities between Israel and its neighbors
may hinder Israel's international trade and lead to economic downturn. This, in
turn, could have a material adverse effect on our remaining operations and
business.

     Our offices are located in Israel. Our operations could be materially and
adversely affected by acts of terrorism or if major hostilities should occur in
the Middle East or trade between Israel and its present trading partners should
be curtailed, including as a result of acts of terrorism in the United States.
Any such events may not be covered by insurance.

     TERRORIST ATTACKS IN ISRAEL AND GLOBALLY MAY HAVE A MATERIAL ADVERSE EFFECT
ON OUR OPERATING RESULTS.

     Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, terrorist attacks in Israel and other
acts of violence or war may affect the markets on which our securities trade,
the markets in which we operate, and our remaining operations during the run-off
period. We cannot assure you that there will not be further terrorist attacks
against the United States or Israel, or against American or Israeli businesses.
These attacks or subsequent armed conflicts resulting from or connected to them
may directly impact our remaining business during the run-off period or the
operations of our customers. Furthermore, the ongoing armed conflicts around the
world such as in Iraq could have a further impact on our remaining operations.


                                       20`

`WE ARE INVOLVED IN LITIGATION ALLEGING VIOLATIONS OF THE SECURITIES LAWS OF
THE STATE OF ISRAEL THAT MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

     In March 2003, a derivative action was filed in Israel against us and
certain of our present and former officers and directors. The derivative action
alleges that the officers and directors breached their duty of care to us and
were negligent in carrying out their duties. Under Israeli law, the derivative
action has to be approved by the Court. The parties' witnesses were
cross-examined on May 26, 2005 and the last written summations were filed during
the last quarter of 2005. On June 18, 2006, the Court rendered its decision
rejecting the motion to certify the derivative action and awarded the
respondents legal fees in the amount of NIS 40,000. On September 18, 2006, the
plaintiff appealed the decision to reject the motion to approve the suit as a
derivative suit to the Supreme Court. The parties to the appeal submitted
written summations and supplemental oral arguments were heard on February 14,
2008. As of yet, the Supreme Court has not rendered its decision.

     On June 1, 2005, we received notice from counsels to our insurers that our
insurers have reservations as to the validity of the insurance coverage for the
action mentioned above and that they reserve their rights in this matter. The
bank has given notice to the insurers that it categorically rejects these
reservations and intends to enforce its rights against the insurers.

     It is difficult to predict the outcome of this legal proceeding. The
litigation process is inherently uncertain. Whatever the outcome of this
proceedings is, we could incur substantial costs and we will expend a
significant amount of time and attention. Since the derivative action is an
action in the name and on behalf of the company, it is the opinion of our legal
advisors that our main exposure in these proceedings is for expenses including
court costs, attorneys fees and special remuneration to the plaintiff.

     POTENTIAL CLAIMS RELATING TO OUR BANKING OPERATIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.

     We may be subject to claims relating to our banking operations. Our
agreements with our business customers generally contain provisions designed to
limit our exposure to potential claims, but these provisions may be declared
void or modified by the Court, if the Court determines that they are prejudicial
in accordance with the Standard Contracts Law -1982 (Israel). We also maintain
an insurance policy. However, our insurance may not cover all relevant claims or
may not provide sufficient coverage. Our remaining business, financial condition
and operating results could be materially adversely affected if costs resulting
from current and future claims are not covered by our insurance or exceed our
coverage.

     In addition, as detailed in Item 6 below, our Bank issued to our Officers
and Directors letters of indemnification that cover any monetary indebtedness
imposed on them in favor of another person by court ruling (including a ruling
rendered as part of a compromise or arbitration ruling approved by the court)
and which are connected or which derive from events set out in the letters of
indemnification. In the future, claims could be made against our Officers and
Directors. If such claims were to be successful, it could have a material
adverse effect on our business.


                                       21`

`YOUR RIGHTS AND RESPONSIBILITIES AS A SHAREHOLDER WILL BE GOVERNED BY
ISRAELI LAW AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF
SHAREHOLDERS UNDER U.S. LAW.

     We are incorporated under Israeli law. The rights and responsibilities of
holders of our shares are governed by our Memorandum of Association, our
Articles of Association and by Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of an Israeli company
has a duty to act in good faith toward the company and other shareholders and to
refrain from abusing his power in the company, including, among other things, in
voting at the general meeting of shareholders on certain matters.

ITEM 4. INFORMATION ON THE COMPANY

     THE FINANCIAL INFORMATION PRESENTED IN THIS ITEM BELOW IS BASED ON ISRAELI
GAAP, WHICH MAY DIFFER MATERIALLY FROM U.S. GAAP. FOR A RECONCILIATION OF OUR
FINANCIAL INFORMATION TO U.S. GAAP, SEE "ITEM 3.A. SELECTED FINANCIAL DATA" AND
"ITEM 17. FINANCIAL STATEMENTS."

A.   HISTORY AND DEVELOPMENT OF THE COMPANY

     The Industrial Development Bank of Israel Limited was incorporated under
the laws of the State of Israel on October 7, 1957. Our initial purpose was to
encourage and assist in the establishment and expansion of industrial
enterprises in Israel. The Bank of Israel issued a banking license in 1989
permitting us to operate as a commercial bank in Israel pursuant to the Banking
Licensing Law -1981 (Israel) and, in September 1991, we commenced our commercial
banking operations.

     Our legal and commercial name is Industrial Development Bank of Israel Ltd.
Our registered office is located at 82 Menachem Begin Road, Tel-Aviv, Israel
67138, and our telephone number is 972-3-6272727. Our corporate website can be
accessed through www.idbi.co.il. The information found on our corporate website
is, however, not part of this Annual Report on Form 20-F. Our agent in the
United States regarding our C Shares, CC Shares, D Shares and DD Shares is Bank
of New York Mellon Shareowner Services Inc., located at 480 Washington
Boulevard, Jersey City, New Jersey 07310. Our agent in the United States
regarding our capital notes is The Bank of New York Mellon, located at 101
Barclay Street, 4 East, New York, N.Y. 10286.


                                       22`

`The controlling rights in the Bank are held primarily by the Government of
Israel, Bank Leumi le-Israel B.M., Israel Discount Bank Ltd. and Bank Hapoalim
B.M. The Government of Israel holds approximately 80% of our equity and
approximately 45.78% of our outstanding voting rights. The Government of Israel
and the three largest banks in Israel, Bank Hapoalim B.M., Bank Leumi le-Israel
B.M. and Israel Discount Bank Ltd., collectively hold approximately 85% of our
voting rights.

     We are subject to the supervision and the regulations of the Bank of
Israel, through the Supervisor of Banks. Among other things, we are required to
submit periodic and other reports to the Bank of Israel and are subject to
inspections by the Bank of Israel. However, once our banking license expires, on
August 1, 2008, the extent of the Bank of Israel's supervision and involvement
may be reduced. Since we are a publicly-traded company, we are also subject to
the supervision and the regulations of the Israel Securities Authority. Since
the State of Israel holds 45.8% of our voting rights and about 50% of the rights
to appoint directors, we are deemed to be a "mixed company" under the Government
Companies Law - 1975 (Israel) (the "Government Companies Law"), and therefore we
must also report to the GCA. Because the State of Israel is entitled to appoint
directors to our board, we are also deemed a "body that the Government of Israel
participates in its management" within the State Comptroller Law - 1958 (Israel)
and consequently we are subject to the State Comptroller's audit.

B.   BUSINESS OVERVIEW

     Until the liquidity crisis we experienced in the third quarter of 2002 (as
discussed below), our business focused on normal banking activities, including,
without limitation, the extension of short, medium and long term credit in NIS
and foreign currencies, the acceptance of deposits in all currencies, the
maintenance of checking accounts and the issuance of credit cards. In addition,
we issued guarantees of all types in Israel and abroad and issued letters of
credit and other documents relating to foreign trade. We maintained a foreign
exchange dealing room, which provided currency conversion services and services
relating to the hedging of currency and interest rate risk. Our finance
department also provided services in factoring and futures transactions. We also
analyzed and prepared applications for "Approved Enterprise" status and
administered government grants. Our customers included many of Israel's well
known large industrial companies, medium size commercial entities, public
institutions, kibbutzim and other agricultural sector companies. Until 2002, our
goal was to gradually expand our range of commercial banking activities, which
generally focused on the business and industrial sectors, and diversify our
customer base.

     The balance of the public's deposits with us sharply declined in the third
quarter of 2002. The balance of the public's deposits with us was NIS 3,597
million as of June 30, 2002 and, by December 31, 2002, the balance had declined
to NIS 1,291 million, a NIS 2,306 million decrease over 6 months. As a result of
the increased withdrawals of deposits by the public, we experienced a severe
liquidity crisis. The decline in the public's deposits continued since then and,
as of December 31, 2007, the balance of the public's deposits with us was NIS 55
million and as of March 31, 2008 it was NIS 52 million.

     In response to our liquidity problems, the Government of Israel and the
Bank of Israel proposed a plan for the sale of our assets and liabilities to a
third party. To help us manage our liquidity crisis and continue operations
until the sale, the Bank of Israel agreed to provide us a Special Line of
Credit. See "Proposed Sale of the Bank and Extension of Special Line of Credit
by the Bank of Israel" below for a detailed description of the proposed sale and
the Special Line of Credit.


                                       23`

`We were unable to consummate the sale of our asset and liability portfolio
"en bloc" and within a short time frame and, on February 27, 2003, our Board of
Directors adopted and the Government of Israel approved the Run-Off Plan (as
defined below; see "Adoption of the Run-Off Plan and Amendment of the Special
Line of Credit") for our business, which has since been extended until July 31,
2008. We are currently operating under the terms of the Run-Off Plan. The
ultimate goal of the Run-Off Plan is the controlled disposal of our credit
assets over a period which will expire on July 31, 2008. For a more detailed
description of the Run-Off Plan and the amendments to the Special Line of
Credit, see "Adoption of the Run-Off Plan and Amendment of the Special Line of
Credit" below.

PROPOSED SALE OF THE BANK AND EXTENSION OF SPECIAL LINE OF CREDIT BY THE BANK OF
ISRAEL

     On August 26, 2002, in response to our severe liquidity crisis, the Prime
Minister's Office of the State of Israel, the Finance Ministry of the State of
Israel and the Bank of Israel adopted a plan for the sale of our asset and
liability portfolio and the extension of the Special Line of Credit to permit us
to bridge our liquidity problems. Our Board of Directors approved the sale of
our asset and liability portfolio and the Special Line of Credit in accordance
with the plan and agreed to cooperate during the sale process so as to
facilitate its implementation.

     On September 9, 2002, the Governor of the Bank of Israel notified us that
he had decided to extend to us the Special Line of Credit. According to the
terms of the Special Line of Credit as initially granted, the interest rate on
the Special Line of Credit (which was to be charged quarterly) was set by the
Governor of the Bank of Israel at a rate equal to the Bank of Israel Rate plus
3%. In addition, we were required to pay the Bank of Israel a commission at an
annual rate of 1% (which was to be charged monthly) in respect of the unutilized
amount of the Special Line of Credit. The Special Line of Credit was available
through the earlier of May 10, 2003 or the date of the sale of our asset and
liability portfolio.

     The grant of the Special Line of Credit was also subject to various
conditions, including, without limitation, the pledge of a substantial part of
our assets to the Bank of Israel. The pledge in favor of the Bank of Israel was
created by us only on November 14, 2002 and the Special Line of Credit, with an
available amount of credit of NIS 2.2 billion, was granted on that date. The
Governor of the Bank of Israel notified us on November 14, 2002 that our
drawings from the Bank of Israel prior to November 14, 2002 would bear interest,
until November 14, 2002, at a rate equal to the Bank of Israel Rate plus 5%,
while according to the terms of the Special Line of Credit as determined on
September 9, 2002, from November 14, 2002, the Special Line of Credit would bear
interest equal to the Bank of Israel Rate plus 3%.

     The pledge in favor of the Bank of Israel does not apply to all of our
assets. The assets that were not pledged to the Bank of Israel included the
following: (a) loans and credits guaranteed by the State of Israel with a total
balance sheet value of approximately NIS 5.0 billion as of December 31, 2007;
(b) our perpetual deposit with the Ministry of Finance in respect of the DD
Shares; and (c) deposits with other banking institutions in Israel and/or
abroad, and/or with brokers in Israel and/or abroad, that we make from time to
time in order to secure those of our liabilities to such banking institutions
and/or brokers that were created after November 14, 2002.


                                       24`

`On November 13, 2002, our Board of Directors approved a process intended to
result in the sale of our asset and liability portfolio. Our Board of Directors
approved the sale as an "en bloc" sale to one or more purchasers. However, our
Board of Directors soon realized that there was little interest on the part of
potential buyers in the proposed sale of our asset and liability portfolio, and
the information room which was opened in connection with the proposed sale was
closed at the end of January 2003 without any potential buyer having commenced a
due diligence review.

ADOPTION OF THE RUN-OFF PLAN AND AMENDMENT OF THE SPECIAL LINE OF CREDIT

     When it became apparent that the proposed "en bloc" sale of our assets and
liabilities within a short time frame would not be consummated, our Board of
Directors decided to entertain other alternatives to such a sale. At its meeting
on February 27, 2003, our Board adopted the principles of a proposed run-off
plan,the components of which included, among other things, (a) a supervised and
gradual realization of our credit assets, to be conducted over a period ending
on December 31, 2006, (b) a significant reduction in manpower and in operating
expenses, and (c) the continuation of the Special Line of Credit during the
period of the run-off. At the same meeting, our board approved a detailed
efficiency plan formulated by our management. The efficiency plan included
extensive cutbacks in operating expenses and manpower, including termination and
reduction of banking services unrelated to the collection of existing loans.

     On July 29, 2003 the Ministerial Committee for Social and Economic Affairs
of the Government of Israel approved the run-off plan with certain modifications
(the "Run-Off Plan"), including fixing the implementation period of the plan at
three years, from July 29, 2003. In connection with the above governmental
approval of the Run-Off Plan, the Bank of Israel agreed on September 1, 2003 to
amend the terms of the Special Line of Credit by extending it for a period of 36
months until August 1, 2006. Under the amended terms, the interest rate on the
utilized portion of the Special Line of Credit was set at the interest rate of
the Bank of Israel, subject to "the fulfillment of all the conditions, including
that which is stipulated in the government's resolution regarding the date of
completion and return of the deposits to the public and the realization of the
bank's assets."

     On July 26, 2005 the Bank's Board of Directors discussed a document that
had been prepared regarding the extension of the Run-Off plan. In light of the
document's conclusion regarding the advantages of extending the Plan, the Board
of Directors approved the extension of the Plan until July 31, 2008, and its
continued implementation on the basis of the Plan that was presented before it.
Furthermore, the Bank's Board of Directors decided that due to the reduction in
the Bank's activity pursuant to the Run-Off Plan and the date set for its
termination, the Bank would notify the Governor of the Bank of Israel that it
agrees that its banking license be restricted in a manner that reflects its
reduced activity as derived from the Run-Off Plan, including the non-acceptance
of new deposits and the non-renewal of existing deposits that have reached
maturity, and to the restricted license specifying that it is valid until the
end of the Plan (July 31, 2008).


                                       25`

`On October 10, 2005 the Ministerial Committee for Social and Economic
Affairs (the Social Economic Cabinet) approved the extension of the Bank's
Run-Off Plan. The main principles of the Committee's decision are as follows:

     o    The assets of the Bank are to be realized in a supervised process and
          over a period ending by July 31, 2008, in the framework of the Run-Off
          Plan approved by the Bank's Board of Directors and with the changes to
          be determined by the Accountant General and the GCA.

     o    The maximum amount of the Special Line of Credit will at no time
          exceed NIS 1.25 billion and over the period of executing the Run-Off
          Plan it will not exceed the amounts approved by the Bank of Israel.

     o    The Bank will not use the Special Line of Credit or other sources for
          the purpose of providing new credit.

     o    The Government is responsible for the repayment of the Special Line of
          Credit as from July 1, 2005, on the condition that the interest on the
          Special Line of Credit until the end of the plan shall not exceed the
          Bank of Israel Rate.

     o    If at the end of the Run-Off Plan there remains an unpaid balance of
          the Special Line of Credit, the Government will repay the balance to
          Bank of Israel by July 31, 2008. In exchange for its repayment of the
          credit balance, the collateral that was provided by the Bank for
          repayment of the credit line will be assigned to the Government.

     We are presently operating under the terms of the Run-Off Plan.

     Following the approval by the Government of Israel of the extension of the
Run-Off Plan, the Governor of the Bank of Israel notified us, in his letter of
October 30, 2005, of his decision to extend the Special Line of Credit until
July 31, 2008, and of the new terms that will apply to the credit line.

     In a letter dated April 13, 2008, the Governor of the Bank of Israel
informed the Director of the GCA of his decision to extend the payment date of
the outstanding balance of the Special Line of Credit, until the earlier of (i)
December 31, 2008, or (ii) until the Court approval of a Section 350
Arrangement. The terms of the Special Line of Credit impose significant
restrictive operating covenants on us. The main terms of the special line of
credit, as they presently apply, and the main restrictions thereunder are as
follows:

     o    The Special Line of Credit shall remain in effect until December 31,
          2008, or until the approval of the court to an arrangement between all
          of the Bank's shareholders, the State of Israel and the Bank pursuant
          to Section 350 of the Companies Law-1999, whichever comes first.
          Beginning on August 1, 2008, the interest rate on the utilized portion
          of the Special Line of Credit will be set at the interest rate of the
          Bank of Israel plus 1.5% per annum. The extension of the Special Line
          of Credit after July 31, 2008 is subject to an appropriate government
          resolution in this matter, the extension of the State guarantee to
          repay the full amount of the line of credit, the execution of the
          necessary amendments and additions to the debenture provided by the
          Bank to the benefit of the Bank of Israel on November 14, 2002 and
          amended on December 29, 2005, and the integration of the comments of
          the Bank of Israel into the arrangement application.


                                       26`

`o    The maximum amount of the Special Line of Credit will at no time
          exceed NIS 1.25 billion and it will decline gradually in accordance
          with the forecast that was attached to the notice of the Governor of
          the Bank of Israel dated October 30, 2005 regarding the extension of
          the line until July 31, 2008.

     o    The Bank will be allowed to continue to use the Special Line of Credit
          in order to meet the liquidity needs it has for fulfilling its current
          and banking obligations.

     o    The interest on the utilized credit until July 31, 2008 will be the
          "Bank of Israel Rate", and thereafter will be the "Bank of Israel
          Rate" plus 1.5%.

     o    Any significant administrative expense that deviates from the Bank's
          ordinary course of business and has an effect on its business results
          will require the approval of the Bank of Israel.

     o    Limitations were set on the Bank's volume of activity with respect to
          making and pledging deposits with banks.

     In the letter of the Governor of the Bank of Israel dated October 30, 2005
it was noted that if the Bank of Israel should see fit, and to the extent
required at its sole discretion, additional restrictions regarding the Bank's
operations in addition to those specified in the aforementioned letter will be
considered, whether or not as a result of non-conformity with the objectives of
the Run-Off Plan.

     The outstanding balance of the Special Line of Credit, not including
interest accrued but not yet charged, was NIS 1.028 billion as of December 31,
2005, NIS 751 million as of December 31, 2006 NIS 476 million as of December 31,
2007 and NIS 369 million as of June 30, 2008.

     In his letter dated January 29, 2006 we were notified by the Governor of
the Bank of Israel as follows:

     o    The banking license that we received on June 4, 1989 would be
          restricted so that we could not engage in any business we did not
          engage in prior to the date of the license (until the date of the
          license we engaged in the financing of investments) and without
          derogating from the generality of the aforementioned, we would not
          receive new deposits and would not renew deposits reaching their
          current date of maturity, other than from shareholders.

     o    Our banking license would be revoked as of August 1, 2008.


                                       27`

`On April 29, 2008, the Ministerial Committee for Privatization Issues paased a
resolution regarding the privatization of the Bank. The privatization resolution
establishes, among other things, as follows:

     o    Our shares held by the State of Israel shall be sold, as a single
          block, by way of a private sale, to an investor or a group of
          investors from Israel and/or abroad, who have not yet been identified
          (the "Purchaser") as part of a comprehensive sale blueprint for the
          transfer of all of our shares to the Purchaser, including those held
          by the public (the "Sale").

     o    Until the completion of the sale, we will continue to collect our
          credit portfolio.

     o    Based upon a letter of principles signed between our shareholders on
          March 18, 2008, we have submited a motion to approve a Section 350
          Arrangement which among other agreements, the Purchaser will purchase
          all of our C Shares, CC Shares, CC1 shares and Preferred Ordinary
          Shares. After consummation of the Sale, these shares will be delisted
          from trading on the TASE. In addition, the Purchaser will purchase,
          within the framework of the Section 350 Arrangement, all of the
          Ordinary A Shares and all of the various shares held by the State of
          Israel.

     o    According to the Section 350 Arrangement, we will redeem, pursuant to
          the terms in their offering prospectus, our D Shares and DD Shares,
          not held by the State of Israel.

     o    As a condition for the approval and execution of the arrangement
          between the shareholders, our shareholders, of all classes, will,
          subject to Court approval, be deemed to have waived their claims
          against us, our officers, employees, controlling shareholders and
          interested parties, as these terms are defined in the Companies Law.
          In addition, we and shareholders of C Shares, CC Shares and CC1 Shares
          will waive all claims against the State of Israel concerning the
          Perpetual Deposit.

     o    We will pay the full amount of the Special Line of Credit, either at
          the execution of the Section 350 Arrangement, or until December 31,
          2008 (or at a later date if the Bank of Israel approves a further
          extension of the Special Line of Credit).

     o    To authorize the Accountant General to carry out the following acts in
          order to facilitate the execution of this resolution:

          a)   To return to us, by July 31, 2008, or by the date of the approval
               by the Court of the Section 350 Arrangement, whichever is later,
               the Perpetual Deposit, including linkage differentials pursuant
               to the agreements between us and the State concerning the
               Perpetual Deposit. The Accountant General, in coordination with
               the GCA and the Bank, may decide that the proportionate amount of
               the Perpetual Deposit from the consideration paid for the D
               Shares and DD Shares held by the public shall be returned to us
               at the time of the return of the Perpetual Deposit as
               aforementioned, or at a later time, closer to the execution of
               the Sale or the liquidation of the Bank. As a condition for the
               return of the Perpetual Deposit, we will assure the Accountant
               General that we will use the Perpetual Deposit money to pay the
               balance of the Special Line of Credit.

          b)   To pay to us, for the purpose of redeeming D Shares and DD Shares
               not held by the State:

               1.   Interest on the Perpetual Deposit equal to the amount of the
                    accumulated dividend to the shareholders of D Shares and DD
                    Shares, except in respect of the shares held by the State of
                    Israel, from July 1, 2002 and until the date of the
                    redemption of the shares.


                                       28`

`2.   A premium in the amount of 5.625% of the par value of the D
                    Shares not held by the State.

          c)   To transfer the remaining balance on the loan granted to the
               Israel Electric Company Ltd. to the benefit of the Accountant
               General or to a banking entity as determined by the Accountant
               General.

     o    To authorize the Accountant General, together with the GCA, to reach
          an agreement with our shareholders, of all classes, regarding the
          distribution of the consideration from the Sale, including taking into
          consideration the economic report of the expert chosen (Prof. Amir
          Barnea), and to incorporate them into the Section 350 Arrangement.

     o    Our employees shall be paid a privatization remuneration, pursuant to
          the directives of the Authority. The remuneration shall be given
          proximate to the Sale and subject to its implementation.

     The privatization resolution was passed further to and based upon a
blueprint for the sale of our issued shares, which has for some time been
examined by the Ministry of Finance and the GCA. Within this framework, on June
17, 2007 the GCA published a Request For Information (RFI), requesting
information from parties interested in purchasing the Bank. According to
information we received from the GCA, 12 companies and individuals responded to
the request.

     On March 18, 2008, a letter of understanding was signed between the State
of Israel and certain holders of our C Shares, CC Shares and CC1 Shares and of
our Preferred Ordinary Shares, by which these parties agreed, among other
things, to cooperate in the implementation of the blueprint for the sale of our
shares.

     Pursuant to the privatization resolution passed by the Ministerial
Committee for Privatization Issues, our Board of Directors resolved, in its
meeting on May 26, 2008, to submit the Section 350 Arrangement for the approval
of the Court.

     According to the resolution, prior to filing the application with the
Court, the Bank will obtain approvals and clarifications regarding the Section
350 Arrangement from the GCA.

     Prior to approving the above resolution, the Board of Directors received
expert opinions regarding the reasonability of the criteria for determining the
minimum price for the sale of our shares as part of such Section 350
Arrangement, and regarding the fairness of such Section 350 Arrangement and the
formula for division of the Sale proceeds as part of the Section 350 Arrangement
vis-a-vis the public shareholders. Professor A. Barnea submitted a report dated
March 9, 2008 where he compared the option of winding-up the Bank with the
proposed sale of our shares. The comparison was based on the basis of our
financial statements as of September 30, 2007, and contains the distribution
formula of the sale proceeds. In addition, a legal opinion was furnished to the
Board of Directors regarding the reasonableness of the arrangement for paying
partial dividend to the holders of the C Shares, CC Shares and CC1 Shares, that
would apply if the Sale will not be effected.


                                       29`

`The decision of the Board to submit the Section 350 Arrangement was based,
among other things, on the conclusion and the findings of the fairness opinion
and the legal opinion, as well as in Professor A. Barnea's report, which led the
Board to the opinion that the sale of the Bank's shares under the terms of the
Section 350 Arrangement, would be more beneficial to the public shareholders of
the Bank than winding-up the Bank.

     The principal elements of the Arrangement Scheme are summarized as follows:

     The Section 350 Arrangement includes three sections (two of which are
alternative) that will be submitted for the approval of the shareholders and the
Court.

     1.   First, immediately upon approval of the Section 350 Arrangement by the
          shareholders and the Court, (i) the State of Israel will pay the Bank
          the Perpetual Deposit excluding the proceeds in respect of the D
          Shares and DD Shares that are not held by the State (the proceeds in
          respect of the D Shares and DD Shares held by the State will remain
          deposited as dollar-linked deposits); (ii) the Bank will pay the
          balance of the Special Line of Credit out of the returned Perpetual
          Deposit; (iii) the originating motion filed by several financial
          institutions against us seeking to renew the dividend payment and our
          appeal of the dismissal of our originating motion relating to the
          accrual of the interest on our Perpetual Deposit will both be
          dismissed.

     2.   Within the framework of the second section, the Sale Option, if a
          purchaser is found by December 31, 2009, all of the Bank's shares (
          except for the D and DD shares not held by the State of Israel), will
          be sold by the State of Israel and the public by means of a sale
          process that will be conducted by the GCA.

          The D and DD shares that are not held by the State of Israel will be
          redeemed, in accordance with the shares' redemption terms. Under these
          terms, redemption of D Shares will be made at a premium of 5.625%
          above their nominal value, plus payment of the accrued preferential
          dividend in arrears, and redemption of the DD Shares in consideration
          of their full value, plus accrued preferential dividend arrears. The
          Bank will, out of his own resources, pay the principal redeemed while
          the State will pay to the Bank the amounts needed to pay the premium
          payment and the preferential dividend arrears.

          If the total consideration that will be received from the Purchaser is
          less than the greater of (i) the average amount set forth in two
          independent evaluations pertaining to the value of the Bank on
          liquidation (and adjusted upon the submission of the price bids by the
          offerors in the Sale Process), that will be ordered by the State, less
          the value of the redeemed D Shares and DD shares, or (ii) NIS 400
          million (whichever is greater, to be called THE "MINIMUM PRICE"), then
          the Sale will require also the approval of 75% of the share capital
          voted in a meeting of the holders of C Shares, CC Shares and CC1
          Shares, voting as a group. The State, in its sole discretion, may
          decide not to proceed with the Sale even if the consideration of the
          Sale is greater than the Minimum Price.


                                       30`

`The Sale proceeds will be divided among the holders of the shares that
          are sold, pursuant to the formulas for dividing the proceeds that were
          formulated by Professor Barnea and which are set forth in the Section
          350 Arrangement.

          The State will return to the Bank the remainder of the Perpetual
          Deposit.

          The Shareholders will release and waive any and all claims or demands
          or complaints regarding the Bank, the Bank's officers, the interested
          parties in the Bank, the Bank's employees and the State of Israel.

          The Bank will assign to such third party as the Accountant General at
          the Ministry of Finance will direct, the rights of the Bank regarding
          the loans that were advanced by the Bank to the Israel Electric
          Company Ltd., together with the State deposits in the Bank that served
          as the source for those loans.

     3.   The third section, the Dividend Option, is proposed as an alternative
          to the Sale Option. The Dividend Option will be implemented in the
          event that the Sale Arrangement is not completed by December 31, 2009,
          or if prior to that date a liquidation order is issued by the Court or
          if the general meeting of the Bank shall pass a resolution of
          voluntary liquidation. Under the Dividend Option, the Bank will pay to
          the holders of C Shares, CC Shares and CC1 Shares, on December 31,
          2009, or when a liquidation order is issued against the Bank or at the
          time a resolution is passed of the voluntary liquidation by the
          general meeting of the Bank, whichever is the earlier, one half of the
          preferred interest at the annual rate of 6%, that accrued during the
          period of July 1, 2002 through July 31, 2008 plus linkage
          differentials and interest by law from July 31, 2008 and until the
          date of the payment to the shareholders. The State of Israel will pay
          to the Bank, one half of the interest at the annual rate of 6% on the
          Bank's share of the Perpetual Deposit that reflects the proceeds of
          the C Shares, CC Shares, CC1 Shares, that accrued during the above
          period, plus linkage differentials and interest by law from July 31,
          2008 and until the date of the payment to the Bank.

          The State will waive any and all claims against the Bank and/or the
          Bank's liquidator and/or the Bank's liquidation fund in relation to
          one half of the preferential dividends in arrears that accrued on or
          for the D Shares and DD Shares owned by the State during the above
          period from July 1, 2002 until July 31, 2008.

          The holders of the C Shares, CC Shares, and CC1 Shares will waive all
          and any claims in connection with the Perpetual Deposit, the return
          thereof to the Bank, the payment of the interest thereon and payment
          of dividend on their shares in respect of the period until the payment
          to them of half of the preferential dividends in arrears as aforesaid.
          However, this waiver will not derogate from the rights of the holders
          of C Shares, CC Shares, and CC1 Shares to the accrual of preferential
          dividend in respect of their shares according to the by-laws of the
          Bank, including in relation to the above period.


                                       31`

`The above description is a summary of the main principles of the Section
     350 Arrangement, and is qualified by the full text of the Section 350
     Arrangement which was approved by the Board of Directors andwhich was filed
     for the Court approval.

     Since the redemption of the D Shares and DD Shares and the payment of half
     of the preferential dividend in respect of the C Shares, CC Shares and CC1
     Shares, as described above, may be deemed a reduction in capital, we filed,
     along with the filing with the Court of the motion to approve the Section
     350 Arrangement, a motion to reduce our capital, as approved by the Bank's
     Board of Directors on May 26, 2008. Therefore, implementation of the
     Section 350 Arrangement is also subject to the Court's approval of the
     motion to reduce capital.

OUR REQUEST FOR REIMBURSEMENT OF SURPLUS INTEREST ON THE SPECIAL LINE OF CREDIT

     We have petitioned the Bank of Israel to reimburse us for certain interest
payments that we previously made. Prior to the amendment of the Special Line of
Credit on September 1, 2003 (in connection with the adoption and approval of the
Run-Off Plan), the interest rate on the amounts outstanding on the credit we
drew from the Bank of Israel was (a) the Bank of Israel Rate plus 5% from August
2002 to November 13, 2002 and (b) the Bank of Israel Rate plus 3% from November
13, 2002 to July 29, 2003. Additionally, we paid a high interest rate on
liquidity deficits that occurred from time to time in our account with the Bank
of Israel. As amended, the Special Line of Credit has an interest rate on
outstanding amounts, until July 31, 2008, equal to the Bank of Israel Rate, and
from August 1, 2008, at the Bank of Israel Rate plus 1.5%. We have requested
that the Bank of Israel reimburse us for the difference between the amount of
interest that we paid at the previous interest rates between August 2002 and
July 2003 and the amount of interest that we would have paid if we were charged
only the Bank of Israel Rate during the same time period. The total amount that
we have requested to be reimbursed, with interest thereon, as of December 31,
2007 is approximately NIS 80 million. In recent discussions between us and the
Bank of Israel it was clarified that the matter of the reimbursement as
aforesaid, shall be reviewed upon the full payment of the Special Line of
Credit. We continue to carry on discussions with the Bank of Israel regarding
the return of the above surplus interest (the amount of which will be examined
and clarified between us and the Bank of Israel).

CURRENT OPERATIONS UNDER THE RUN-OFF PLAN

     As a result of our considerable efforts to collect existing loans, we have
significantly reduced the aggregate amount of our outstanding loans to the
public. This balance (not including a loan to the Israel Electric Corporation
Ltd. guaranteed by the State of Israel and granted out of a deposit that the
State of Israel has deposited with us for that purpose), which at December 31,
2001 amounted to NIS 5,238 million, was reduced to NIS 1,826 million on December
31, 2004, to NIS 1,276 million on December 31, 2005, to NIS 848 million on
December 31, 2006 and to NIS 558 million on December 31, 2007. Even when we take
into consideration the allowances for doubtful debts provided for during this
period (and which are deducted from the amount of our outstanding loans), this
still represents a collection of considerable loan amounts.


                                       32`

`As part of the implementation of the Run-Off Plan, we have discontinued or
almost discontinued the following activities: our foreign currency and foreign
trade activity, operation of a foreign exchange dealing room, operation of
current accounts and securities accounts, execution of Government grants through
the "Approved Enterprise" status system, operation of independent teller and
clearing facilities and issuance of credit cards. We refrain from accepting new
deposits, and pursuant to directives of the Bank of Israel, we ceased renewing
deposits that reach maturity, with certain exceptions.

     Following the liquidity crisis that we experienced in the third quarter of
2002 and the implementation of our Run-Off Plan, we are presently able to borrow
only by drawing on the Special Line of Credit. The Special Line of Credit is
available to us only in shekels at a variable rate of interest based upon the
Bank of Israel Rate and for a period expiring on December 31, 2008, or until the
Court approves the Section 350 Arrangement, whichever is earlier.

     In order to reduce our exposure to the risks resulting from these
circumstances, we are carrying out swap transactions with other banks.

     For further discussion of our risk management, see "Item 11. Quantitative
and Qualitative Disclosures About Market Risk" below.

     The reduction in our operations was accompanied by a reduction in our
staff. The number of employees, which as of January 1, 2002 was 170, was reduced
to 79 by December 31, 2003, and was further reduced to 43 by December 31, 2007.

     In addition to the significant reduction in payroll expenses because of the
reduction in the number of employees and the salary reductions that were
implemented at the beginning of 2003, we also took steps to significantly reduce
operating costs. We relocated to new offices in September 2003. The new office
space is two-thirds smaller than the previous office space that we rented and
the rent per square meter of the new office space is significantly lower than
the rent we had been paying. We have also outsourced our computer services in
order to reduce our computer expenses. We maintain close and continuous contacts
with the Bank of Israel and the Government of Israel. Due to the limitations
imposed upon us, we will refrain from extending new loans to customers and our
activities will concentrate on collection of the existing loan portfolio. Our
policy is to act diligently in all matters relating to collection of problematic
debts, and in connection with such policy, we have incurred significant
collection costs and legal fees.

AVERAGE BALANCE SHEETS AND INTEREST RATES

     The following tables show our average balance sheets and interest rates for
the three years ending on December 31, 2007, 2006 and 2005.


                                       33`

`AVERAGE BALANCE SHEETS AND INTEREST RATES(1)
IN TERMS OF NIS OF DECEMBER 2007

                                                             2007                                  2006                                  2005
                                               --------------------------------      -------------------------------      ---------------------------------
                                                           FINANCING    RATE OF                 FINANCING    RATE OF                   FINANCING    RATE OF
                                               AVERAGE      INCOME      INCOME       AVERAGE     INCOME      INCOME      AVERAGE        INCOME       INCOME
                                             BALANCE (2)  (EXPENSES)   (EXPENSES)   BALANCE (2) (EXPENSES)  (EXPENSES)  BALANCE (2)   (EXPENSES)   (EXPENSES)
                                               -------      -------     -------      -------     -------     -------      -------       -------     -------
                                                REPORTED AMOUNTS *                    REPORTED AMOUNTS *                   REPORTED AMOUNTS *
                                               --------------------     -------      -------------------     -------      ---------------------     -------
                                                    NIS MILLIONS           %             NIS MILLIONS           %             NIS MILLIONS              %
                                               --------------------     -------      -------------------     -------      ---------------------     -------

ISRAELI CURRENCY - NON-LINKED
ASSETS
Credit to the Public                             168.1         10.8        6.42        337.5        23.3        6.90        587.3          33.1        5.64
Deposits with Bank of Israel                       3.3            -           -          5.4           -           -          8.5             -           -
Deposits with banks                               12.4          0.5        4.03         21.0         1.1        5.25         22.5           0.9        4.00
Debentures                                           -            -           -            -           -           -          0.6           0.1       16.67
                                               -------      -------     -------      -------     -------     -------      -------       -------     -------
Total assets before effect of derivatives        183.8         11.3        6.15        363.9        24.4        6.71        618.9          34.1        5.51
Effect of derivatives ALM (3)                     64.7          2.6        4.02        137.7         7.7        5.59        288.4          11.6        4.01
                                               -------      -------                  -------     -------                  -------       -------
Total assets after effect of derivatives         248.5         13.9        5.59        501.6        32.1        6.40        907.3          45.7        5.04
                                               =======      =======     =======      =======     =======     =======      =======       =======     =======

LIABILITIES
Deposits of the public                            31.1         (0.9)      (2.89)        46.0        (1.7)      (3.70)       163.7          (5.5)      (3.36)
Deposits of Bank of Israel                       601.0        (23.7)      (3.94)       889.9       (45.2)      (5.08)     1,172.0         (43.0)      (3.67)
                                               -------      -------     -------      -------     -------     -------      -------       -------     -------
Total liabilities                               632 .1        (24.6)      (3.89)       935.9       (46.9)      (5.01)     1,335.7         (48.5)      (3.63)
                                               =======      =======     =======      =======     =======     =======      =======       =======     =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                  2.26                                 1.70                                   1.88
INTEREST MARGIN INCLUDING DERIVATIVES                                      1.70                                 1.39                                   1.41
                                               -------      -------     -------      -------     -------     -------      -------       -------     -------

ISRAELI CURRENCY -LINKED TO THE CPI
ASSETS
Credit to the Public                             441.2         34.4        7.80        539.3        27.9        5.17        663.4          54.2        8.17
Credit to governments                              5.9          0.1        1.69          7.6           -           -         10.0           0.3        3.00
Deposits with banks                                7.2          0.6        8.33         13.7         0.8        5.84         19.6           1.5        7.65
Debentures                                         0.5            -           -          0.8           -           -          2.6           0.2        7.69
                                               -------      -------     -------      -------     -------     -------      -------       -------     -------
Total assets                                     454.8         35.1        7.72        561.4        28.7        5.11        695.6          56.2        8.08
                                               =======      =======     =======      =======     =======     =======      =======       =======     =======

LIABILITIES
Deposits of the public                            28.4         (2.2)      (7.75)        51.6        (2.6)      (5.04)       116.5          (8.3)      (7.12)
Deposits of the Government                       280.0        (14.1)      (5.04)       335.9        (7.2)      (2.14)       362.7         (18.0)      (4.96)
                                               -------      -------     -------      -------     -------     -------      -------       -------     -------
                                                 308.4        (16.3)      (5.29)       387.5        (9.8)      (2.53)       479.2         (26.3)      (5.49)
Effect of derivatives ALM (3)                     40.0         (2.6)      (6.50)        43.3        (1.1)      (2.54)        92.3          (4.2)      (4.57)
                                               -------      -------                  -------     -------                  -------       -------
Total liabilities                                348.4        (18.9)      (5.42)       430.8       (10.9)      (2.53)       571.5         (30.5)      (5.34)
                                               =======      =======     =======      =======     =======     =======      =======       =======     =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                  2.43                                 2.58                                   2.59
INTEREST MARGIN INCLUDING DERIVATIVES                                      2.30                                 2.58                                   2.74


                                       34`

`AVERAGE BALANCE SHEETS AND INTEREST RATES(1) (CONT'D)
IN TERMS OF NIS OF DECEMBER 2007

                                                                     2007                                     2006                                      2005
                                                     ------------------------------------      -----------------------------------      --------------------------------------
                                                                  FINANCING      RATE OF                    FINANCING    RATE OF                      FINANCING       RATE OF
                                                      AVERAGE       INCOME       INCOME        AVERAGE        INCOME      INCOME         AVERAGE        INCOME        INCOME
                                                    BALANCE (2)   (EXPENSES)   (EXPENSES)     BALANCE (2)   (EXPENSES)  (EXPENSES)      BALANCE (2)   (EXPENSES)     (EXPENSES)
                                                     ---------     ---------    ---------      ---------     ---------   ---------      ---------     ---------      ---------
                                                        REPORTED AMOUNTS *                        REPORTED AMOUNTS *                      REPORTED AMOUNTS *
                                                     -----------------------    ---------      -----------------------   ---------      -----------------------      ---------
                                                           NIS MILLIONS             %                NIS MILLIONS            %                NIS MILLIONS                %
                                                     -----------------------    ---------      -----------------------   ---------      -----------------------      ---------

FOREIGN CURRENCY-DOMESTIC OPERATIONS (4)
ASSETS
Credit to the Public                                   5,583.9        (126.0)       (2.26)       6,370.5         (90.9)      (1.43)       6,691.0         892.1          13.33
Credit to governments                                      4.9          (0.1)       (2.04)          16.9          (0.9)      (5.33)          29.5           0.7           2.37
Deposits with Bank of Israel                               0.4             -            -            0.6             -           -            1.0             -              -
Deposits with banks                                       12.5          (0.2)       (1.60)          18.5          (1.2)      (6.49)          53.5           5.8          10.84
                                                     ---------     ---------    ---------      ---------     ---------   ---------      ---------     ---------      ---------
                                                       5,601.7        (126.3)       (2.25)       6,406.5         (93.0)      (1.45)       6,775.0         898.6          13.26
Effect of derivatives ALM (3)                                -             -            -              -             -           -           57.2           7.1          12.36
                                                     ---------     ---------                   ---------     ---------                  ---------     ---------
Total assets                                           5,601.7        (126.3)       (2.25)       6,406.5         (93.0)      (1.45)       6,832.2         905.7          13.26
                                                     =========     =========    =========      =========     =========   =========      =========     =========      =========
LIABILITIES
Deposits of the public                                     2.0             -            -            4.5          (0.1)      (2.22)          29.1          (1.7)         (5.84)
Deposits of the Government                             5,550.2         129.3         2.33        6,260.1          91.4        1.46        6,471.1        (883.6)        (13.65)
Deposits of banks                                          3.9           0.1         2.56           11.4           0.9        7.89           19.6           0.7           3.57
                                                     ---------     ---------    ---------      ---------     ---------   ---------      ---------     ---------      ---------
                                                       5,556.1         129.4         2.33        6,276.0          92.2        1.47        6,519.8        (884.6)        (13.57)
Effect of derivatives ALM (3)                             24.7           0.3         1.21           94.4           5.0        5.35          253.3         (11.9)         (4.70)
                                                     ---------     ---------                   ---------     ---------                  ---------     ---------
Total liabilities                                      5,580.8         129.7         2.32        6,370.4          97.2        1.53        6,773.1        (896.5)        (13.24)
                                                     =========     =========    =========      =========     =========   =========      =========     =========      =========
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                            0.08                                     0.02                                       (0.31)
INTEREST MARGIN INCLUDING DERIVATIVES                                                0.07                                     0.08                                        0.02

TOTAL
Monetary assets generating financial income            6,240.3         (79.9)       (1.28)       7,331.8         (39.9)      (0.54)       8,089.5         988.9          12.22
Effect of derivatives ALM (3)                             64.7           2.6         4.02          137.7           7.7        5.59          345.6          18.7           5.41
                                                     ---------     ---------                   ---------     ---------                  ---------     ---------
Total monetary assets generating financing
income                                                 6,305.0         (77.3)       (1.23)       7,469.5         (32.2)      (0.43)       8,435.1       1,007.6          11.95
                                                     =========     =========                   =========     =========                  =========     =========
Monetary liabilities generating financing
expenses                                               6,496.6          88.5         1.36        7,599.4          35.5       (0.47)       8,334.7        (959.4)        (11.51)
Effect of derivatives ALM (3)                             64.7          (2.3)       (3.55)         137.7           3.9        2.83          345.6         (16.1)         (4.66)
                                                     ---------     ---------                   ---------     ---------                  ---------     ---------
Total liabilities generating financing expenses        6,561.3          86.2         1.31        7,737.1          39.4        0.51        8,680.3        (975.5)        (11.24)
                                                     =========     =========                   =========     =========                  =========     =========
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                            0.08                                    (0.07)                                       0.71
INTEREST MARGIN INCLUDING DERIVATIVES                                                0.08                                     0.08                                        0.71


                                       35`

`AVERAGE BALANCE SHEETS AND INTEREST RATES(1) (CONT'D)
IN TERMS OF NIS OF DECEMBER 2007

                                                                     2007                                     2006                                      2005
                                                     ------------------------------------      -----------------------------------      --------------------------------------
                                                                  FINANCING         RATE OF                          FINANCING           RATE OF                           FINANCING       RATE OF
                                                      AVERAGE       INCOME          INCOME           AVERAGE          INCOME             INCOME          AVERAGE             INCOME        INCOME
                                                    BALANCE (2)   (EXPENSES)      (EXPENSES)        BALANCE (2)      (EXPENSES)         (EXPENSES)      BALANCE (2)        (EXPENSES)     (EXPENSES)
                                                    ----------    -----------      ---------         ----------       ---------         ----------       ---------         ---------       ---------
                                                        REPORTED AMOUNTS *                               REPORTED AMOUNTS *                                  REPORTED AMOUNTS *
                                                    -------------------------      ---------         -------------------------          ----------       -----------------------------     ---------
                                                          NIS MILLIONS                 %                   NIS MILLIONS                     %                     NIS MILLIONS                 %
                                                    -------------------------      ---------         -------------------------          ----------       -----------------------------     ---------

In respect of options                                                       -                                                 -                                                  (0.8)
Financing commissions and other financing
income                                                                   30.0                                              23.7                                                  41.5
Other financing expenses                                                 (9.6)                                            (12.7)                                                (11.2)
                                                                    ---------                                         ---------                                             ---------
Profit from financing operations before                                  29.3                                              18.2                                                  61.6
allowance for doubtful debts
Allowance for doubtful debts (including
general and supplementary allowances)                                    13.8                                             (21.7)                                                (44.2)
                                                                    ---------                                         ---------                                             ---------
Profit (Loss) from financing operations
after allowance for doubtful debts                                       43.1                                              (3.5)                                                 17.4
                                                                    =========                                         =========                                             =========
Other monetary assets                                  865.1                                            868.7                                                 852.6
General and supplementary allowances for
doubtful debts                                         (49.0)                                           (55.1)                                                (65.6)

Non-monetary assets                                     48.7                                             57.1                                                  63.5
                                                   ---------                                         --------                                            ----------
Total assets                                         7,105.1                                          8,202.5                                               8,940.0
                                                   =========                                         ========                                            ==========

Other monetary liabilities                              85.8                                             79.3                                                  87.6
Non-monetary liabilities                                 1.1                                              1.6                                                   2.6
Capital resources                                      521.6                                            522.2                                                 515.1
                                                   ---------                                         --------                                            ----------

Total liabilities and capital resources              7,105.1                                          8,202.5                                               8,940.0
                                                   =========                                         ========                                            ==========

FOOTNOTES:

(1)  The data in this table is presented before and after the effect of
     derivative instruments (including the off-balance sheet effect of
     derivative instruments).

(2)  Based on monthly opening balances except for the non-linked Israeli
     currency segment where the average balance is based on daily figures, and
     net of the average balance of the specific allowance for doubtful debts.

(3)  Derivatives (ALM) which comprise part of the Bank's asset and liability
     management and with respect to which revenue (expense) can be attributed to
     the linkage segments.

(4)  Including Israeli currency linked to foreign currency.


                                       36`

`The following table summarizes our assets and liabilities outstanding as of
December 31, 2007, 2006, and 2005:

                                  IN MILLIONS OF NIS
                             ----------------------------
                                   REPORTED AMOUNTS
                             ----------------------------
                             2007        2006        2005
                             ----        ----        ----

Total assets                6,483       7,516       8,721

Assets consisting of
credits to the public       5,521       6,519       7,681
Total liabilities*          5,926       7,006       8,193
Liabilities
consisting of
deposits                    5,855       6,923       8,110

* Not including Preference shares

     The following table shows the linkage basis (currency) breakdown of our
credit to the public outstanding as of December 31, 2007, 2006 and 2005:

                                                      IN MILLIONS OF NIS
                                                -----------------------------
                                                       REPORTED AMOUNTS
                                                -----------------------------
                                                2007        2006         2005
                                                -----       -----       -----

Non-linked Israeli currency                       104         214         400

CPI linked Israeli currency                       340         465         617

Dollar and linked thereto                       5,060       5,819       6,597

Other foreign currency and linked thereto          17          21          67
                                                -----       -----       -----

TOTAL                                           5,521       6,519       7,681
                                                =====       =====       =====


                                       37`

`INVESTMENT PORTFOLIO

     The following table presents the book or market value of our investment
portfolio as of December 31 of 2003, 2004, 2005, 2006 and 2007:

                                                              IN MILLIONS OF NIS
                                               --------------------------------------------------

                                                2007*     2006*       2005*      2004*     2003**
                                               ------     ------     ------     ------     ------

Marketable Non-Government bonds                     -          -          -        0.2        7.2
Non-marketable Non-
Government bonds                                  0.5        0.7        2.6        3.5        7.9
Non-marketable shares                            11.8       16.7       29.6       30.5       34.3

Marketable and available for sale shares         34.0       33.0       31.0       25.8       36.0
                                               ------     ------     ------     ------     ------

Total                                            46.3       50.4       63.2       60.0       85.4
                                               ======     ======     ======     ======     ======

     * Reported Amounts

     ** Adjusted Amounts

INTERNATIONAL OPERATIONS

     We have no material operations outside of Israel and our past and current
operations concentrate on the Israeli market.


                                       38`

`LOAN PORTFOLIO

     TOTAL CREDIT TO THE PUBLIC

     As of December 31, 2007, the total credit to the public amounted to NIS
5,521 million compared with NIS 6,519 million as of December 31, 2006. These
figures include credit guaranteed by the State of Israel and granted to the
Israel Electric Corporation Ltd. out of a deposit that was deposited with us by
the State of Israel for that purpose, the balance of which amounted to NIS 4,963
million as of December 31, 2007 compared with NIS 5,671 million as of December
31, 2006. Net of such credit, the credit to the public amounted to NIS 558
million as of December 31, 2007 compared with NIS 848 million as of December 31,
2006 (a 34% decrease). The above figures are after deduction of allowance for
doubtful debts. This decrease stemmed mainly from our policy to reduce our
credit portfolio and was also affected by the allowances for doubtful debts that
were recorded in the past year. As of March 31, 2008, total credit to the public
amounted to NIS 462 million (excluding credit guaranteed by the State of Israel
and granted to the Israel Electric Corporation Ltd. out of a deposit that was
deposited with us by the State of Israel for that purpose), which reflects a
decline of NIS 96 million (approximately 17%) compared to the balance
outstanding as of December 31, 2007.

ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS

     The following tables show, by business sector, the related risk
counterparties to whom our counterparty risk exposures were allocated in the
last five years.


                                       39`

`CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS
ADJUSTED AMOUNTS

                                                                               DECEMBER 31, 2007
                                        ------------------------------------------------------------------------------------------------
                                                                                ANNUAL
                                                                               EXPENSE
                                                                               FOR THE
                                                                               SPECIFIC                                        % OF SECTOR
                                        BALANCE                  TOTAL RISK    ALLOWANCE  BALANCE OF               TOTAL RISK  OF TOTAL RISK
                                         SHEET     OFF-BALANCE       OF           FOR    PROBLEMATIC                 NET OF       NET OF
                                        CREDIT     SHEET CREDIT  CREDIT TO      DOUBTFUL    DEBTS    GOVERNMENT    GOVERNMENT   GOVERNMENT
                                       RISK (1)**    RISK (2)**   PUBLIC**       DEBTS     (3)(5)    GUARANTEES    GUARANTEES   GUARANTEES
                                        -------       -------     -------       -------    -------     -------       -------     -------

                                                                                IN MILLIONS OF NIS
                                        ------------------------------------------------------------------------------------------------

Agriculture                                 5.2           0.6         5.8          (0.2)       1.0           -           5.8         0.8%
Industry                                  264.6          12.1       276.7          (7.2)     179.6           -         276.7        36.1%
Construction and real estate               56.4          65.3       121.7           0.6      102.4           -         121.7        15.9%
Electricity                             5,083.5           3.2     5,086.7             -       38.0     4,963.2         123.5        16.1%
Commerce                                   14.3           5.6        19.9          (0.6)      16.8           -          19.9         2.6%
Restaurants and hotels                      8.9           2.1        11.0             -        7.5           -          11.0         1.4%
Transport and storage                      19.2             -        19.2             -          -           -          19.2         2.5%
Communications and computer services        3.8           0.4         4.2           0.8        2.0           -           4.2         0.5%
Financial services                         32.6          70.8       103.4          (1.2)       2.7           -         103.4        13.5%
Other business services                    32.1           3.4        35.5           0.8        8.9           -          35.5         4.6%
Public and community services              42.6           0.1        42.7          (0.4)      30.9           -          42.7         5.5%
Private households                          3.6             -         3.6             -        0.3           -           3.6         0.5%
                                        -------       -------     -------       -------    -------     -------       -------     -------
Total                                   5,566.8         163.6     5,730.4          (7.4)     390.1     4,963.2         767.2       100.0%
                                        =======       =======     =======       =======    =======     =======       =======     =======
Credit risk included in the
 various industry sectors:
Agricultural settlement movements (4)     173.8           1.4       175.2          (6.3)      78.0
Local authorities and entities
   controlled by them                       4.0             -         4.0             -          -

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2007 was NIS 572.6 million


                                       40`

`CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS (CONT.)
REPORTED AMOUNTS

                                                                                         DECEMBER 31, 2006
                                                -------------------------------------------------------------------------------------------------
                                                                                        ANNUAL
                                                                                        EXPENSE
                                                                                        FOR THE
                                                                                        SPECIFIC                                       % OF SECTOR
                                                BALANCE                  TOTAL RISK    ALLOWANCE  BALANCE OF              TOTAL RISK  OF TOTAL RISK
                                                 SHEET      OFF-BALANCE     OF           FOR    PROBLEMATIC                NET OF       NET OF
                                                CREDIT     SHEET CREDIT  CREDIT TO      DOUBTFUL    DEBTS     GOVERNMENT  GOVERNMENT   GOVERNMENT
                                               RISK (1)       RISK (2)    PUBLIC         DEBTS      (3)(5)    GUARANTEES   GUARANTEES   GUARANTEES
                                                -------       -------     -------       -------     -------     -------     -------       -------

                                                                                            NIS MILLIONS
                                                -------------------------------------------------------------------------------------------------

Agriculture                                         5.6           0.3         5.9           1.4         0.7           -         5.9           0.6%
Industry                                          338.7          14.4       353.1           7.2       221.9           -       353.1          32.6%
Construction and real estate                      156.4          71.3       227.7           7.5       193.9           -       227.7          21.0%
Electricity                                     5,795.8           3.7     5,799.5             -        34.9       5,671       128.5          11.8%
Commerce                                           31.0           5.7        36.7           2.1        28.3           -        36.7           3.4%
Restaurants and hotels                             11.6           2.1        13.7           0.7         8.6           -        13.7           1.3%
Transport and storage                              23.0             -        23.0           0.1         0.5           -        23.0           2.1%
Communications and computer services                7.9             -         7.9          (1.1)        7.2           -         7.9           0.7%
Financial services                                 45.2          84.0       129.2           1.3        23.0           -       129.2          11.9%
Other business services                            54.4           2.5        56.9           6.7        31.9           -        56.9           5.2%
Public and community services                      97.2           0.2        97.4           1.2        32.0           -        97.4           9.0%
Private households                                  4.7             -         4.7           0.5         0.3           -         4.7           0.4%
                                                -------       -------     -------       -------     -------     -------     -------       -------
Total                                           6,571.5         184.2     6,755.7          27.6       583.2       5,671     1,084.7         100.0%
                                                =======       =======     =======       =======     =======     =======     =======       =======
Credit risk included in the
 various economic sectors:
Agricultural settlement movements (4)             208.9           2.8       211.7           2.1        94.0
Local authorities and entities controlled
by them                                             6.5             -         6.5             -           -

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2006 was NIS 658.3 million.


                                       41`

`CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS (CONT.)
REPORTED AMOUNTS

                                                                                     DECEMBER 31, 2005
                                            ---------------------------------------------------------------------------------------------------
                                                                                    ANNUAL
                                                                                    EXPENSE
                                                                                    FOR THE
                                                                                   SPECIFIC                                          % OF SECTOR
                                            BALANCE                 TOTAL RISK     ALLOWANCE  BALANCE OF                TOTAL RISK   OF TOTAL RISK
                                            SHEET       OFF-BALANCE     OF            FOR    PROBLEMATIC                  NET OF        NET OF
                                            CREDIT     SHEET CREDIT  CREDIT TO      DOUBTFUL    DEBTS     GOVERNMENT    GOVERNMENT    GOVERNMENT
                                           RISK (1)      RISK (2)     PUBLIC         DEBTS      (3)(5)    GUARANTEES    GUARANTEES    GUARANTEES
                                            -------       -------     -------       -------     -------     -------       -------       -------

                                                                                        NIS MILLIONS
                                            ---------------------------------------------------------------------------------------------------


Agriculture                                    12.3           0.3        12.6             -        10.0           -          12.6           0.8%
Industry                                      462.4          45.6       508.0          15.5       304.9         2.7         505.3          33.1%
Construction and real estate                  291.0          33.8       324.8          31.7       247.9         1.8         323.0          21.1%
Electricity                                 6,549.7           1.7     6,551.4          19.0        42.5       6,405         146.4           9.6%
Commerce                                       42.9           5.9        48.8           2.5        32.3           -          48.8           3.2%
Restaurants and hotels                         15.2           2.4        17.6           0.9        13.0           -          17.6           1.2%
Transport and storage                          27.1             -        27.1           0.1         7.5           -          27.1           1.8%
Communications and computer services            8.4             -         8.4           1.3         7.6           -           8.4           0.6%
Financial services                            114.5         100.9       215.4         (17.7)       45.6           -         215.4          14.1%
Other business services                        92.0           3.4        95.4           3.4        46.5           -          95.4           6.2%
Public and community services                 119.0           1.2       120.2          (0.5)       40.8           -         120.2           7.9%
Private households                              6.4             -         6.4             -         0.5           -           6.4           0.4%
                                            -------       -------     -------       -------     -------     -------       -------       -------
Total                                       7,740.9         195.2     7,936.1          56.2       799.1     6,409.5       1,526.6        100.00%
                                            =======       =======     =======       =======     =======     =======       =======       =======
Credit risk included in the
 various economic sectors:
Agricultural settlement movements (4)         254.2           3.0       257.2          (1.5)      119.1
Local authorities and entities
controlled by them                              9.9             -         9.9             -           -

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2005 was NIS 675.6 million.


                                       42`

`CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS (CONT.)
 REPORTED AMOUNTS

                                                                                     DECEMBER 31, 2004
                                            -----------------------------------------------------------------------------------------------------
                                                                                    ANNUAL
                                                                                    EXPENSE
                                                                                    FOR THE
                                                                                   SPECIFIC                                             % OF SECTOR
                                            BALANCE                 TOTAL RISK     ALLOWANCE  BALANCE OF                  TOTAL RISK   OF TOTAL RISK
                                            SHEET       OFF-BALANCE     OF            FOR    PROBLEMATIC                    NET OF        NET OF
                                            CREDIT     SHEET CREDIT  CREDIT TO      DOUBTFUL    DEBTS       GOVERNMENT    GOVERNMENT    GOVERNMENT
                                           RISK (1)**    RISK (2)**   PUBLIC**       DEBTS      (3)(5)      GUARANTEES    GUARANTEES    GUARANTEES
                                            -------       -------     -------       -------     -------       -------       -------       -------
                                                                                    IN MILLIONS OF NIS
                                            -----------------------------------------------------------------------------------------------------

Agriculture                                    14.9           0.3        15.2           0.7        10.6           0.2            15           0.7%
Industry                                      595.4          53.5       648.9          29.8       331.4           5.3         643.6          30.0%
Construction and real estate                  447.3          84.2       531.5          24.3       395.1           4.3         527.2          24.6%
Electricity                                 6,341.9           4.6     6,346.5           2.6        86.1       6,167.3         179.2           8.4%
Commerce                                       65.7           9.5        75.2           4.2        32.8           0.2            75           3.5%
Restaurants and hotels                         42.3           2.5        44.8           0.5        35.1             -          44.8           2.1%
Transport and storage                          32.4             -        32.4             -         0.2             -          32.4           1.5%
Communications and computer services           44.2           0.1        44.3          (0.5)       18.8             -          44.3           2.1%
Financial services                            159.8          98.0       257.8           4.7        83.1             -         257.8          12.0%
Other business services                       127.3           2.3       129.6          10.6        43.3             -         129.6           6.0%
Public and community services                 184.9           1.2       186.1           1.1        88.8             -         186.1           8.7%
Private households                              9.7             -         9.7           1.1         0.8             -           9.7           0.5%
                                            -------       -------     -------       -------     -------       -------       -------       -------
TOTAL                                       8,065.8         256.2     8,322.0          79.1     1,126.1       6,177.3       2,144.7        100.00%
                                            =======       =======     =======       =======     =======       =======       =======       =======
Credit risk included in the
 various industry sectors:
Agricultural settlement movements (4)         291.5           5.6       297.1          (1.8)      124.7
Local authorities and entities
controlled by them                             22.5             -        22.5             -         1.9

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2004 was NIS 714.4 million.


                                       43`

`CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SECTORS (CONT.)
ADJUSTED AMOUNTS

                                                                                    DECEMBER 31, 2003
                                            -----------------------------------------------------------------------------------------------------
                                                                                    ANNUAL
                                                                                    EXPENSE
                                                                                    FOR THE
                                                                                   SPECIFIC                                             % OF SECTOR
                                            BALANCE                 TOTAL RISK     ALLOWANCE  BALANCE OF                  TOTAL RISK   OF TOTAL RISK
                                            SHEET       OFF-BALANCE     OF            FOR    PROBLEMATIC                    NET OF        NET OF
                                            CREDIT     SHEET CREDIT  CREDIT TO      DOUBTFUL    DEBTS       GOVERNMENT    GOVERNMENT    GOVERNMENT
                                           RISK (1)**    RISK (2)**   PUBLIC**       DEBTS      (3)(5)      GUARANTEES    GUARANTEES    GUARANTEES
                                            -------       -------     -------       -------     -------       -------       -------       -------
                                                                                    IN MILLIONS OF NIS
                                            -----------------------------------------------------------------------------------------------------

Agriculture                                    25.0             -        25.0             -         7.7           0.3          24.7           0.8
Industry                                      922.5          90.5     1,013.0          66.1       4,713          20.1         992.9          30.5
Construction and real estate                  524.9         135.3       660.2          18.8       433.8           4.5         655.7          20.1
Electricity                                 6,575.2          17.7     6,593.9           1.2        66.6       6,405.3         188.6           5.8
Commerce                                       97.5           6.1       103.6           4.9        47.3             -         103.6           3.2
Restaurants and hotels                         83.1          31.9       115.0           6.8        77.0           2.5         112.5           3.5
Transport and storage                          90.5           0.2        90.8           0.1         0.2             -          90.8           2.8
Communications and computer services           93.5           8.8       102.3           7.8        29.4             -         102.3           3.1
Financial services                            344.8         109.2       454.0          10.0       121.1             -         454.0          13.9
Other business services                       264.9           2.8       267.7           6.7        43.6             -         267.7           8.2
Public and community services                 233.8           1.3       235.1          11.5       146.6             -         235.1           7.2
Private households                             27.5           0.8        28.2             -         2.8             -          28.2           0.9
                                            -------       -------     -------       -------     -------       -------       -------       -------
TOTAL                                       9,283.2         404.6     9,688.8         133.9     1,447.4       6,432.7       3,256.1         100.0
                                            =======       =======     =======       =======     =======       =======       =======       =======
Credit risk included in the
 various industry sectors:
Agricultural settlement movements (4)         345.7           5.4       351.1          10.2       163.3
Local authorities and entities
   controlled by them                          28.6             -        28.6             -         1.9

The credit risk and the balance of problematic debts are presented net of the
specific allowance for doubtful debts.

(1)  Credit to the public and investments in debentures of the public. There are
     no other assets in respect of derivative instruments in relation to the
     public.

(2)  Credit risk in off-balance sheet financial instruments as calculated for
     the purpose of determining per borrower credit limitations.

(3)  Balances of problematic debts, less the specific allowance for doubtful
     debts and less credit covered by collateral that is deductible for purposes
     of individual borrower and group of borrowers limitations. Includes
     components of off-balance sheet risk.

(4)  Kibbutzim and cooperative settlements and related local and national
     organizations and entities controlled by such movements.

(5)  The total specific allowance for doubtful debts (not including interest on
     non-income bearing loans) as of December 31, 2003 was NIS 732.5 million.


                                       44`

`MATURITY DISTRIBUTION OF CREDIT TO THE PUBLIC BY LINKAGE BASIS SEGMENTS

     The following table sets forth the maturity profile of our credit to the
public by linkage basis segments as of December 31, 2007. In this table, the
future cash flows in respect of assets and liabilities are presented according
to linkage base, and in accordance with the remaining period to the contractual
maturity date of each cash flow.

                                                                  IN MILLIONS OF NIS
                                          -----------------------------------------------------------------------
                                            UP        BETWEEN     BETWEEN 6   BETWEEN        MORE
LINKAGE                                    TO 3        3 AND        AND        1 AND         THAN
BASIS                                     MONTHS      6 MONTHS   12 MONTHS    5 YEARS       5 YEARS        TOTAL
                                          -------     -------     -------     -------       -------       -------

Non-Linked Israeli currency                  63.2         4.0        21.0        26.8             -         115.0
CPI-linked Israeli Currency                  15.1        17.0        30.3       209.5         195.8         467.7
Foreign Currency and linked thereto         157.9       138.8       279.2     2,188.0       5,484.6       8,248.5
                                          -------     -------     -------     -------       -------       -------

TOTAL                                       236.2       159.8       330.5     2,424.3       5,680.4       8,831.2
                                          =======     =======     =======     =======       =======       =======

Balances of current accounts and credits which have matured are included in the
up to 3 months category.

DEVELOPMENT OF CREDIT RISK IN RESPECT OF PROBLEMATIC BORROWERS

     The following table sets forth comparative data on the development of the
overall credit risk in respect of problematic borrowers (not including
problematic debts that are covered by collateral that is deductible for purposes
of individual borrower and borrower group indebtedness limitations) (Proper
Banking Procedure No. 313):

                                                                                 AS OF DECEMBER 31
                                                              ---------------------------------------------------------
                                                              2007          2006        2005          2004         2003
                                                              -----        -----        -----        -----        -----

Non income bearing                                             69.7        171.2        267.0        400.2        571.6
Restructured (2)                                               31.5         74.1         97.9        108.3         34.7
Designated for restructuring (3)                               17.3         26.9         13.5         24.3         54.2
Temporarily in arrears                                          8.7         14.5         64.2        117.9        102.4
Under special supervision*                                    181.7        208.5        282.8        353.8        497.2
                                                              -----        -----        -----        -----        -----
Total balance sheet credit to
   problematic borrowers (1)                                  308.9        495.2        725.4      1,004.5      1,260.1
                                                              =====        =====        =====      =======      =======

 Off-balance sheet credit risk in respect of
   problematic borrowers (1)                                   81.2         88.0         73.7        121.6        187.2

Debentures of problematic borrowers                               -            -            -            -          0.1
                                                              -----        -----        -----        -----        -----
Overall credit risk in respect of problematic
   borrowers (1) (4)                                          390.1        583.2        799.1      1,126.1      1,447.4
                                                              =====        =====        =====      =======      =======

*    Including NIS 169.7 million as of December 31, 2007 in respect of debts for
     which a specific allowance exists (NIS 183.1 as of December 31, 2006, NIS
     74.9 million as of December 31, 2005, NIS 116.1 million as of December 31,
     2004 and NIS 136.1 million as of December 31, 2003).


                                       45`

`(1)  Not including problematic debts that are covered by collateral that is
     deductible for purposes of individual borrower and borrower group
     indebtedness limitations (Proper Banking Procedure No. 313).

(2)  Credit that was restructured in the current year and credit that was
     restructured in prior years with waiver of income.

(3)  Credit to borrowers in respect of which there is an as yet unimplemented
     decision by management to restructure their debt.

(4)  As calculated for purposes of individual borrower and borrower group
     indebtedness limitations, except in respect of guarantees granted by a
     borrower as security for the debt of a third party.

     The data presented above indicates the high volume of debts that are
classified as non-income bearing in relation to total credit to the public. The
interest revenue in respect of those debts, which will not be included in
financing income, will have a negative impact on our results of operations in
the future, as long as the debts continue to be classified as non-income
bearing. Interest income that was not credited to income for non-income bearing
debts for the year ending December 31, 2007 was NIS 9 million, in comparison to
NIS 23 million for the year ending December 31, 2006, and NIS 28 million for the
year ending December 31, 2005.

     According to our policy, a loan is classified as non-income bearing if the
loan is in arrears and management's evaluation is that the arrears are not
temporary.


                                       46`

`LOAN CONCENTRATION


     The following table sets forth our credit risk exposure to the largest six
borrowers/borrower groups as defined by the Proper Banking Procedures of the
Bank of Israel, for the five years ending on December 31, 2007, 2006, 2005,
2004, and 2003:

                                                        IN MILLIONS OF NIS
                             ----------------------------------------------------------------------------
                                 2007           2006           2005            2004            2003
                             -------------- -------------- -------------- --------------- ---------------
                                                                                             ADJUSTED
                                                  REPORTED AMOUNTS                           AMOUNTS
                             ------------------------------------------------------------ ---------------

Credit risk exposure to
the largest six
borrowers/borrower groups*            313.1          368.6          433.2          542.3            595.5
---------------------------- --------------  -------------  -------------  --------------  --------------
Total credit to the
public**                            5,521.1        6,519.1        7,680.7        7,993.4          9,189.6
---------------------------- --------------  -------------  -------------  --------------  --------------
Percentage of the
borrower/borrower group of
the total credit to the
public                                  5.7%           5.7%           5.6%            6.8%            6.5%
---------------------------- --------------  -------------  -------------  --------------  --------------

*    The credit risk exposure is calculated according to the Proper Banking
     Procedures of the Supervisor of Banks (Israel) and consequently, the
     amounts are presented after the deduction of certain types of collateral,
     such as State of Israel guarantees.

**   The amount of total credit to the public includes a credit to the Israel
     Electric Corporation Ltd., guaranteed by the State of Israel which was
     granted out of a deposit that was deposited with us by the State of Israel
     for that purpose and the outstanding balance of which, for each of the
     above years , was as follows:

        o    December 31, 2007* -               NIS 4,963.2 million

        o    December 31, 2006*                 NIS 5,671.0 million

        o    December 31, 2005* -               NIS 6,405.0 million

        o    December 31, 2004* -               NIS 6,167.3 million

        o    December 31, 2003** -              NIS 6,405.3 million

        *    Reported Amounts

        **   Adjusted Amounts


                                       47`

`ANALYSIS OF SPECIFIC ALLOWANCES FOR DOUBTFUL DEBTS BY BUSINESS SECTORS

The following table details our annual expense (income) for specific allowances
for doubtful debts, according to business sectors, for each of the past five
years:

                                          2007                    2006                    2005                    2004                    2003
                                    ------------------     -------------------     -------------------     -------------------     -------------------
                                    REPORTED               REPORTED                REPORTED                REPORTED                ADJUSTED
                                    AMOUNTS                AMOUNTS                 AMOUNTS                 AMOUNTS                 AMOUNTS
                                    -------                -------                 -------                 -------                 -------
                                       IN                    IN                      IN                      IN                      IN
                                    MILLIONS               MILLIONS                MILLIONS                MILLIONS                MILLIONS
                                     OF NIS       %        OF NIS         %        OF NIS         %        OF NIS         %        OF NIS         %
                                    -------    -------     -------     -------     -------     -------     -------     -------     -------     -------

Agriculture                            (0.2)         3         1.4           5           -           -         0.7           1           -           -
Industry                               (7.2)        97         7.2          26        15.5          28        29.8          38        66.1          49
Construction and real estate            0.6         (8)        7.5          27        31.7          56        24.3          31        18.8          14
Electricity                               -          -           -           -        19.0          34         2.6           3         1.2           1
Commerce                               (0.6)         8         2.1           8         2.5           4         4.2           5         4.9           4
Restaurants and hotels                    -          -         0.7           3         0.9           2         0.5           1         6.8           5
Transport and storage                     -          -         0.1           -         0.1           -           -           -         0.1           -
Communications and computer
services                                0.8        (11)       (1.1)         (4)        1.3           2        (0.5)         (1)        7.8           6
Financial services                     (1.2)        16         1.3           5       (17.7)        (31)        4.7           6        10.0           7
Other business services                 0.8        (11)        6.7          24         3.4           6        10.6          14         6.7           5
Public and community services          (0.4)         6         1.2           4        (0.5)         (1)        1.1           1        11.5           9
Private households                        -                    0.5           2           -           -         1.1           1           -           -
TOTAL                                  (7.4)       100        27.6         100        56.2         100        79.1         100       133.9         100
                                    -------    -------     -------     -------     -------     -------     -------     -------     -------     -------
Credit risk included in the
various industry sectors:
Agricultural settlement
movements                              (6.3)        85         2.1           8        (1.5)         (3)       (1.8)         (2)       10.2           8
Local authorities                         -          -           -           -           -           -           -           -           -           -


                                       48`

`DEPOSITS

     The following tables provide an analysis of the maturity of deposits as of
December 31, 2007. In the tables below the future cash flows in respect of
assets and liabilities are presented according to linkage base, and in
accordance with the remaining period to the contractual maturity date of each
cash flow.

DEPOSITS OF THE PUBLIC AS OF DECEMBER 31, 2007

                                                        IN MILLIONS OF NIS
                                           ---------------------------------------------
                                             UP      BETWEEN    BETWEEN 6  MORE
LINKAGE                                    TO 3       3 AND      AND 12    THAN
SEGMENT                                    MONTHS    6 MONTHS    MONTHS   1 YEAR   TOTAL
                                           ------    --------    ------   ------   -----

Non-Linked Israeli currency                 26.7        0.2       2.8         -    29.7
CPI-linked Israeli Currency                  2.2        1.9       4.6      20.1    28.8
Foreign Currency and linked thereto          0.2        0.2       0.1         -     0.5

DEPOSITS OF THE GOVERNMENT AS OF DECEMBER 31, 2007

                                                          IN MILLIONS OF NIS
                                           ----------------------------------------------------
                                             UP      BETWEEN      BETWEEN 6    MORE
LINKAGE                                     TO 3      3 AND        AND 12      THAN
SEGMENT                                    MONTHS    6 MONTHS      MONTHS     1 YEAR     TOTAL
                                           ------    --------      ------     -------   -------

CPI- linked Israeli Currency                 11.2        18.2        22.4       223.9     275.7
Foreign Currency and linked thereto         138.8       138.1       276.9     7,658.8   8,212.6

C.   ORGANIZATIONAL STRUCTURE

     Not applicable.

D.   PROPERTY, PLANTS AND EQUIPMENT

     Until September 14, 2003, our offices, which we leased, were located at
Asia House, 4 Weizman Street, Tel Aviv, Israel. These premises encompassed
approximately 30,000 square feet.

     In connection with the Run-Off Plan and the efficiency plan approved by our
Board and the reduction in the number of employees, all of our operations moved
on September 14, 2003 to a smaller office located at 82 Menachem Begin Road, Tel
Aviv, Israel.


                                       49`

`ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     THE FINANCIAL INFORMATION PRESENTED IN THIS ITEM BELOW IS BASED ON ISRAELI
GAAP, WHICH MAY DIFFER MATERIALLY FROM U.S. GAAP. FOR A RECONCILIATION OF OUR
FINANCIAL INFORMATION TO U.S. GAAP, SEE "ITEM 3.A. SELECTED FINANCIAL DATA" AND
"ITEM 17. FINANCIAL STATEMENTS."

     SUMMARY

     Until the liquidity crisis we experienced in the third quarter of 2002,
which stemmed from the withdrawals of deposits by the public, our business
focused on regular banking activities, including, without limitation, the
extension of short, medium and long term credit in NIS and foreign currencies,
the acceptance of deposits in all currencies, the maintenance of checking
accounts and the issuance of credit cards. In addition, we issued guarantees of
all types in Israel and abroad and issued letters of credit and other documents
relating to foreign trade. As of June 30, 2002, the balance of the public's
deposits with us was NIS 3,597 million, which decreased to NIS 1,291 million as
of December 31, 2002. As a result of the increased withdrawals of deposits by
the public, we began to experience a severe liquidity crisis. By December 31,
2003 the balance of the public's deposits with us had declined to only NIS 620
million, and by December 31, 2007, to NIS 55 million.

     In response to the liquidity crisis, the Government of Israel and the Bank
of Israel proposed a plan for the ultimate sale of our assets and liabilities to
a third party. Until the sale, however, the Bank of Israel agreed to provide us
the Special Line of Credit to help us manage our liquidity crisis and continue
our operations. See "Item 4. Information on the Company-Business
Overview-Proposed Sale of the Bank and Extension of Special Line of Credit by
the Bank of Israel" for a detailed description of the proposed sale and the
Special Line of Credit from the Bank of Israel.

     The "en bloc" sale of our asset and liability portfolio within a short time
frame was not consummated and, on February 27, 2003, our Board of Directors
adopted a Run-Off Plan for our business, a modified version of which was
approved by the Government of Israel. On July 26, 2005, our Board of Directors
decided to extend the term of the Run-Off Plan until July 31, 2008, and on
October 10, 2005, the Government of Israel approved the extension. The ultimate
goal of the Run-Off Plan is the controlled realization of our credit assets over
a period expiring in July 2008. For a more detailed description of the Run-Off
Plan and the amendments to the Special Line of Credit, see "Item 4. Information
on the Company-Business Overview-Adoption of the Run-Off Plan and Amendment of
the Special Line of Credit."

     On April 29, 2008, the Ministerial Committee for Privatization Matters
passed a resolution regarding the privatization of the Bank, which would be
implemented as part of the Section 350 Arrangement, whereby all of our shares
would be sold or redeemed. See Item 4. Information on the Company-Business
Overview- Adoption of the Run-Off Plan and Amendment of the Special Line of
Credit."


                                       50`

`Pursuant to the privatization resolution passed by the Ministerial
Committee for Privatization Issues, our Board of Directors resolved, at its
meeting on 26 May, 2008, to submit the Section 350 Arrangement for the approval
of the Court.

     Prior to approving the above resolution, our Board of Directors received
expert opinions regarding the reasonability of the criteria for determining the
minimum price for the sale of our shares as part of such Section 350
Arrangement, and regarding the fairness of such Section 350 Arrangement and the
formula for division of the Sale proceeds as part of the Section 350 Arrangement
vis-a-vis the public shareholders. Professor A. Barnea submitted a report dated
March 9, 2008, where he compared the option of winding-up the Bank with the
proposed sale of our shares., The comparison was based on our financial
statements as of September 30, 2007, and contains the distribution formula of
the sale proceeds. In addition, a legal opinion was furnished to the Board
regarding the reasonableness of the arrangement for paying partial dividend to
the holders of the C Share, CC Shares and CC1 Shares, if the Sale will not be
effected.

     The Board of Directors' decision to submit the Section 350 Arrangement was
based, among other things, on the conclusion and the findings of the fairness
opinion and the legal opinion, as well as on Professor Barnea's report, which
led the Board to the opinion that the sale of the Bank's shares under the terms
of the Section 350 Arrangement, would be more beneficial to th epublic
shareholders of the bank than winding-up the Bank.

     The principal elements of the Arrangement Scheme are summarized in Item 4.
Information on the Company-Business Overview- Adoption of the Run-Off Plan and
Amendment of the Special Line of Credit."

A.   OPERATING RESULTS

     For the fiscal year ended December 31, 2007, we had a profit of NIS 22.2
million, compared with a loss of NIS 17.1 million in 2006 and a loss of NIS 8.4
million in 2005.

     Our total balance sheet as of December 31, 2007 amounted to NIS 6,483
million as compared to NIS 7,516 million at December 31, 2006 and NIS 8,721
million as of December 31, 2005. Credit to the public amounted to NIS 5,521
million, which represented approximately 85.2% of our total balance sheet.

     Our profits from financing operations before the provision for doubtful
debts amounted to NIS 29.3 million in 2007 compared to NIS 18.2 million in 2006
and NIS 61.6 million in 2005. Our after-tax profit from ordinary operations
amounted to NIS 22.2 million in 2007 compared to a loss of NIS 17.1 million in
2006 and a loss of NIS 8.4 in 2005.

The increase in profit from financing operations resulted mainly from the
following:

-    The increase in revenues from interest collected on problematic debts which
     amounted to NIS 17.4 million compared with NIS 9.4 million in 2006 and NIS
     21.6 million in 2005.


                                       51`

`-    A decrease in the volume of problematic debts classified as non-interest
     bearing. The average balance of non-interest bearing debts in 2007 amounted
     to NIS 109 million, compared with NIS 242 million in 2006. The balance of
     these debts constituted 13.7% of total monetary assets (excluding credit to
     the Israel Electric Company guaranteed by the State), compared with 20.3%
     in 2006.

-    The impact of the decrease in the interest rate in the economy on the
     volume of the non-accrual of income in respect of non-interest bearing
     debt. The average interest rate in 2007 was lower than the average interest
     last year. As a result, the negative impact of the non-accrual of revenues
     in respect of non-revenue generating debt was smaller than in the same
     period last year, in addition to the aforementioned volume of problematic
     debts.

On the other hand, this increase was offset by the decrease in the volume of the
Bank's financing activity, as part of the policy implemented by the Bank in the
past few years. For details regarding this decrease in volume, see the analysis
of financing activity by linkage segment.

     In our allowance for doubtful debts, an amount of NIS 13.8 million was
recorded as income in this item in 2007, compared with an expense of NIS 21.7
million in 2006 and an expense of NIS 44.2 million in 2005. In the specific
allowances for doubtful debts, income of NIS 7.3 million was recorded in 2007,
compared with an expense of NIS 27.6 million in 2006 and an expense of NIS 56.2
million in 2005. The supplementary allowance for doubtful debts reflected a
decrease of NIS 6.5 million in 2007, compared with a decrease of NIS 5.9 million
in 2006 and NIS 12.0 million in 2005.

     The decrease in the supplementary allowance for doubtful debts is mainly
due to the decrease in the volume of problematic debts in general and to the
volume of non-income bearing debts in particular. This decline is gradual and
has been reflected in our financial statements in recent years.

     The supplementary allowance for doubtful debts (including a general
allowance for doubtful debts) amounted to NIS 45.2 million as of December 31,
2007, constituting 7.5% of the balance of the credit (excluding State-guaranteed
credit to the Israel Electric Company out of the State deposit) before the
aforementioned allowance, compared with an allowance of NIS 51.7 million in 2006
which constituted 5.7% of the balance of the credit. This rate is
extraordinarily higher than the accepted rate in the banking system. The high
rate derives mainly from the volume of the general allowance which amounts to
NIS 38.9 million. The general allowance was standard practice in the banking
system until December 31, 1991 and it was based on the volume of the debt as of
that date. In accordance with the provisions of the Supervisor of Banks, the
aforementioned allowance remained at that volume, notwithstanding the decrease
in the volume of debt in recent years. At present it constitutes 6.4% of the
balance of the credit (versus 4.3% at December 31, 2006).


                                       52`

`Following are comparative data on the development of the overall credit
risk in respect of problematic borrowers(1) (in NIS millions):

                                                                             AS AT DECEMBER 31,
                                                                            -------------------
                                                                              2007        2006
                                                                            -------     -------

Non income bearing                                                             69.7       171.2
Restructured (2)                                                               31.5        74.1
Designated for restructuring (3)                                               17.3        26.9
Temporarily in arrears                                                          8.7        14.5
Under special supervision*                                                    181.7       208.5
                                                                            -------     -------
Total balance sheet credit to problematic borrowers (1)                       308.9       495.2
Off-balance sheet credit risk in respect of problematic borrowers (1)          81.2        88.0
                                                                            -------     -------

Overall credit risk in respect of problematic borrowers (1) (4)               390.1       583.2
                                                                            =======     =======

*    Including an amount of NIS 169.7 million (NIS 183.1 million on December 31,
     2006) in respect of debts for which a specific allowance exists.

(1)  Not including problematic debts that are covered by collateral that is
     deductible for purposes of individual borrower and borrower group
     limitations (Proper Banking Procedure Directive No. 313).

(2)  Credit that was restructured in the current year and credit that was
     restructured in prior years with waiver of income.

(3)  Credit to borrowers in respect of which there is a yet unimplemented
     management decision to restructure their debt.

(4)  As calculated for purposes of individual borrower and borrower group
     limitations, except in respect of guarantees granted by a borrower as
     security for the debt of a third party.

     A comparison of the data indicates a decrease in the volume of problematic
debts in general and debts classified as non-income bearing in particular. The
decrease in the volume of debts classified as non-income bearing derives from a
combination of the following factors: collection of debts from customers
classified as non-income bearing, and arrangements with some of these customers,
further to which moved over to a track of regular payments and were classified
as restructured.

     Nevertheless, the data point to a high proportion of debts classified as
non-income bearing when compared to total public credit. The interest charges in
respect of these debts, which were not recorded to financing income, will have a
negative impact on the results of our operations in the future as long as these
debts are classified as non-income bearing. It is worth noting that
notwithstanding the decline in the volume of non-income bearing debts as a
result of the policy implemented by us of collecting credit, it is reasonable to
assume that the negative impact of this debt on the results of operations will
continue to be significant. In connection with this it is worth noting that the
amount of the interest that will not accrue to income will be affected both by
the volume of the non-income bearing debt and the interest rate in the economy.
In the event that the Bank of Israel interest rate increases, the negative
impact of the non-income bearing debt on the amount of financing income will be
even greater.


                                       53`

`Almost all of the volume of the off-balance sheet credit risk in respect of
problematic borrowers derives from the indemnification issued by the Bank in
favor of the receivers that were appointed to realize the assets of the
companies undergoing legal proceedings. The writs of indemnification are in
respect of receipts that were credited to the borrowers' accounts with the Bank
out of the proceeds from the realization of the assets.

TOTAL ASSETS

     Our total assets as of December 31, 2007 decreased to NIS 6,483 million as
compared to NIS 7,516 million as of December 31, 2006 and NIS 8,721 million as
of December 31, 2005. The main component of the net change in the total assets
was the reduction of our credit portfolio, which decreased from NIS 7,681 as of
December 31, 2005 to NIS 6,519 million as of December 31, 2006 and to NIS 5,521
million as of December 31, 2007 (a decrease of 15% in the last year). The above
figures include a state guaranteed credit to the Israel Electric Corporation
Ltd.(NIS 4,963 million as of December 31, 2007, NIS 5,671 million as of December
31, 2006 and NIS 6,405 million as of December 31, 2005), granted out of a
deposit that was deposited with us by the State of Israel for that purpose.

TOTAL LIABILITIES

     Our total liabilities, not including Preference Shares, as of December 31,
2007 decreased to NIS 5,926 million as compared to NIS 7,006 million as of
December 31, 2006 and NIS 8,193 million as of December 31, 2005. The main
component of the net change in the total liabilities was the reduction of our
deposits, which decreased from NIS 8,110 million as of December 31, 2005 to NIS
6,923 million as of December 31, 2006 to NIS 5,855 million as of December 31,
2007 (15% decrease in the last year). The calculation of total liabilities
includes a deposit of the State of Israel that was used to grant a credit
guaranteed by the State of Israel to the Israel Electric Corporation Ltd., the
balance of which amounted to NIS 6,405 million as of December 2005, NIS 5,671
million as of December 31, 2006 and NIS 4,963 million as of December 31, 2007.

AVERAGE BALANCE OF ASSETS IN VARIOUS LINKAGE SEGMENTS AND THE MARGIN ON THESE
ASSETS

     UNLINKED SHEKEL SEGMENT - The average balance of assets in this segment
amounted to NIS 184 million in 2007, compared with NIS 364 million in 2006, a
decrease of 49%. The margin in this segment, including the effect of
derivatives, was 1.70% in 2007, compared with 1.39% in 2006.

     It should be noted that most of the non-income bearing debt is included in
this segment. The balance of such debt as of December 31, 2007 amounted to NIS
42 million, compared with NIS 125 million at December 31, 2006. The improvement
in the margin of this segment compared with 2006, derived both from the decrease
in the volume of non-interest bearing debt and its relative weight out of total
credit and from the decline in the interest rate and its impact on the
non-accrual of revenue in respect of these debts.


                                       54`

`CPI-LINKED SHEKEL SEGMENT - The average balance of assets in this segment
amounted to NIS 455 million in 2007, compared with NIS 561 million in 2006, a
decrease of 18.9%. The decrease in the volume of activity of this segment
derives both from the overall decline in our activity and from our policy
whereby credit renewed by us is for short periods and mainly in the unlinked
shekel segment. The margin in this segment, including the effect of derivatives,
was 2.30% in 2007, compared with 2.58% in 2006.

     FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT - The average overall
volume of assets in this segment amounted to NIS 5,602 million in 2007 compared
with NIS 6,406 million in 2006. Credit in this segment includes credit
guaranteed by the State that was granted to the Israel Electric Company Ltd. out
of a deposit of the State. The margin in respect of this credit is negligible
and matches the level of risk attached to this credit. The average balance of
this credit in 2007 amounted to NIS 5,445 million compared with NIS 6,143
million in 2006. Excluding the said credit, the average balance of assets in
this segment amounts to NIS 156 million, compared with NIS 264 million in 2006,
a decrease of 41%. The margin in this segment, including the effect of
derivatives, was 0.07% in 2007, compared with 0.08% in 2006. The low margin rate
in this segment is the result of the volume of State guaranteed credit, as
stated above. The credit guaranteed by the State and the deposit of the State
from which the credit is granted bear interest at a high rate. Due to their
heavy weight in the assets and liabilities and the negligible interest margin on
this credit, they distort the data referring to the margin in this segment. In
respect of this credit, denominated in dollars, an expense was recorded in 2007
in an amount of NIS 127 million (compared with an expense of NIS 89 million in
2006). The reason that in these years an expense was recorded in respect of this
credit was the decline in the rate of the dollar. As mentioned above, this
credit is guaranteed by the State and the margin in respect thereof is marginal.
Therefore, the amount of the income recorded in respect of the deposit of the
State granted as a source to finance the credit is similar in amount.

     In an analysis made regarding the data of this segment, net of the
aforementioned credit and deposit, the data indicate a margin of 2.37% in 2007
(compared with 1.99% in 2006).

     The average of the total financial assets (excluding state-guaranteed
credit to the Israel Electric Company) amounted to NIS 795 million in 2007,
compared with NIS 1,189 million in 2006, a decrease of 33%.

     Regarding income from financing activity, it can be assumed that the policy
implemented by us to reduce our activity and the continued decline in the volume
of credit will continue to negatively impact on the income from financing
activity.


                                       55`

`OPERATING INCOME AND EXPENSE

     OPERATING AND OTHER INCOME - This income amounted to NIS 11.5 million in
2007, compared with NIS 21.5 million in 2006 and NIS 18.2 million in 2005. Most
of the income derived from gains from investments in shares which amounted to
NIS 8.7 million in 2007, compared with NIS 16.4 million in 2006 and NIS 11.3
million in 2005. It is worth noting that the entire investment in shares
amounted to NIS 61 million as at December 31, 2005, NIS 50 million as at
December 31, 2006, and NIS 46 million at December 31, 2007, so that the gains on
the aforementioned stock portfolio in recent years are considerably high and
there is no certainty that they will continue also in the future.

     In 2007, income from operating commissions amounted to NIS 1.1 million
compared with NIS 1.3 million in 2006 and NIS 2.2 million in 2005, a decrease
reflecting the decline in transactions executed by the customers through the
Bank.

     OPERATING AND OTHER EXPENSES - Amounted to NIS 30.8 million in 2007,
compared with NIS 35.1 million in 2006 and NIS 44.0 million in 2005. Payroll
expenses totaled NIS 18.5 million in 2007, compared with NIS 17.6 million in
2006 and NIS 18.2 million in 2005. With regard to payroll expenses, the
following points should be noted:

     -    Payroll expenses of 2007 included an amount of NIS 2.5 million in
          respect of payroll tax. The payroll expenses of 2006 and 2005 did not
          include payroll tax since there was a loss for purposes of the profit
          tax in 2006 and 2005.

     -    Payroll expenses of 2007 included a provision in an amount of NIS 0.8
          million in respect of an expense related to additional severance pay
          approved to the Chairman of the Board of the Bank, the GM, and the
          deputy GM, upon their retirement from the Bank (see Note 18A to the
          financial statements).

     Neutralizing the effect of these factors shows that there was a decrease of
NIS 2.4 million in payroll expenses.

     Maintenance and depreciation expenses for 2007 amounted to NIS 2.9 million,
compared with NIS 2.7 million in 2006 and NIS 3.8 million in 2005.

     Other operating expenses amounted to NIS 9.4 million in 2007,, compared
with NIS 14.3 million in 2006 and NIS 16.5 million in 2005. There was a
significant decrease in the components of this item as part of the efficiency
plan that we implemented in connection with the Run-off Plan.

     PROVISION FOR TAXES ON INCOME - The provision for taxes on profits in 2007,
which amounted to NIS 1.6 million and which derived from the losses carried
forward from previous years, cannot be offset against profit tax. We received
tax assessments though the 2003 tax year. We have tax loss carry-forwards of NIS
719 million in respect of which no deferred taxes were recorded.


                                       56`

`B.   LIQUIDITY AND CAPITAL RESOURCES

SOURCES OF FUNDS

     Our main sources of liquidity at the present time are (a) the Special Line
of Credit extended by the Bank of Israel, (b) Treasury deposits, and (c) any
collections we obtain on existing loans to customers. Set forth below is a chart
showing the percentage of the various segments of deposits, as of December 31,
2007:

      Deposits from the public:                              1%
      Treasury:                                             91%
      Deposits from Bank of Israel:                          8%

     The balance of the Special Line of Credit (principal and interest) as of
December 31, 2007 was NIS 481 million, as compared to NIS 761 million as of
December 31, 2006, a decline of NIS 280 million. We used funds made available
primarily from the realization of our assets to repay deposits of the public and
repay the Special Line of Credit. The utilized balance as of December 31, 2007
is NIS 174 million lower than the credit line amount that was set for that date
for the Bank in the updated credit line decline forecast that was attached to
the notification of the Governor of the Bank of Israel regarding the extension
of the line and lower than the framework stipulated by the Bank of Israel for
the conclusion of the Run-Off Plan.

     The special line of credit will be in effect until the earlier of December
31, 2008 or receipt of the approval by the court of the Arrangement Plan between
all of the shareholders of the Bank, the State and the Bank pursuant to Article
350 of the Companies Law - 1999

     The balance of the Special Line of Credit (principal and interest) at the
end of each quarter of 2007, was as follows:

                           IN MILLIONS OF NIS
                           ------------------

                           1st Quarter-              697
                           2nd Quarter-              581
                           3rd Quarter-              538
                           4th Quarter-              481

     The terms of the Special Line of Credit require that the loans extended to
us thereunder be repaid, at the latest, by December 31, 2008.

     Under the present terms of the Special Line of Credit, as set forth in the
letter of the Governor of the Bank of Israel dated October 30, 2005, the maximum
amount of the Special Line of Credit shall not exceed at any time the sum of NIS
1.25 billion and the balance shall decrease according to the forecast that was
attached to the above letter.


                                       57`

`In the opinion of management, subject to the continued availability of the
Special Line of Credit, our capital is sufficient for our present requirements.
We expect that the realization of assets process will allow us to reduce the
Special Line of Credit during 2008 by more than NIS 150 million, however, and as
described in Item 3 above, to continue our operations, we are dependent on the
Special Line of Credit. If the Special Line of Credit were to be terminated
prior to the date when the Perpetual Deposit with the Ministry of Finance will
be returned to us, then, in the absence of any alternative liquidity source, we
would have difficulty in our operations.

     In addition, if the scheme for the sale and/or redemption of our shares is
approved and executed, it is unclear if and on which terms we will operate and
what would be the nature of our activity after the sale. On the other hand, if
the sale is not approved or if it is not completed by December 31, 2009, our
continued activity will be determined by the State of Israel , and it can not be
ruled out that at some stage we might enter into liquidation proceedings.

     For a more detailed description of the restrictions imposed by the Special
Line of Credit, see "Item 4. Information on the Company-Business
Overview-Adoption of Run-Off Plan and Amendment of the Special Line of Credit"
above.

     Deposits of the public amounted to NIS 55 million on December 31, 2007,
compared with NIS 67 million on December 31, 2006, a decrease of 18%. These
deposits are comprised of non-linked shekel deposits in the amount of NIS 29
million, compared with NIS 31 million at December 31, 2006, CPI-linked deposits
in the amount of NIS 25 million, compared with NIS 33 million at December 31,
2006, and foreign currency denominated or linked deposits in the amount of NIS 1
million, compared with NIS 3 million at December 31, 2006.

     Government deposits as of December 31, 2007 amounted to NIS 5,319 million,
compared with NIS 6,087 million on December 31, 2006. The main component of the
Government deposits is foreign currency denominated deposits, which serve as the
source for granting long-term loans. The balance of the Government's foreign
currency deposits amounted to NIS 5,062 million on December 31, 2007, compared
with NIS 5,781 million at the end of 2006. The decrease in the foreign currency
Government deposits is due to the decrease in the exchange rate of the dollar.
The Government's foreign currency deposits include a deposit of NIS 4,963
million (compared wth NIS 5,671 million at the end of 2006) that was made in
order to provide long-term credit to the Israel Electric Corporation Ltd. The
terms of the credit and deposit are the same except for an insignificant margin
that we have with respect to the credit. As aforementioned, we also received a
guarantee from the State as security for the said credit.

     Another component of these deposits are the CPI-linked deposits, received
as part of the arrangement of the Kibbutzim. These deposits served as a source
for rescheduling the debts of the kibbutzim. The balance of the Government's
CPI-linked deposits as of December 31, 2007 amounted to NIS 257 million,
compared with NIS 306 million as of December 31, 2006. These deposits are
long-term deposits that are repaid in installments according to the period for
which the arrangement loans were provided (until the end of 2013).


                                       58`

`In respect of government deposits, in 2007 we recorded income of NIS 115.2
million. This was the result of the fact that the government deposit, which
serves as a source for the granting of credit to the Israel Electric Company is
dollar-denominated. Due to the decrease in the exchange rate of the dollar in
2006, income was recorded in respect of this deposit, since the negative
exchange rate differentials were higher than the interest in respect of the
deposit. In 2006, the income in respect of the government deposit amounted to
NIS 84.2 million.

     Deposits from Banks as of December 31, 2007 amounted to NIS 481 million,
compared with NIS 768 million as of December 31, 2006. The entire balance as of
December 31, 2007 derived from the Special Line of Credit. The balance at
December 31, 2006 also included a deposit from a foreign bank, the balance of
which at December 31, 2006 amounted to NIS 7 million. This deposit was paid out
during 2007. The utilized balance of the Special Line of Credit declined during
2007 by an amount of NIS 280 million. The utilized balance of the Special Line
of Credit on December 31, 2007 is lower than the framework set for the Bank,
both for December 31, 2007 and for the end of the Run-off Plan.

CASH FLOW

     Our cash flow must be examined in light of the process by which we are
realizing the assets of the bank.

     The cash balance as of December 31, 2007 amounted to approximately NIS 30
million, compared with NIS 53 million as of December 31, 2006.

     CASH AND DEPOSITS WITH BANKS. The balance of our deposits with banks
amounted to NIS 33.8 million, as of December 31, 2007, compared with NIS 66.49
million as of December 31, 2006 and NIS 72.9 as of December 31, 2005.

     The balance of our deposits with banks as of December 31, 2007 was
comprised as follows:

     o    NIS 5.9 million deposits with the Bank of Israel.

     o    NIS 27.9 million short-term deposits with other banks in Israel and
          abroad. (This amount includes NIS 10.0 million, as of December 31,
          2007, that are pledged to the banks in which they are deposited. These
          pledges were granted pursuant to the approval of the Bank of Israel
          and serve as collateral for our activities in derivative financial
          instruments with these banks.)

     o    This amount includes NIS 3.8 million long-term CPI-linked deposits.

     Cash flow from current operations in 2007 showed a deficit of NIS 1.6
million.

     Cash flow from asset operations in 2007 shows a decline in the assets in an
amount equal to approximately NIS 1,049 million, resulting primarily from a
decline in loans, which was approximately NIS 1,110 million.

     Cash flow from liabilities in 2007 showed a decline of approximately NIS
1,071 million in our liabilities, including deposits of the public, deposits of
banks and deposits of the Government. The Special Line of Credit currently
represents the cash flow surplus between the cash flow resulting from
realization of the assets and the cash flow resulting from the payment of
liabilities. The balance of the Special Line of Credit at the end of 2007 was
NIS 280 million less than at the end of 2006, which indicates that, during the
course of 2007, the consideration from the realization of the assets (including
the decline of cash), despite the deficit in the cash flow from current
operations, constituted a sufficient source for the payment of the liabilities
and the significant reduction of the outstanding balance of the Special Line of
Credit.


                                       59`

`The changes in the makeup of our asset and liability portfolio should be
viewed in light of the Run-Off Plan that we implemented. The Run-Off Plan
includes the cessation of our granting of new credits, the gradual realization
of our assets and the repayment of deposits to our depositors. We are presently
unable to raise new capital or new deposits and the Special Line of Credit was
extended to us to enable us to meet our obligations.

EQUITY CAPITAL

     Our shareholders' equity including preference shares amounted to NIS 557
million as at December 31, 2007, compared with NIS 511 million as at December
31, 2006.

     From an accounting standpoint, our preference shares are classified as a
liability and are not included in our shareholders' equity. The total amount of
liabilities in respect of the preference shares amounted to NIS 447 million
(compared with NIS 491 million as at December 31, 2006).

Therefore, the shareholders' equity at December 31, 2007 amounted to NIS 110
million, compared with NIS 20 million on December 31, 2006. The increase in
shareholders' equity is comprised of the annual income of NIS 22 million, and
the difference between the revaluation of the perpetual deposit with the
Treasury which is linked to the Index and the revaluation of the preference
shares that are linked to the dollar. This gap amounted in 2007 to NIS 67
million and is expressed in our capital and is reflected in the statement of
changes in shareholders' equity, without it being expressed in the statement of
operations.

     Of the total amount in respect of the preferred shares which amounted to
NIS 447 million at December 31, 2007, an amount of NIS 171 million is in respect
of profit-sharing preference shares (compared with NIS 187 million as at
December 31, 2006). Until December 31, 2005, the profit-sharing preference
shares were classified as part of our shareholders' equity. As a result of the
implementation of Israeli Accounting Standard No. 22, they were reclassified,
commencing January 1, 2006, as a liability in respect of profit-sharing
preference shares (for details regarding this change, see Note 1D of our
financial statements).

     This accounting change has no impact on the surplus of assets distributable
to shareholders upon liquidation, on the preference order for the distribution
of the balance of assets of the Bank upon liquidation and on the related rights
of each class of shares. For details of these rights, see Notes 14, 15, and 16
of our financial statements.


                                       60`

`CAPITAL ADEQUACY

     On December 31, 2007, our ratio of capital to risk assets was 15.4%, higher
than the 9% minimum rate stipulated in Proper Banking Procedures and compared
with 1.3% as of December 31, 2006, a rate that was lower than the minimum
stipulated in the Proper Banking Procedures.

     Our shareholders' equity as of December 31, 2007 amounted to NIS 110
million. Our preference shares, in an amount of NIS 447 million, are not
included in our shareholders' equity. The equity amount of the preference
shares, plus the general allowance for doubtful doubts, constitutes our
second-tier capital. In view of the restriction whereby in calculating the
minimum capital ratio, second-tier capital that exceeds first-tier capital is
not taken into consideration, most of our second-tier capital is unutilized for
purposes of this calculation (as of December 31, 2007, second-tier capital of
NIS 385 million is unutilized).

     In the opinion of our Board of Directors, in our present circumstances, the
requirement to maintain a minimum capital ratio is irrelevant to our operations.

     It should be noted that the regulatory mandated minimum capital ratio is
applied to entities operating on a regular basis, while we are currently subject
to severe limitations pursuant to the Run-Off Plan.

ALLOWANCE FOR DOUBTFUL DEBTS

     The following table shows a summary of the changes in the allowance for
doubtful debts for the years ended December 31, 2007, 2006 and 2005:

                                                                       2007
                                                        --------------------------------
                                                       SPECIFIC    SUPPLEMENTARY
                                                     ALLOWANCE (1) ALLOWANCE (2)  TOTAL
                                                        -------      -------     -------
                                                                REPORTED AMOUNTS
                                                        --------------------------------
                                                                 NIS MILLIONS
                                                        --------------------------------

Balance of allowance at beginning of year                 658.3         51.7       710.0
                                                        -------      -------     -------
Current allowances                                         13.1            -        13.1
Reduction in allowances                                   (19.6)        (6.5)      (26.1)
Collection of debts written-off in previous years          (0.8)           -        (0.8)
                                                        -------      -------     -------
Amount charged to the income statement                     (7.3)        (6.5)      (13.8)
                                                        -------      -------     -------

Debts written-off                                         (79.2)           -       (79.2)
                                                        -------      -------     -------

Balance of allowance at end of year                       572.6         45.2       617.8
                                                        =======      =======     =======
Amount of allowance not deducted from credit
 to public                                                  1.3            -         1.3
                                                        -------      -------     -------


                                       61`

`2006
                                                        --------------------------------
                                                       SPECIFIC    SUPPLEMENTARY
                                                     ALLOWANCE (1) ALLOWANCE (2)  TOTAL
                                                        -------      -------     -------
                                                                REPORTED AMOUNTS
                                                        --------------------------------
                                                                  NIS MILLIONS
                                                        --------------------------------

Balance of allowance at beginning of year                 675.6         57.6       733.2
                                                        -------      -------     -------
Current allowances                                         40.8            -        40.8
Reduction in allowances                                   (12.0)        (5.9)      (17.9)
                                                        -------      -------     -------
Collection of debts written-off in previous years          (1.2)           -        (1.2)
                                                        -------      -------     -------
Amount charged to the income statement                     27.6         (5.9)       21.7
                                                        -------      -------     -------

Debts written-off                                         (46.1)           -       (46.1)
Balance of allowance at end of year                       658.3         51.7       710.0
                                                        =======      =======     =======
Amount of allowance not deducted from credit
 to public                                                  1.9            -         1.9
                                                        -------      -------     -------

                                                                      2005
                                                        --------------------------------
                                                       SPECIFIC    SUPPLEMENTARY
                                                    ALLOWANCE (1)  ALLOWANCE (2)  TOTAL
                                                        -------      -------     -------
                                                                REPORTED AMOUNTS
                                                        --------------------------------
                                                                  NIS MILLIONS
                                                        --------------------------------

Balance of allowance at beginning of year                 714.4         69.6       784.0
                                                        -------      -------     -------

Current allowances                                         82.9            -        82.9
Reduction in allowances                                   (26.4)       (12.0)      (38.4)
Collection of debts written-off in previous years          (0.3)           -        (0.3)
                                                        -------      -------     -------
Amount charged to the income statement                     56.2        (12.0)       44.2
                                                        -------      -------     -------

Debts written-off                                         (95.3)           -       (95.3)
                                                        -------      -------     -------

Balance of allowance at end of year                       675.6         57.6       733.2
                                                        =======      =======     =======

Amount of allowance not deducted from credit
 to public                                                  1.0            -         1.0
                                                        -------      -------     -------

(1)  Not including allowance for interest on non-income bearing loans.

(2)  Including a general allowance in accordance with Bank of Israel directives
     in the total amount of NIS 38.9 million (as of December 31, 2006 - NIS 38.9
     million; as of December 31, 2005 - NIS 38.9 million).


                                       62`

`The following table summarizes the balance of overall credit risk of
problem loans in 2007, 2006 and 2005 and the allowance for doubtful debts
relating to them:

                                                                AS OF DECEMBER 31
                                                         -------------------------------
                                                                IN MILLIONS OF NIS
                                                         -------------------------------
                                                         2007         2006          2005
                                                         ----         ----          ----

Overall Credit Risk of Problem Loans                    390.1         583.2        799.1
Annual Expense for Allowance for Doubtful Debts         (13.8)         21.7         44.2
Percentage of Annual Expense for Allowances for
Doubtful Debts out of Overall Credit of Problem
Loans                                                    (3.5)%         3.7%         5.5%

C.   OFF-BALANCE SHEET ARRANGEMENTS (GUARANTEE ARRANGEMENTS AND OTHER
     COMMITMENTS)

     In the normal course of our business, prior to the liquidity crisis we
experienced in the third quarter of 2002, we engaged in several types of
off-balance sheet arrangements to meet the financing needs of our customers,
including various types of guarantees, commitments to extend credit and letters
of credit. The following table summarizes the balances of these arrangements as
of December 31, 2007 and 2006:

                                           DECEMBER 31  DECEMBER 31
                                               2007        2006
                                              ------      ------
                                              IN MILLIONS OF NIS
                                              ------------------

TRANSACTIONS THE BALANCE OF WHICH
 REPRESENTS A CREDIT RISK -

Guarantees securing credit                     157.9       170.9
Guarantees to home purchasers                   17.9        46.2
Other guarantees and liabilities                 4.6         6.3
Unutilized revolving credit facilities             -         0.6

     Our income and expenses from the above types of off-balance sheet financial
instruments for the past two years were as follows:

                                                IN MILLIONS OF NIS
                                                -----------------
                                                2007         2006
                                                ----         ----

Income from guarantees issued by us              1.7         1.4
Expenses on guarantees issued in our favor         -           -


                                       63`

`Our off-balance sheet arrangements involve credit risk, as detailed in the
table above, according to each type of arrangement.

     The realization of our undertakings pursuant to our off-balance sheet
arrangements will have an adverse effect on our liquidity.

     The circumstances under which we would have to pay pursuant to our
off-balance sheet arrangements are generally external circumstances, dependent
upon third parties. While, generally speaking, it is not certain whether or not
such circumstances will take place, it can be assumed with a high degree of
certainty that we will pay part of the above off-balance sheet arrangements.

OTHER CONTINGENT LIABILITIES AND COMMITMENTS

     In 2003, we signed a rental agreement in respect of our office premises for
an initial period ending in August 2006. On March 21, 2006, we exercised our
option to extend the lease period until August 31, 2009. The annual rental
payment, which is linked to the CPI, amounts to NIS 1.1 million.

     We have outsourced our computer services. In connection with the
outsourcing, in 2004 we entered into an agreement with a three-year term, with
an optional two year extension. On May 7, 2006, we exercised the extension
option, extending the agreement until December 31, 2008. In 2007, the cost of
the service amounted to NIS 2.2 million.

     Between 1998-2001, we entered into agreements to participate in private
investment funds. The total amount approved for investment by us amounts to
US$20 million. The investment funds invest in Israeli companies or companies
related to Israel. The majority of the investments made by these funds is in the
credit component. The balance of this undertaking as of balance sheet date
amounts to US$ 0.7 million.

     We have granted to our officers, directors and others, various
indemnification agreements. For a description of certain indemnification
agreements granted to our directors and senior officers, see "Item 6. Directors,
Senior Management and Employees." For a description of certain indemnification
agreements granted to employees and others, see Note 21 to our financial
statements under Item 17.


                                       64`

`DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY PERIODS

A.   VOLUME OF OPERATIONS

1.   Stated amount of derivative instruments ALM (1)

                             DECEMBER 31, 2007           DECEMBER 31, 2006
                           ---------------------       ---------------------
                         CPI/SHEKEL    FOREIGN       CPI/SHEKEL     FOREIGN
                          INTEREST     CURRENCY       INTEREST      CURRENCY
                          CONTRACTS    CONTRACTS      CONTRACTS     CONTRACTS
                           -------       -------       -------       -------
                              REPORTED AMOUNTS            REPORTED AMOUNTS
                           ---------------------       ---------------------
                        NIS MILLIONS  NIS MILLIONS  NIS MILLIONS   NIS MILLIONS
                           -------       -------       -------       -------

Forward contracts             30.4          17.0          45.9          53.4
                           -------       -------       -------       -------

Total                         30.4          17.0          45.9          53.4
                           =======       =======       =======       =======

2.   Gross fair value of derivative instruments ALM (1)

                                     DECEMBER 31, 2007          DECEMBER 31, 2006
                                   ---------------------      --------------------
                                 CPI/SHEKEL     FOREIGN     CPI/SHEKEL    FOREIGN
                                  INTEREST      CURRENCY     INTEREST     CURRENCY
                                  CONTRACTS     CONTRACTS    CONTRACTS    CONTRACTS
                                   -------       -------      -------      -------
                                      REPORTED AMOUNTS           REPORTED AMOUNTS
                                   ---------------------      --------------------
                                NIS MILLIONS  NIS MILLIONS NIS MILLIONS  NIS MILLIONS
                                   -------       -------      -------      -------

Gross positive fair value                -           0.5          1.0          1.1
Gross negative fair value             (0.6)            -            -            -
                                   -------       -------      -------      -------

Total                                 (0.6)          0.5          1.0          1.1
                                   =======       =======      =======      =======

B.   DERIVATIVE INSTRUMENTS CREDIT RISKIN RELATION TO THE OPPOSITE PARTY TO THE
     CONTRACT

                                                                       DECEMBER 31, 2007
                                                                -------------------------------
                                                                       REPORTED AMOUNTS
                                                                -------------------------------
                                                                          NIS MILLIONS
                                                                -------------------------------
                                                                 BANKS   CENTRAL BANKS   TOTAL
                                                                -------      -------    -------

Gross positive fair value of derivative instruments                 0.5            -        0.5
Off-balance sheet credit risk in
 respect of derivative instruments (2)                              4.7            -        4.7
                                                                -------      -------    -------

Total credit risk in respect of derivative instruments              5.2            -        5.2
                                                                =======      =======    =======


                                       65`

`DECEMBER 31, 2006
                                                --------------------------------
                                                        REPORTED AMOUNTS
                                                --------------------------------
                                                         NIS MILLIONS
                                                --------------------------------
                                                 BANKS    CENTRAL BANKS   TOTAL
                                                -------       -------    -------

Gross positive fair value
 of derivative instruments                          2.1             -        2.1
Off-balance sheet credit risk in
 respect of derivative instruments (2)              9.9             -        9.9
                                                -------       -------    -------
Total credit risk in respect of
 derivative instruments                            12.0             -       12.0
                                                =======       =======    =======

(1)  Derivatives comprising part of the asset and liability management of the
     Bank, not designated for hedging purposes.

(2)  Off-balance sheet credit risk relating to derivative instruments (including
     those with a negative fair value) as computed for limitation on individual
     borrower indebtedness.

     As of December 31, 2007, deposits with banks in the amount of NIS 10.0
million have been pledged by the Bank in favor of those banks (December 31, 2006
- NIS 22.0 million). The Bank of Israel gave its consent to the pledge, which
serves as collateral for transactions in derivative financial instruments with
those banks.

C.   MATURITY PERIOD - STATED AMOUNTS AT YEAR-END

                                                DECEMBER 31, 2007
                                       -----------------------------------
                                                REPORTED AMOUNTS
                                       -----------------------------------
                                                  FROM 3 MONTHS
                                   UP TO 3 MONTHS   TO 1 YEAR       TOTAL
                                       -------       -------       -------
                                    NIS MILLIONS  NIS MILLIONS   NIS MILLIONS
                                       -------       -------       -------

CPI/Shekel interest contracts             20.3          10.1          30.4
Foreign currency contracts                17.0             -          17.0
                                       -------       -------       -------

Total                                     37.3          10.1          47.4
                                       =======       =======       =======


                                                DECEMBER 31, 2006
                                       -----------------------------------
                                                 REPORTED AMOUNTS
                                       -----------------------------------
                                                  FROM 3 MONTHS
                                   UP TO 3 MONTHS   TO 1 YEAR       TOTAL
                                       -------       -------       -------
                                    NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                       -------       -------       -------

CPI/Shekel interest contracts             20.5          25.4          45.9
Foreign currency contracts                53.4             -          53.4
                                       -------       -------       -------

Total                                     73.9          25.4          99.3
                                       =======       =======       =======

     Since we currently enter into these transactions in derivative financial
instruments with other banks that have high credit ratings, the credit risk
involved in these transactions is relatively small.


                                       66`

`We enter into derivative financial instruments transactions in order to
limit our market risk exposure, as further detailed in "Item 11. Quantitative
and Qualitative Disclosures about Market Risk."

ALLOWANCE FOR DOUBTFUL DEBTS RELATING TO OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

     Our allowance for doubtful debts relating to off-balance sheet financial
instruments was NIS 1.3 million in 2007 compared with NIS 1.9 million for 2006
and 1.0 for 2005.

MATURITY PROFILE OF OUR CONTRACTUAL OBLIGATIONS

     The following table sets forth as of December 31, 2007 the maturity profile
of our contractual obligations.

                                                                      AS OF DECEMBER 31, 2007
                                      ------------------------------------------------------------------------------------------
                                                             PAYMENTS DUE BY PERIOD - IN MILLIONS OF NIS
                                      ------------------------------------------------------------------------------------------
                                                                                                                        WITHOUT
                                                     LESS THAN 1                                                        MATURITY
                                       TOTAL            YEAR         1-3 YEARS        4-5 YEARS      OVER 5 YEARS         DATE
                                      -------          -------        -------          -------          -------          -------

CONTRACTUAL CASH OBLIGATIONS

Senior Debt*                            493.2                -              -                -                -            493.2
Subordinated Debt                     8,620.7            646.5        1,217.2          1,174.0          5,532.9             50.1
                                      -------          -------        -------          -------          -------          -------

Total Contractual Cash
Obligations**                         9,113.9            646.5        1,217.2          1,174.0          5,532.9            543.3
                                      =======          =======        =======          =======          =======          =======

CONTINGENT LIABILITIES AND
COMMITMENTS

Rental Agreement                          1.8              1.1            0.7                -                -                -
IT Outsource Contract                     2.5              2.3            0.2                -                -                -
Stated Amount of Derivative
Instruments                              47.4             47.4              -                -                -                -
                                                                      -------          -------          -------          -------

Total Contingent Liabilities
and Commitments                          51.7             50.8            0.9                -                -                -
                                      =======          =======        =======          =======          =======          =======

*    The balance includes the balance of the Special Line of Credit until the
     earlier of (i) December 31, 2008 or (ii) the approval by the Court of the
     Section 350 Arrangement.

**   Not including Preferred Shares (see Note 1.D to our financial statements in
     Item 17).


                                       67`

`In the above table, the future cash flows are presented in respect of the
liabilities in accordance with the remaining period to the contractual maturity
date of each cash flow.

     Out of the total contractual cash obligations set forth in the table above,
NIS 8,043.1 million (included in subordinated debt) stems from the repayment of
the State of Israel's deposit which served for the granting of a credit
guaranteed by the State of Israel. The maturity profile of the payments due with
respect to the deposit is as follows:

     Less than one year         NIS 545.4 million

     1-3 years                  NIS 1,079.5 million

     4-5 years                  NIS 1,064.5 million

     More than 5 years          NIS 5,353.7 million

ACCOUNTING POLICY IN RESPECT OF CRITICAL ISSUES AND CRITICAL ACCOUNTING
ESTIMATES.

     Note 1 of the financial statements describes the principal accounting
policies according to which our financial statements are prepared. The
implementation of these accounting principles by the Board of Directors and
Management when preparing the financial statements often requires the use of
various assessments and estimates that affect the reported amounts of assets and
liabilities (including contingent liabilities) and our financial results.

     We would like to make it perfectly clear that actual results may be
different than these estimates and assessments.

     The financial statements do not contain any changes in the value or
classification of assets or liabilities that may be required should the Bank
cease to operate as a "going concern".

     Accounting policy in respect of critical issues as set out below relates to
issues which are of importance to the description of our financial condition,
which are difficult and subjective and which often require complex assessment,
as a result of the need to make estimates of effects which for the most part are
uncertain.

     Some of the estimates and assessments used, involve a great extent of
uncertainty or dependency on many variables. Such types of estimates and
assessments may have a significant impact on the results of operations in the
financial statements.

     In each of the critical issues detailed below, our Management makes use of
the best information it has in its possession. Our board of directors and
management are of the opinion that the estimates and assessments applied in the
preparation of the financial statements are fair.

     THESE ACCOUNTING PRINCIPLES IN RESPECT OF CRITICAL ISSUES ARE IMPLEMENTED
BY OUR BOARD OF DIRECTORS AND MANAGEMENT ACCORDING TO ISRAELI GAAP, WHICH
DIFFERS IN CERTAIN RESPECTS FROM U.S. GAAP AS DESCRIBED BELOW IN "ITEM 17.
FINANCIAL STATEMENTS" AND NOTE 32 TO THE FINANCIAL STATEMENTS.


                                       68`

`The following issues were defined by our board of directors and management
to be critical issues / estimates from an accounting standpoint:

     PROVISIONS FOR DOUBTFUL DEBTS - The specific provision for doubtful debts
is made on the basis of the assessment of the Board of Directors and management
regarding the inherent losses in our credit portfolio, including in respect of
off-balance sheet items. The assessment of the Board of Directors and management
takes into account, among other considerations, the risks involved in the
financial strength of the debtors and in their repayment capabilities, on the
basis of the information in their possession regarding their financial position
and future cash flows, as well as in the condition and value of the collateral
received.

     The financial strength of the debtors and their repayment capabilities are
contingent upon economic variables, part of which are not under our control
and/or the control of the customers.

     Our Management and Board of Directors use external appraisers and valuators
in order to obtain an indication of the value of the collateral. For example,
the assessment of the collateral that pertains to real estate is usually done by
external appraisers who conduct appraisals for us. The value that is used for
the provisions required for doubtful debts is usually lower than the market
value of the real estate, due to the constraints of quick realization and the
tax that would apply (if at all) upon the realization of the real estate.

     The amount that can be collected from the debtors is based, therefore, on
estimates which, by their nature, are subjective. The dependency on these
estimates cannot guarantee that the amount actually collected will be in
accordance with the assessment.

     The total balance of the monetary debt (excluding off-balance sheet items)
of the debtors in respect of which there is a provision for doubtful debts
amounted to NIS 252 million as of December 31, 2007 (NIS 362 million as of
December 31, 2006).

     The amount of the credit to the public in the financial statements is after
deduction of the supplementary allowance and the general allowance for doubtful
debts, the total balance of which as of December 31, 2007 is NIS 45.2 million
(December 31, 2006 - NIS 51.7 million). These allowances are in accordance with
the instructions of the Bank of Israel.

     Our Management classifies problematic debts on the basis of the
classifications and criteria set out in the Proper Banking Management
Provisions. The classification of debts is sometime subjective (such as the
distinction between a debt that is temporarily in arrears versus one that is in
arrears, and the classification of a debt under special supervision). Changes in
such assessments may have a material impact on the financial statements.

     Our Management and the Board of Directors review the allowances for
doubtful debts and the classifications of the customers on a quarterly basis and
update them where necessary.


                                       69`

`The supplementary allowance is based on risk criteria set out by the Bank
of Israel. As mentioned above, the Bank of Israel exempted us from the need to
make a supplementary allowance in respect of deviations from the restrictions
regarding the debts of borrowers and groups of borrowers, in respect of
deviations from the restrictions on the financing of the acquisition of means of
control in corporations, and in respect of deviations from restrictions on
concentration of debts. As a result, the supplementary allowance was made only
in respect of certain deviations relating to the absence of up-to-date financial
statements and in respect of credit balances of borrowers who are classified as
problematic borrowers.

FAIR VALUE OF SECURITIES - All of the securities held by us are classified as
available for sale securities.

     Marketable securities are presented in the financial statements at fair
value. The balance of marketable securities at market value as of December 31,
2007 was NIS 34 million (on December 31, 2006 - NIS 33 million). This data does
not necessarily reflect the price that will be obtained on the sale of a large
number of the securities.

     The fair value of non-marketable shares as of December 31, 2007 is NIS 12
million (December 31, 2006 - NIS 17 million). These shares are presented in the
financial statements at adjusted cost, less write-downs in value based on
management estimates. Write-downs in value are done on the basis of the
financial statements of the companies. The actual realization of the investment
in non-marketable shares may be different than the book value in the financial
statements.

CONTINGENT LIABILITIES - There are a number of legal suits pending against us.
Each of the suits is transferred to an external attorney for handling. These
attorneys provide us with their assessments of the probability that the risk
involved in the suit will be realized. In respect of suits, the probability of
which the attorneys believe to be remote or possible, we do not usually set up a
provision in respect of the risk involved.

     Regarding suits which the attending attorneys believe will not be rejected
or cancelled, we set up an appropriate provision.

     The opinions of our legal counsel are received quarterly, and our
Management updates the provisions when necessary.

     There is no certainty that the final results of the suits will be in
accordance with the aforementioned assessments.

     Issues defined in the past as critical accounting issues (i.e. allowance
for severance payments, derivative financial instruments) were not included this
year due to the reduced scope of these issues.


                                       70`

`ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

IDENTITY OF DIRECTORS

     The name, age and position of each member of our Board of Directors as of
September 1, 2008, and the month and/or year his or her tenure began, are set
forth in the following table:

NAME                          AGE  POSITION WITH REGISTRANT                                HOLDS POSITION SINCE
----                          ---  ------------------------                                --------------------

Dr. Raanan Cohen(1,3,4,12)     67  Chairman of the Board of Directors of the Bank          August 2002
Richard Armonn(1,4,5)          73  Deputy Chairman of the Board of Directors of the Bank   1971(6)
Avi Olshansky1,(4,8)           71  Director                                                November 1997
Yacob Eizner(2,4,8)            61  Director                                                October 2002
Shulamit Eshbol(2,3,9)         42  Director                                                November 2002
Yeheskel Beinisch(2,3,9)       66  Director                                                November 2002
Moshe Gavish(1,3,9)            59  Director                                                November  2002
Ehud Green(2,3,4,10)           53  Director                                                December 2002
Aharon Hildesheimer(1,2,11)    65  Director                                                March 2006
Ben-Zion Dagan(3,4,7,13)       75  Director                                                July 2002

----------

(1)  Member of the Administration Committee.

(2)  Member of the Audit Committee.

(3)  Member of Financial Statement Review Committee.

(4)  Member of Credit Committee.

(5)  Appointee of Bank Hapoalim B.M. and its affiliates.

(6)  Director since 1971 with interruptions.

(7)  Appointee of Israel Discount Bank Ltd. and its affiliates.

(8)  Appointee of Bank Leumi le-Israel B.M. and its affiliates.

(9)  Appointee of State of Israel.

(10) Outside director re-elected by our shareholders at the annual general
     meeting of the shareholders on March 22, 2006 in accordance with the
     Companies Law. Did not serve as a director from December 25, 2005 until
     March 21, 2006.

(11) Outside director elected by our shareholders at the annual general meeting
     of the shareholders on March 22, 2006 in accordance with the Companies Law.

(12) Dr. Raanan Cohen is not a director appointed by the holders of our Ordinary
     A Shares. He was appointed to the Board of Directors by the other members
     of the Board of Directors. Under our Articles of Association, a director so
     appointed by the other directors automatically becomes Chairman of the
     Board.

(13) Tenure ended March 18, 2008.


                                       71`

`DR. RAANAN COHEN, DIRECTOR AND CHAIRMAN OF THE BOARD. Dr. Cohen has been a
director since August 2002 and he currently serves as our Chairman of the Board.
He was appointed to the Board of Directors by the other directors. He is
Chairman of our Administration Committee and Financial Statement Review
Committee and a member of our Credit Committee. Dr. Cohen was a member of
Knesset (the Israeli parliament) from 1988 until 2002. Dr. Cohen served as the
Secretary General of the Israeli Labor Party from 1997 until 2002. From 2000
until 2002, he served as a Minister in the Government. From 1992 until 1999, he
served as a public director of Transclal Trade Ltd., Williger Ltd. and Blue
Square Cooperative. Dr. Cohen has served as a director of Oil Refineries Ltd.
and Phoenix (Israel) Insurance Ltd. He is currently a director of., Transclal
Trade Ltd., Zerah Oil and Gas Exploration Ltd., Gaon Holdings Ltd., Neto Melinda
Trading Ltd. and New Koppel Insurance Ltd.

     RICHARD ARMONN, DIRECTOR. Mr. Armonn has been a director since 1971, with
interruptions. He is an appointee of Bank Hapoalim B.M. and its affiliates and
he currently serves as our Deputy Chairman. He is Chairman of our Credit
Committee and a member of our Administration Committee. Mr. Armonn served in the
past as Deputy Chief Executive Officer of Bank Hapoalim B.M. and he was also the
manager of the credit department for that bank. He has served as Deputy Chief
Executive Officer and Chairman of the board of Gmul Investments Ltd. He is the
Honorary Chairman of the Israel-Romania Chamber of Commerce and Industry. He is
also a director of Elhana Ltd.

     AVI OLSHANSKY, DIRECTOR. Mr. Olshansky has been a director since November
1997. He is an appointee of Bank Leumi-le-Israel B.M. and its affiliates. Mr.
Olshansky is a member of our Administration Committee and Credit Committee.
Since 1997, he has worked as a financial and economic adviser and since 2003, as
Chairman of A.Olshansky Consulting Ltd. From 1978 to 1991, Mr. Olshansky also
served in various positions at Bank Hapoalim B.M., including as Vice President,
Deputy Managing Director, Senior Executive Vice-President and joint Managing
Director. From 1991 to 1997, he served as Chairman of the Board of Clal (Israel)
Ltd., that operated companies in the insurance, industry, commerce and
construction fields. Until June 2006, Mr. Olshansky served as a director of
Azorim Investment Development and Construction Company Ltd. Mr. Olshansky is a
director of the following companies: Camel Grinding Wheels Sarid Ltd.,
Kibbutz-Tzora, Tzora Active System Ltd. and a member of the Investment Committee
of the provident and participating pension fund of Harel Insurance Ltd.

     YACOB EIZNER, DIRECTOR. Mr. Eizner has been a director since October 2002.
He is an appointee of Bank Leumi le-Israel B.M. and its affiliates. Mr. Eizner
is a member of our Audit Committee and Credit Committee. Mr. Eizner was the
Managing Director (from 1996-1999) and Deputy Managing Director (from 1986-1996)
of Bank of Jerusalem Ltd. Since 2000, Mr. Eizner has worked as an independent
real estate promoter. Mr. Eizner is also a director of Sadot Binyamina Ltd. and
serves as the head of the Investment Committee of the Teachers' Education Fund.

     SHULAMIT ESHBOL, DIRECTOR. Ms. Eshbol has been a director since November
2002. She is an appointee of the State of Israel. Ms. Eshbol is a member of our
Audit Committee and Financial Statement Review Committee. Ms. Eshbol worked in
public accounting as a sole practitioner from 1994-1998. She has also practiced
law at the firm of Eshbol & Yakuel since 2000. As part of her legal practice,
she is engaged in commercial and financial fields. She has served as a director
in Zim Lines Ltd. and the Zichron Yaacov Economic Development Company and
currently is a director of the Israel Electric Corporation Ltd..


                                       72`

`YEHESKEL BEINISCH, DIRECTOR. Mr. Beinisch has been a director since
November 2002. He is an appointee of the State of Israel. He is Chairman of our
Audit Committee and a member of our Financial Statement Review Committee. Mr.
Beinisch has practiced law since 1967 and currently heads his own firm, Y.
Beinisch-Law office. Mr. Beinisch was a director of Card Guard AG (Switzerland)
until April 2004.

     MOSHE GAVISH, DIRECTOR. Mr. Gavish has been a director since November 2002.
He is an appointee of the State of Israel. Mr. Gavish is a member of our
Administration Committee and Financial Statement Review Committee. From 1989 to
1993, he served as Commissioner of the Income Tax and Property Tax Authority and
from 1994 to 2000, as General Manager of Mercantile Discount Bank. Since 2000,
he has practiced law and advised companies independently. Mr. Gavish is a
director in Afikim Hashkaot G.G. (2000) Ltd., Innoventions and Allium and is the
Chairman of the Israel Broadcasting Authority.

     EHUD GREEN, DIRECTOR. Mr. Green has been a director since December 2002. He
is a member of our Audit Committee, Credit Committee and Financial Statement
Committee. Mr. Green is an outside director. From 1972 to 1996, Mr. Green served
as a career officer in the Israel Defense Forces, the Israel Police and the
security services. Mr. Green has been practicing law in his own firm since 1996.

     BEN-ZION DAGAN, DIRECTOR. Mr. Dagan's tenure ended in March 2008 having
been a director since July 2002. He was an appointee of Israel Discount Bank
Ltd. and its affiliates. He was a member of our Audit Committee and Financial
Statement Review Committee. Mr. Dagan served as a director of a subsidiary of
Bank of Jerusalem Ltd. from 1997 to 2002.

     AHARON HILDESHEIMER, DIRECTOR. Mr. Hildesheimer has been a director since
March 2006. He is a member of our Audit Committee and Administration Committee.
Mr. Hildesheimer is an outside director. Since 1991, Mr. Hildesheimer is the
Managing Director of Admon Trust & Investments Ltd. From 1973 to 1987, he served
in various senior positions at Mizrahi Bank Ltd. From 1987 to 1991, Mr.
Hildesheimer served as Managing Director of Finance and Trade Bank Ltd. From
1994 to 2002, he was the founder, director and CFO of Inflight Financial
Services, Ltd., Dublin, Ireland. Mr. Hildesheimer is a director of Pardes
Industries Ltd.

     For further information regarding the directors having accounting and
financial expertise, as defined in the Companies Law, see below in this Item 6.


                                       73`

`IDENTITY OF OFFICERS

     The name, age and position of each of our executive officers, as of June 1,
2008, and the month and year his or her tenure began, are set forth in the
following table:

NAME                   AGE     POSITION WITH REGISTRANT                 HELD POSITION SINCE
----                   ---     ------------------------                 -------------------

Dr. Raanan Cohen(1)    67      Chairman of the Board                    August 2002

Uri Galili(2)          63      General Manager                          July 2002

Arieh Savir(3)         62      Deputy General Manager                   September 2002

Rimon Shmaya(4)        59      Comptroller                              April 2001
                               Comptroller & Financial Risks Manager    January 1998
                               Member of the Management                 May 1996

Nathan Dekel(5)        57      Operations  &  Controls Manager          April 2004
                               Operations Manager                       July 1999
                               Member of the Management                 August 1990

Michael Warzager(6)    53      General Counsel                          March 1998

Itzhak David(7)        53      Internal Auditor                         November 2002

     (1) Dr. Raanan Cohen is included in this list since he is a salaried
employee of the bank. Under Israeli law, a director, including a salaried
chairman of the board, is not considered to be an executive officer.

     (2) Mr. Uri Galili has served as our General Manager since July 2002. From
1995 until 2001, Mr. Galili was Director and General Manager of Bank Leumi (UK)
plc From 2001 until July 2002, he served as Head of International Private
Banking at Bank Leumi le-Israel B.M.

     (3) Mr. Arieh Savir has served as our Credit Manager since September 2002
and as our Deputy General Manager since October 2002. From 1994 until September
2002, Mr. Savir was Head of the Financial Services and Workout Division of Bank
Hapoalim B.M.

     (4) Mr. Rimon Shmaya has served as our Comptroller since January 1998 and
as a member of our management since May 1996.

     (5) Mr. Nathan Dekel has served as our Operations Manager since July 1999.
Prior to that, he served as the Business Department Manager and has been a
member of our management since 1990.

     (6) Mr. Michael Warzager has served as our General Counsel since March
1998. Prior to that, he was the Head of our Legal Department.

     (7) Mr. Itzhak David has served as our Internal Auditor since November
2002. Prior to that, he served as assistant to the Internal Auditor for
approximately one year. From 2000 to 2001, Mr. David was Chief Financial Officer
of Ampa Investments Ltd. From 1994 until 2000, he was the Chief Financial
Officer and Secretary of The Investment Company for Industrial Development in
Israel Ltd. and its subsidiaries.


                                       74`

`FAMILY RELATIONSHIPS

     No family relationships exist between any of our directors or executive
officers and any other directors or executive officers of the Bank.

SELECTION OF DIRECTORS AND OFFICERS AND TERMS OF OFFICE

     Except for the outside directors (the election and removal of which are
discussed in the next paragraph) and the Chairman of the Board (who is appointed
by the other Board members), our directors are appointed by the holders of our
Ordinary A Shares, par value NIS 0.10. See "Item 7. Major Shareholders and
Related Party Transactions-Major Shareholders" below for more detailed
information regarding the ownership of our Ordinary A Shares.

     Each holder of Ordinary A Shares is entitled to appoint one director for
every 1,015 Ordinary A Shares held by such holder, and each group of
shareholders (who together hold 1,015 or more Ordinary A Shares) is entitled to
appoint one director for every 1,015 Ordinary A Shares held. As a result, the
Government of Israel currently has the right to appoint seven directors, Bank
Leumi le-Israel B.M. currently has the right to appoint three directors, Israel
Discount Bank Ltd. currently has the right to appoint one director and Bank
Hapoalim B.M. currently has the right to appoint one director. However, we have
been advised by Bank Hapoalim B.M. that pursuant to an agreement between Bank
Hapoalim B.M. and certain other holders of Ordinary A shares (which holders
together have 500 Ordinary A Shares), Bank Hapoalim B.M. is entitled to the
rights attached to such other voters' shares for the purpose of appointing
directors. By virtue of this agreement, by combining its own shares and the
shares of the other holders party to the agreement, Bank Hapoalim B.M. is
entitled to appoint one additional director. The directors appointed by the
State of Israel serve three year terms, and the term of the current directors
who are State of Israel's appointees will expire in November 2008. The outside
directors are appointed for three year terms, and the term of the current
outside directors will expire in March 2009. The directors who are appointed by
the banks serve as such until removed by the appointing bank

     Due to the sharp reduction in our activities and in the number of our
employees, the State of Israel and the three banks agreed to reduce, in a
recprocal manner, the number of their representatives on the Board. The State of
Israel reduced its Board members to 4, Bank Leumi le-Israel B.M. reduced its
Board members to 2, Israel Discount Bank Ltd. reduced its representatives to 1
and Bank Hapoalim B.M. reduced its members on the Board to 1.These members
include the outside directors who are appointed at the recommendations of the
State of Israel and the three banks.

     Pursuant to the Companies Law, we are required to have at least two outside
directors elected by our shareholders voting at a general meeting of the
shareholders, at least one of whom must have accounting and financial expertise
and the others must have professional skills, according to the definition of
these terms in the aforementioned law. At the time of the appointment or during
the two years preceding the appointment, neither the outside director himself
nor any of his relatives, partners, employers or companies in which he is a
controlling member may have had an interest in the company to whose board the
outside director is to be appointed. Among the other qualifications for
election, no individual shall be appointed an outside director if his other
positions or affairs create or are liable to create a conflict of interest with
his position as director. Our outside directors hold office for a term of three
years and, according to the Companies Law, outside directors may be elected for
one additional three-year term after the initial three-year term. Our outside
directors are Ehud Green (who is serving his second three-year term) and Aharon
Hildesheimer.


                                       75`

`In order to facilitate the appointment of outside directors at the
shareholders' general meeting without exceeding the maximum number of directors
prescribed by our Articles of Association and by Israeli Proper Banking
Procedures, special arrangements have been reached by our major shareholders.
The Government of Israel has agreed to refrain (subject to various conditions)
from exercising its right to appoint one director of the seven that it is
entitled to appoint. Bank Leumi le-Israel B.M., Israel Discount Bank Ltd. and
Bank Hapoalim B.M. groups have agreed that they will refrain (subject to various
conditions), through a rotation among them, from exercising their right to
appoint one director of the seven that they are jointly entitled to appoint.
Consequently, as long as these consents remain in force, the two outside
directors may be elected by the shareholders at a general meeting, on account of
the vacancies created by the above consents. Under these arrangements, the
outside directors elected by the shareholders at a general meeting should be the
candidates put forward by the shareholders who created the vacancies.

     Shareholders who, by virtue of their ownership of Ordinary A Shares, have
appointed a director may remove such director at any time and appoint another in
his or her place. Each director (who is appointed by the holders of Ordinary A
Shares), therefore, holds office until removed by the holders of Ordinary A
Shares who originally appointed such director or, if appointed for a fixed term,
until such term expires.

     In addition to the provisions that apply to all directors regarding their
removal, the Companies Law established additional, special provisions regarding
the removal of an outside director. Pursuant to these provisions:

     1.   An outside director may be removed by court order, if the court (a)
          finds that the director is permanently unable to exercise his office;
          (b) the outside director no longer meets one of the conditions
          required by law for his appointment; (c) the outside director violated
          his obligation of loyalty to the company; or (d) the outside director,
          during his tenure, was convicted by a court abroad of offenses such as
          bribery, deceit or utilization of inside information.

     2.   Alternatively, if the board of directors determines that the outside
          director no longer meets one of the conditions required for his
          appointment or that he violated his obligation of loyalty, then the
          board of directors shall call an extraordinary meeting of the
          shareholders in order to present to the shareholders its reasons for
          the removal of the outside director. At such meeting, the outside
          director shall have an opportunity to respond. The removal of the
          outside director must be approved at the extraordinary meeting with
          the same majority that was necessary for his appointment.


                                       76`

`Our Chairman of the Board is appointed by the other members of the Board of
Directors and he serves until removed by the Board or until the expiration of
his term of appointment. Our General Manager and Internal Auditor are appointed
by our Board of Directors and hold office until removed by the Board or until
the expiration of the term of their appointment. The remainder of our executive
officers are appointed by the General Manager, subject to the approval of our
Board of Directors.

COMPENSATION OF DIRECTORS AND OFFICERS

     The aggregate amount of remuneration that we paid to all directors and
executive officers as a group during the year ended December 31, 2007 was NIS
4,711,000 and we set aside and made provisions of NIS 2,095,000 to provide
severance pay, retirement or similar benefits for our directors and executive
officers.

     The following chart sets forth, on an individual basis, the compensation
paid to our executive officers:

                                       SEVERANCE      ADDITIONAL
          NAME              SALARY       PAY(1)       AMOUNTS(2)    TOTAL(3)
          ----              ------       ------       ----------    --------
                                   IN THOUSANDS OF NIS

Raanan Cohen                  614         444            ---            1,058
Uri Galili                    728         559            ---            1,287
Arieh Savir                   619         452            ---            1,071
Nathan Dekel                  612         198            ---              810
Rimon Shmaya                  604         216            ---              820
Itzhak David                  331          64            ---              395
Michael Warzager              605         162            ---              767

     (1)  Includes severance pay, provident fund, pension, national insurance,
          further education allowance, vacation pay, provisions/payments of long
          service bonus and provisions for unutilized sick leave benefits and
          vacation.

     (2)  Includes amounts with respect to salary-related benefits resulting
          from changes in the salary during any given year.

     (3)  Includes salaries and related benefits not including payroll tax.

     For a description of t he severance pay agreements with our senior
executives, see Notes 18.A.2 and 18.A.4 to our financial statements.

     Pursuant to resolutions of our Board of Directors and Audit Committee,
dated July 30, 2008, beginning on March 6, 2008, the annual compensation paid to
our directors was NIS 42,000, plus V.A.T., paid on a monthly basis. This annual
compensation is linked to the CPI for the month of December 2007.

     In addition, our directors receive compensation for each plenum or
committee meeting attended. The amount of compensation paid for plenum and
committee meetings is also linked to the CPI for th emonth of December. Our
directors receive as of March 6, 2008, NIS 2,200 plus V.A.T. for each plenum and
committee meeting attended. The amounts set forth in the preceding two
paragraphs are after a 12% reduction in compensation pursuant to a resolution of
the Board on October 1, 2002, which resolution was made in light of our
financial situation. In addition, the amounts set forth in the preceding two
paragraphs do not apply to our Chairman of the Board, who receives a monthly
salary in accordance with his employment contract.


                                       77`

`Except for our Chairman of the Board of Directors, none of our directors
has a service contract with us. The service contracts for our Chairman of the
Board of Directors, our General Manager and our Deputy General Manager provide
that, upon the termination of their employment, we must pay them compensation
for unused vacation days and make available to them the amount deposited for
their benefit, during their employment with us, into insurance policies or
pension funds. Similarly, we must pay them an additional 100% severance pay and
three months' prior notice and three months' "adaptation" pay (the prior notice
and "adaptation" pay were approved by the Commissioner of Wages and Labor
Agreements in the Israeli Ministry of Finance.

     In the past, we signed personal employment contracts with three of our
senior executives. Under these contracts, each party has the right to terminate
the employee-employer relationship by providing an advance notice of three
months.

     In accordance with these contracts, in the event of the resignation of the
executives, we have undertaken to pay them additional severance payments and an
"adaptation bonus" in addition to the regular severance pay. In the event that
their employment is terminated by us, these executives are entitled to severance
pay at higher rates or to early pensions. In August 2006, the employment
contracts of these three employees were amended with regard to the severance
terms in the event of termination by us. The amended terms, which in general are
inferior to those included in the original employee contracts, were determined
on the basis of the principles of the collective agreement dated December 26,
2002 and in accordance with the approval of the Supervisor of Wages in the
Israeli Finance Ministry.

     We have an appropriate provision included in the reserve for severance pay
in respect of these liabilities, which as at December 31, 2007 amounted to NIS
6.4 million (December 31, 2006 - NIS 6.5 million).

     On May 30, 2007, the Audit Committee and the Board of Directors of the Bank
authorized the granting of additional severance pay to the GM and the Deputy GM
of the Bank upon resignation from their positions (in excess of the amounts
provided for them in managers insurance policies and/or pension funds), at a
rate of one month's salary for each year of service and the relative share of a
month's salary in respect of part of the year. This resolution was approved by
the Supervisor of Wages and Labor Agreements in the Israeli Finance Ministry.

     The additional severance pay to the Chairman of the Board of Directors was
ratified by the general shareholders meeting of the Bank. The periods of service
of the Chairman of the Board, Dr. R. Cohen, the GM, Mr. A Galili, and the Deputy
GM, Mr. A Savir, started at different times during the second half of 2002 and,
therefore, assuming that their periods of service conclude at the end of the
Run-off Plan on July 31, 2008, there will be additional severance pay of
six-months' salary for each of the above. The cost of the additional severance
pay in respect of the three of them together, for the entire period, amounts to
NIS 0.9 million. The financial statements contained a provision related to the
period ended September 30, 2007 (approx. NIS 0.8 million).


                                       78`

`We issued to our officers and directors a letter of indemnification that
was approved by our shareholders' general meeting on August 8, 2002. According
to the letter of indemnification that was issued, we undertook to indemnify our
officers and directors in respect of any monetary liability imposed on them in
favor of another person in accordance with a court ruling (including a ruling
made as part of a compromise and an arbitration decision that received court
approval) and in respect of reasonable legal expenses (including attorney fees),
that are imposed on them following actions (defined as including acts of
omission or commission) that were taken and/or will be taken by them due to
their being officers or directors of the Bank or as part of a position or duty
that they fulfilled and/or will fulfill at our request or on our behalf in a
company or other corporate entity or any business venture in which we have
invested or will invest, providing that these actions are connected with one or
more of the types of events detailed in the letter of indemnification including,
inter alia, the following events:

     o    The issuance of securities.

     o    Using voting rights and rights to appoint directors in a company in
          which we held and/or will hold shares and/or in another company and/or
          business venture in which we have or will invest.

     o    Voting for or against any decision of the Board of Directors, a
          committee, etc., of a company, entity or venture as aforementioned.

     o    The realizing of collateral provided to us.

     o    The approval of credit and/or the provision of credit and other
          actions as part of our permissible business in accordance with the
          Banking Law (Licensing) - 1981.

     o    The holding of assets in trust.

     o    The providing of an underwriting commitment.

     o    A transaction in assets executed by the Bank for itself.

     o    The issuance of a report or notice as required by law.

     o    The receipt of licenses and permits. o Events connected to
          employee-employer relations.

     o    The privatization of the Bank and any course of action performed to
          further the privatization or in connection therewith.

     o    Any refraining from executing one or more of the aforementioned acts.

     The amount of the total cumulative indemnification that is payable
according to the aforementioned letter of indemnification shall not exceed 25%
of our shareholders' equity according to its financial statements for March 31,
2002, which was NIS 640.3 million, meaning no more than NIS 160.1 million,
linked to the CPI published in respect of March 2002. The letter of
indemnification is subject to the provisions of the Companies Law and to various
conditions as specified in the letter of indemnification. It is noted that
Amendment 3 to the Companies Law - 1999 (dated March 7, 2005) provides, inter
alia, that an indemnification commitment (such as the aforementioned letter of
indemnification) has to be limited to events the board of directors believes may
actually occur at the time of providing the indemnification commitment and to an
amount or criterion the board of directors deems as reasonable under the
circumstances of the matter. The question of the amendment applying to existing
letters of indemnification and the interpretation of the aforementioned
restriction have not yet been addressed in court rulings and therefore the
effects of the amendment on the aforementioned writ of indemnification are
uncertain.


                                       79`

`In May 2003, our Audit Committee and Board of Directors approved the
applicability of the letter of indemnification to an additional director whose
appointment ended prior to July 11, 2002.

     Our Audit Committee and our Board of Directors at their meeting on February
26, 2008 and the General Meeting of the bank held on April 15, 2008 approved the
issuance of a new letter of indemnification to our Directors and Officers
(hereinafter - the "New Letter of Indemnification"). The new letter of
indemnification applies to transactions (as defined to include acts of omission
and decisions) conducted commencing on August 26, 2002 (which is the date on
which the Prime Minister's Office, the Finance Ministry and the Bank of Israel
decided on a package of steps in connection with the Bank, including the sale of
our asset and liability portfolio) and that were performed and/or will be
performed by our Officers and Directors by virtue of their being our Officers or
Directors, or by virtue of any position or job in any company, the shares of
which are and/or will be held by us or in any corporation or other business
project in which we invested and/or will invest. The new letter of
indemnification covers monetary indebtedness placed on the Officers or Directors
in favor of another person by court ruling (including a ruling rendered as part
of a compromise or arbitration ruling approved by the court) and which are
connected or which derive from events set out in the new letter of
indemnification, that are events that our Board of Directors found to be
foreseeable in view of our activity at the date of the approval of the new
letter of indemnification.

These events include, among other things, the following:

     o    The sale or assignment of credit or collateral.

     o    Receipt of a special credit line from the Bank of Israel.

     o    Adoption or extension of our Run-off Plan.

     o    Liquidation or receivership of our assets.

     o    Repayment of the Perpetual Deposit with the Treasury.

     o    Redemption of our redeemable preference shares.

     o    Conducting and/or advancing negotiations and executing an arrangement
          with our shareholders as part of Section 350 of the Companies Law -
          1999, in connection with the transfer and/or delivery and/or
          redemption of their shares.

     o    The privatization of the Bank.

     o    Management of credit, handling debts, restructuring of debts, taking
          steps to collect debts.

     o    Management of various types of risks.

     o    Activities connected with the disclosure and recording requirements
          applicable to us.


                                       80`

`The overall amount of the indemnification in respect of the aforementioned
monetary indebtedness to be paid as part of the new letter of indemnification
and the overall amount of the indemnification in respect of the monetary
indebtedness to be paid as part of the existing letter of indemnification which
was approved by our general meeting on August 8, 2002 (hereinafter - the
"existing letter of indemnification"), shall not exceed in the aggregate the
ceiling for indemnification set out in the existing letter of indemnification
which, as mentioned above, amounts to NIS 160.1 million, linked to the Cost of
Living Index in respect of March 2002.

     In addition to the aforementioned monetary indebtedness, the new letter of
indemnification also covers reasonable litigation costs, including attorney fees
that officers or directors incurred or will be charged in certain proceedings.
The new letter of indemnification was approved by our general meeting and went
into effect owith the submission on July 6, 2008 of our request to the court to
approve a compromise plan and/or arrangement pursuant to Section 350 of the
Companies Law - 1999, between us and all or part of our shareholders, in
connection with (among other things) the purchase and/or redemption of their
shares.

     Our Audit Committee and our Board of Directors at their meeting on February
26, 2008 and our General Meeting held on April 15, 2008 approved the issuance of
a letter of exemption to our Officers and Directors. The letter of exemption
exempts our Officers and Directors from liability in respect of damage caused to
the Bank as a result of a breach in their fiduciary responsibility towards us in
actions (defined as including acts of omission and decisions) carried out and/or
that will be carried out by them by virtue of their being our Officers and
Directors, except for actions carried out, as above, prior to August 26, 2002.

     The letter of exemption will go into effect only upon submission of our
request to the court to approve a compromise plan and/or arrangement pursuant to
Section 350 of the Companies Law - 1999, between us and all or part of our
shareholders, in connection with (among other things) the purchase and/or
redemption of their shares.

BOARD PRACTICES

     During 2007, our Audit Committee was composed of Yeheskel Beinisch, who
served as the Audit Committee Chairman, Yacob Eizner, Shulamit Eshbol, Ehud
Green and Aharon Hildesheimer. The Audit Committee operates pursuant to the
Audit Committee procedures, which were ratified by our Board of Directors. The
primary functions and responsibilities of the Audit Committee, are as follows:

     1.   To provide recommendations to the Board of Directors regarding the
          appointment or termination of the appointment of the internal auditor.

     2.   To define the responsibilities of the internal auditor.

     3.   To review and make recommendations to the Chairman of the Board of
          Directors regarding the internal auditor's work plan.

     4.   To review the periodic and special reports of the internal auditor.


                                       81`

`5.   To review the audit reports of the Supervisor of Banks and the
          external auditor.

     6.   To review the implementation of the internal auditor's work plan, at
          least quarterly.

     7.   To review the handling of irregularities reported by the internal
          auditor concerning the activities of the Board of Directors

     8.   To review the correction of defects raised in the internal auditor's
          reports.

     9.   To approve (subject to the approval of the Board of Directors and the
          shareholders at a general meeting) the terms of service of directors,
          including remuneration, the granting of insurance, exemption from
          liability and indemnification, and to approve (subject to the approval
          of the Board of Directors and/or, to the extent required by our
          Articles of Association, subject also to the approval of the
          shareholders at a general meeting) the granting of insurance,
          exemption from liability and indemnification to officers who are not
          directors.

     10.  To approve (subject to approval of the Board of Directors) any
          extraordinary transactions between us and a third party in which any
          of our directors or officers has a personal interest.

     11.  To approve (subject to the approval of the Board of Directors and the
          shareholders at a general meeting) extraordinary transactions between
          us and any of our controlling shareholders, and extraordinary
          transactions between us and a third person, in which any of our
          controlling shareholders has a personal interest.

     12.  To approve transactions between us and associated parties (as defined
          in the Proper Banking Procedures), the amounts of which exceed the
          minimum prescribed by the Proper Banking Procedures.

     During 2007, our Administration Committee was composed of Dr. Raanan Cohen,
Richard Armonn, Avi Olshansky, Moshe Gavish and Aharon Hildesheimer. The
Chairman is Dr. Raanan Cohen. The primary functions and responsibilities of the
Administration Committee are as follows:

     1.   To approve organizational changes proposed by the General Manager.

     2.   To approve collective employment agreements pursuant to guidelines set
          by the Board of Directors.

     3.   To review work plans as presented by the General Manager and recommend
          their approval by the Board of Directors.

     4.   To review our overall budget as presented by management and recommend
          its approval by the Board of Directors.

     5.   To approve our senior authorized signatories.


                                       82`

`During 2007, our Credit Committee was composed of Dr. Raanan Cohen, Richard
Armonn, Avi Olshansky, Yacob Eizner, Ehud Green and Ben-Zion Dagan. The Chairman
is Richard Armonn. The primary functions and responsibilities of the Credit
Committee are as follows:

     1.   To approve the rescheduling of debt or the reorganization of debt for
          customers whose outstanding debt to us is between NIS 15-50 million
          (for regular customers), or between NIS 15-30 million (for problem
          customers).

     2.   To approve write-offs of loans between NIS 0.75-3 million for any one
          customer.

     In June 2008, the functions and responsibilities of the Credit Committee
were transferred back to the Board of Directors.

     During 2007, our Financial Statement Review Committee was composed of Dr.
Raanan Cohen, Shulamit Eshbol, Yeheskel Beinisch, Moshe Gavish, Ben-Zion Dagan,
and Ehud Green. The Chairman is Dr. Raanan Cohen. The primary functions and
responsibilities of the Financial Statement Review Committee are as follows:

     1.   To review drafts of the annual and quarterly financial statements
          prior to their presentation to the Board of Directors.

     2.   To keep regular contact with the external auditors and our comptroller
          on matters relating to accounting principles implemented in the
          financial statements.

     3.   To review all matters relating to the financial statements brought
          before it by the Board of Directors.

     We do not have a remuneration committee.

DIRECTORS HAVING ACCOUNTING AND FINANCIAL SKILLS/EXPERTISE

     The Bank of Israel has instructed the banks to implement (with certain
changes and adjustments) a directive that had been initially issued by the
Israel Securities Authority in 2003 relating to directors' accounting and
financial skills. According to the directive of the Israel Securities Authority
and the instructions of the Bank of Israel, a bank has to determine the minimum
number of directors having accounting and financial skills that should serve on
the bank's board of directors, the audit committee and the financial statement
review committee, with "a director having accounting and financial skills" being
a director that does not hold any other position in the company and due to his
education, experience or qualifications, has high skills and understanding in
business, accounting, internal control and financial statement matters, in a way
that enables him to have an in-depth understanding of the financial statements
of the company and to raise on the agenda of the board of directors issues and
questions relating to the financial reporting of the company, with the objective
of approving and publishing fair financial statements.


                                       83`

`In 2005 the Knesset passed Amendment No. 3 to the Companies Law,pursuant to
which, among other provisions, a public company must have at least one outside
director who has accounting and financial expertise and additional directors
having accounting and financial expertise in the number determined by the board
of directors. The definition of "accounting and financial expertise" was
included in regulations that were published at the end of 2005 and it is
essentially similar to the definition of "accounting and financial skills"
described above (other than its not including a threshold condition of not
holding an additional position in the company).

     We have implemented both the directive of the Israel Securities Authority
regarding directors having accounting and financial skills as instructed by the
Bank of Israel and pursuant to the provisions of the Companies Law and
aforementioned amendments with respect to directors having accounting and
financial expertise. Our Board of Directors has decided that the appropriate
minimum number of directors having accounting and financial skills/expertise
that should serve on our Board of Directors is two, being of the opinion that in
light of the significant decrease in the volume of our activities, the reduction
in the lines of operation in which it is engaged and the focus on the collection
of loans, this number is adequate in order to enable the Board to fulfill the
duties it has to perform in accordance with the Law and our Articles of
Association, and, in particular in relation to the examination of our financial
position and the preparation and approval of our financial statements.

     Our Board of Directors also decided that the appropriate minimum number of
these directors on the Audit Committee and the Financial Statement Review
Committee is one. As of June 1, 2008, the Bank has seven directors with
accounting and financial skills/expertise on its Board of Directors. It has
three such directors on the Audit Committee and three such directors on the
Financial Statement Review Committee. The directors having accounting and
financial skills/expertise and the facts that support them as such are as
follows:

DR. RAANAN COHEN: Chairman of the Board of Directors of the Bank from August 15,
2002. He is also the Chairman of the Financial Statement Review Committee. He
has taken academic courses in risk management, investments in securities and in
financial instruments, directors' training and company recovery laws. Dr. Raanan
Cohen has also served as a director of Phoenix Insurance Company Ltd. (Chairman
of the Audit Committee). He is currently a director of Trans Clal Trade Ltd.
(member of the Audit Committee), of Gaon Holdings Ltd. (member of the Audit
Committee) and of New Koppel Insurance Ltd. (member of the Audit Committee).

A. OLSHANSKY: Bachelor of Economics from the Hebrew University. Served in the
past in various positions in Bank Hapoalim B.M., including VP, Deputy Managing
Director and joint Managing Director. Acted as CEO of Gmul Investment Company
Ltd. (central management company of pension funds). Served as Chairman of the
Board of Clal (Israel) Ltd., which operated companies in the insurance,
industry, commerce and construction fields. Mr. Olshansky served and is serving
as a director in various companies. He also engages in financial and economic
consulting.


                                       84`

`Y. EIZNER: Member of the Audit Committee. Bachelor of Economics and Statistics,
studied business administration at the Hebrew University. In the past, Mr.
Eizner served for several years as CEO of Bank Jerusalem Ltd. and as a director
of the bank and its subsidiaries, and prior to that as Deputy CEO of that bank.
Mr. Eizner is also a director of Sadot Binyamina Ltd. and serves as the head of
the Investment Committee of the Teachers' Education Fund.

S. ESHBOL: CPA and lawyer. Member of the Audit Committee and the Financial
Statement Review Committee. Ms. Eshbol has a Bachelor of Accounting with
secondary courses in financing from the College of Administration and a Bachelor
of Laws from the Herzliya Interdisciplinary Center. Ms. Eshbol engaged in
accounting in the past and for the last several years has been practicing law.
As part of her legal practice is engaged in commercial and financial fields. She
has served as director of other companies and currently serves as a director of
the Israel Electric Corporation Ltd.

M. GAVISH: Member of the Financial Statement Review Committee. Mr. Gavish holds
a Bachelor of Economics and Law and Master of Business Administration from the
Hebrew University. He served as Commissioner of the Income Tax and Property Tax
Authority and as CEO of Mercantile Discount Bank. Mr. Gavish has also served and
is serving as CEO of certain companies, as chairman of finance committees of
various entities, as director of several companies, including as Chairman of the
Israel Broadcasting Authority. In addition, Mr. Gavish serves as a consultant to
companies.

R. ARMONN: Bachelor of Political Science, studied business administration at the
Hebrew University. Studied law at the Parhom University of Bucharest. Served in
the past as Deputy CEO of Bank Hapoalim B.M. and was in charge of credits in
that bank. Mr. Armonn also served as Deputy CEO and Chairman of the Board of
Gmul Investment Company Ltd. (central management company of pension funds) and
as director and chairman of the board of various other companies. He has been a
director of the Bank since 1967 (not continuously), and served as Chairman of
the Loan Committee of the Board.

A. HILDESHEIMER: Member of the Audit Committee. Bachelor of Economics and
Political Science, and Master of Business Administration from the Hebrew
University. In the past, Mr. Hildesheimer filled a number of positions at
Mizrahi Bank Ltd., including assistant to the CEO and Deputy CEO. He also served
as the CEO of Finance and Trade Bank Ltd. and as a director in various
companies. Currently, Mr. Hildesheimer engages in economic and financial
consulting.

EMPLOYEES

     As of December 31, 2007, we had 43 employees, as follows:

     Personnel/Training Staff                   2
     Compliance and Auditing                    1
      Officers                                  6
     Professional Staff                        16
     Support Staff                             18


                                       85`

`All of our employees and officers reside in Israel and work at our offices
in Tel Aviv.

     The reduction in our operations pursuant to the Run-Off Plan was
accompanied also by a reduction in our staff. The number of our employees as of
December 31, 2007 is about 28% of the number that were employed on December 31,
2002.

     18 of our employees as of December 31, 2007 are subject to collective
employment agreements entered into between us, the General Federation of Labor
and our employees' committee.

     Pursuant to the Basic Budget Law - 1985 (Israel), "mixed companies," as
defined in the Government Companies Law, shall not agree to changes in wages,
severance payments, retirement or other employment-related financial benefits
and shall not institute such changes or benefits other than changes that have
either been (i) agreed to or instituted with respect to all of the state
employees, or (ii) approved by the Minister of Finance. The Minister of
Finance's authority to approve such changes was delegated to the Commissioner of
Wages and Labor Agreements in the Ministry of Finance.

     We are a "mixed company" as defined in the Government Companies Law and the
opinion of the Commissioner of Wages and Labor Agreements in the Ministry of
Finance is that the above Basic Budget Law applies to us. The collective
agreement entered into between us and some of our employees, in December 2002
was approved, upon our request, by the Commissioner of Wages and Labor
Agreements in the Ministry of Finance and he also approved certain severance
payments to our officers, which were lower than those stipulated in their
employment agreements. The collective agreement was subsequently extended with
the approval of the Commissioner of Wages and Labor Agreements in the Ministry
of Finance until the earlier of the termination of the Run-Off Plan and December
31, 2008 We are currently in negotiations for the extension of the collective
agreement.

SHARE OWNERSHIP

     None of our directors or executive officers own any of our shares. We do
not have any arrangements, including stock option plans, which provide for the
issuance of our securities to our directors or officers.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.   MAJOR SHAREHOLDERS

RELATIONSHIP OF THE BANK TO THE GOVERNMENT OF ISRAEL

     As of December 31, 2007, the State of Israel held approximately 80% of our
equity and approximately 45.78% of our outstanding voting rights and had the
right to appoint approximately 50% of the directors (based upon the actual
number of directors the State of Israel is entitled to appoint out of the total
number of directors that may be appointed by the shareholders). Directors
appointed by both the Ministry of Finance and the Ministry of Industry, Trade
and Employment are members of our Board of Directors.


                                       86`

`The Government has issued guarantees in our favor (which guarantees are
also granted to other banks) to secure loans granted by us in cases where the
Government was interested in supporting the projects being financed by such
loans.

     In accordance with the governmental approval of the Run-Off Plan, the
Government is responsible for the repayment of the Special Line of Credit as
from July 1, 2005, on the condition that the interest rate on the credit line
until the end of the Run-Off Plan shall not exceed the Bank of Israel Rate. If
at the end of the Run-Off Plan there remains an unpaid balance of the Special
Line of Credit, the Government will repay the balance to Bank of Israel by July
31, 2008. Recently, the Special Line of Credit was extended until December 31,
2008 or until the approval by the Court of the Section 350 Arrangement among our
shareholders, the State of Israel and the Bank, whichever is earlier.
Consequently, repayment by the Government of the Special Line of Credit was also
extended. In exchange for its repayment of the credit balance, the collateral
that was provided by the Bank for repayment of the Special Line of Credit will
be assigned to the Government. It is our understanding that the Government's
assuming responsibility for the repayment of the balance of the Special Line of
Credit does not derogate from our primary obligation to repay the outstanding
balance to the Bank of Israel. See "Item 4. Information on the Company-Business
Overview" above for a discussion of the Special Line of Credit.

     Since the State of Israel holds approximately 45.78% of our voting rights
and about 50% of the rights to appoint directors, we are considered a "Mixed
Company" under the Government Companies Law, and therefore we must report to the
Governmental Companies Authority. Due to the State of Israel's entitlement to
appoint directors to our Board, we are also considered as a "body that the
Government of Israel participates in its management" within the State
Comptroller Law-1958 (Israel), and consequently we are subject to the State
Comptroller's audit.

     During the last several years, the State of Israel has purchased our D
Shares and DD Shares in off-floor transactions. The shares that were purchased
in the years 2005 and 2006 and their purchase prices were as follows:

                             2007                                                          2006
---------------------------------------------------------------  -----------------------------------------------------------
                                                      PURCHASE                                                    PURCHASE
             NUMBER OF                               PRICE PER             NUMBER OF                             PRICE PER
CLASS OF      SHARES             HOLDING %           SHARE (IN  CLASS OF    SHARES             HOLDING %         SHARE (IN
 SHARES      PURCHASED      OF PURCHASED SHARES     US DOLLARS)  SHARES    PURCHASED      OF PURCHASED SHARES    US DOLLARS)
 ------      ---------      --------------------    -----------  ------    ---------      -------------------    -----------
                              IN        IN VOTING                                           IN      IN VOTING
                            EQUITY        RIGHTS                                          EQUITY      RIGHTS
                            ------        ------                                          ------      ------

D               290          0.01%           -           90          D         391         0.01%        -             90

DD              308          0.44%           -        1,000         DD         415         0.59%        -          1,000

     To our knowledge, the D Shares were purchased by the State based upon a
declaration that was included in the letter of the Minister of Finance, Mr.
Pinchas Sapir, dated February 15, 1967 (which was addressed to the Vice
President of Capital For Israel Inc.) by which the State of Israel intends to
purchase D Shares upon their registration for trading on the Tel Aviv Stock
Exchange, at prices between 90% and 95% of their par value, which is US$ 100 per
share.


                                       87`

`To our knowledge, the DD Shares were purchased by the State following the
declaration that was included in the prospectuses for the issuance of these
shares, by which the State of Israel agreed that if these shares are offered for
sale on the Tel Aviv Stock Exchange anytime during the 20 years from the date
they were issued to the public, it would cause them to be purchased at a price
equal to 90% of the $ 1,000 per share at which they were issued, and beginning
from the 21st year from their issuance - at a price equal to 100% of the said
price at which they were issued.

     The D Shares and DD Shares were de-listed from the stock exchange in the
1990s. To our knowledge, the State's continued purchase of these shares is
nonetheless based upon the foregoing undertakings. As indicated by the data in
the foregoing table, the State's holdings of these shares do not confer control.

     During the past year, we conducted examinations and verifications which
revealed that, of the 3,429 D Shares (par value $100 each) and the 1,901 DD
Shares (par value $1,000 each) registered in the name of the State in our
Agent's registry in the United States but not registered in our books and not
reported by us, 2,636 D Shares and 1,306 DD Shares should be transferred and
registered in the name of the State in our books (and at the same time removed
from the registry in the United States). At its meeting on February 26, 2008,
our Board of Directors resolved to approve the transfer of the aforementioned
shares in the name of the State, subject to the receipt of certain approvals
from the State in connection with the correction of the existing records in its
name and the "surplus" stock certificates it has in its possession. Once the
transfer is carried out, the percentage of our capital held by the State will
amount to 81.82% instead of 79.92% as currently reported. It should be noted
that apparently, 30 additional DD Shares were purchased by the State, but due to
a lack of information regarding the sellers, it is not currently possible to
transfer and register these shares in the name of the State in our books.

SHAREHOLDERS IN THE UNITED STATES

     The number of holders of shares in the United States and the number of
shares that such holders held as of September 1, 2008 is set forth below:

     6% C Shares - 1,079 holders in the United States, holding 2,015,774 shares.

     6% CC Shares - 713 holders in the United States, holding 116,388 shares.

     7-1/2% D Shares - 571 holders in the United States, holding 13,359 shares.

     7-1/2% DD Shares - 1,381 holders in the United States, holding 7,677
shares.


                                       88`

`PRINCIPAL HOLDERS OF VOTING SECURITIES

     The following table sets forth, as of August 31, 2008, certain information
concerning ownership of our voting securities, including all persons known by us
to own more than 5% of any class of our voting securities and the total amount
of any class of our voting securities owned by our officers and directors as a
group:

                                                                                                                  PERCENTAGE OF
                                                                         NUMBER OF SHARES    PERCENTAGE OF         TOTAL VOTING
     NAME OF HOLDER                       TITLE OF CLASS                       OWNED          CLASS OWNED          RIGHTS HELD
     --------------                       --------------                       -----          -----------          -----------

State of Israel                         Ordinary A Shares(1)                  7,370              48.81%               45.78%
Bank HaPoalim B.M. Israel (3)           Ordinary A Shares(1)                  1,830              12.12%               11.37%(4)
Israel Discount Bank Ltd.,              Ordinary A Shares(1)                  1,530              10.13%                9.50%
Bank Leumi le-Israel B.M Israel (5)     Ordinary A Shares(1)                  3,110(6)           20.60%               19.32%
Bank Hapoalim B.M Israel (5)            Ordinary Preferred Shares(2)         65,020(7)            6.50%                0.40%
All officers and directors as a group   Voting shares                    None (as per the
                                                                         records of our
                                                                         Bank)

     (1)  Each Ordinary A Share entitles the owner thereof to 1,000 votes at any
          meeting of our shareholders.

     (2)  Each Ordinary Preferred Share entitles the owner thereof to one (1)
          vote at any meetings of our shareholders.

     (3)  The Ordinary A Shares are listed in the name of Poalim Trust Services
          Ltd., which reported to us that said shares are held in trust, as
          follows:

          1,829.8 Shares held for Bank Hapoalim B.M.

          0.20 Shares held for David Shocnay

     (4)  We have been advised by Bank Hapoalim B.M. Israel that according to an
          agreement between them and Israeli Manufacturers Association, Bank
          Hapoalim B.M. Israel was granted the voting rights related to 250
          Ordinary A shares held by the Israeli Manufacturers Association. In
          light of this agreement, Bank Hapoalim B.M. Israel holds 13.32% of the
          voting rights.


                                       89`

`(5)  Includes shares held by affiliates of the shareholder

     (6)  Includes 1,050 or 6.95% held by Bank Leumi Lepituah Hataasiya Ltd., an
          affiliate of Bank Leumi le-Israel B.M.

     (7)  Held of record (not beneficially) by Hevra Lerishumim shel Bank
          Discount le-Israel. The shares are beneficially held by Bank Hapoalim
          B.M. and its affiliates.

B.   RELATED PARTY TRANSACTIONS

     "Related Parties" and "Interested Parties" of the Bank, as defined in
Opinion No. 29 of the Institute of Certified Public Accountants in Israel and
the Securities Regulations (Preparation of Annual Financial Statements) - 1993,
are: The State of Israel; Bank Hapoalim B.M.; Israel Discount Bank Ltd.; Bank
Leumi le-Israel B.M.; the General Manager, Directors of the Bank and companies
related to them, affiliates of the Bank and their related companies.

     We conduct transactions with all or some of the aforementioned parties, in
the ordinary course of business on terms applicable to our transactions in
general. Following are the material transactions with these parties:

     Credit to the Israel Electric Corporation Ltd. and deposits of the State of
Israel - We provided long-term credit to the Israel Electric Corporation Ltd.
which was granted out of a deposit of the State. The State provided a guarantee
as security for the repayment of such credit to us. As of December 31, 2007, the
balance of the credit was NIS 4,963 million (as at December 31, 2006 - NIS 5,671
million). An expense of NIS 127 million was recorded in respect of the
aforementioned credit in 2007 (in 2006 - an expense of NIS 89 million). This
refers to dollar-denominated credit and due to the decrease in the exchange rate
of the dollar, negative exchange rate differentials were recorded. In 2005,
income of NIS 864 million was recorded, constituting more than 10% of the profit
from financing operations before the allowance for doubtful debts in the said
year.

     As aforementioned, the source for this credit was a deposit of the State of
Israel. In addition to the said deposit, the balance of the Government deposits
includes also deposits made in order to provide loans in the framework of the
Kibbutzim arrangement and other deposits made in order to provide other
long-term loans. As at December 31, 2007, the overall balance of the Government
deposits amounted to NIS 5,319 million compared with NIS 6,087 million as at
December 31, 2006. Financing income in an amount of NIS 115 million was recorded
in 2007 in respect of the Government deposits, compared with income of NIS 84
million in 2006 and an expense of NIS 902 million in 2005.

C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.


                                       90`

`ITEM 8. FINANCIAL INFORMATION

A.   CONSOLIDATED FINANCIAL STATEMENT AND OTHER FINANCIAL INFORMATION

     OUR FINANCIAL STATEMENTS ARE PREPARED IN ACCORDANCE WITH ISRAELI GAAP AND
WITH THE DIRECTIVES OF THE ISRAELI SUPERVISOR OF BANKS. ISRAELI GAAP MAY DIFFER
SIGNIFICANTLY FROM U.S. GAAP. SEE "ITEM 17. FINANCIAL STATEMENTS," IN PARTICULAR
NOTE 32 THERETO, WHICH SETS FORTH THE PRINCIPAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP.

LEGAL PROCEEDINGS

     Set forth below are certain details regarding material legal proceedings
against us which were pending as of June 1, 2008:

     (A) In August 2000, a claim, originally fixed for court fees in the sum of
US$18,666,711 and which was later increased to US$ 22.5 million, was filed by
several venture capital funds against Mr. Blass, our former deputy general
manager, and twenty four other defendants alleging a violation of an investment
agreement by Mr. Blass and the other defendants. In addition to damages, the
claimants also seek receiving shares in kind. Mr. Blass rejects the claim and he
has instructed his lawyer to file a statement of defense. The claim was filed
against Mr. Blass in his capacity as a director in the company in which the
investment was to be made, Jolt Ltd. At that time, Mr. Blass served as the
general manager of our subsidiary and was appointed by our subsidiary as
director in the above company. In 2000, we sold all of our holdings in the
subsidiary. On June 29, 2008, the Court approved a mediation agreement reached
between the parties, by which all the claims between the parties were settled,
without any monetary liability being imposed upon Mr. Blass. Pursuant to the
mediation agreement, those parties who are to compensate the plaintiff are to
pay the compensation by August 22, 2008.

     (B) In October 2002, a class action was filed against us, the State of
Israel (as our controlling shareholder) and seventeen of our current and former
officers and directors (two of whom were later struck from the statement of
claim). This action was instituted by Mr. A. Finn, one of our shareholders. The
action was instituted in the name of all those who purchased our shares between
December 1, 2001 and August 22, 2002. The claim alleges that we breached our
duty to report pursuant to the Securities Law - 1968 (Israel) and the Securities
Regulations (Immediate and Periodic Reports) - 1970 (Israel). According to the
action, between December 1, 2001 and August 22, 2002, several events occurred
which demonstrated our severe condition. The claim alleges that the occurrence
of the events obligated us to file an immediate report pursuant to Israeli
securities regulations, and that such report was not filed. The claim seeks
damages of NIS 20 million or in the alternate, of NIS 14 million.

     On July 11, 2007, a settlement agreement was signed between the parties,
which was approved by our shareholders at their general meeting on August 20,
2007 and by the Court on November 4, 2007. According to the settlement
agreement, we have paid to the plaintiff class the sum of NIS 4.7 million. In
addition, we have paid a special remuneration to the plaintiff, plaintiff's
attorneys' fees and various other expenses, all of which amounted to
approximately NIS 1.5 million. At the same time, we have also reached an
agreement with our Directors and Officers insurers according to which the
insurers reimbursed us for half of the cost of the above-mentioned settlement
agreement with the plaintiff and an additional amount of NIS 1 million for legal
expenses we have incurred. On November 4, 2007, the settlement agreement was
approved by the Court. We paid the above settlement amount and received the
above reimbursement from our insurers.


                                       91`

`(C) In March 2003, Lahava Chatamim Ltd., in its capacity as a shareholder,
filed a derivative action in the amount of NIS 409.5 million against us and
eleven of our current and former officers and directors. The plaintiff claims
that the officers and directors breached their duty of care and were negligent
in carrying out their duties, by granting credits without proper collateral. The
claimant argues that the breach and negligence are evidenced by the problems in
the bank credit policy, the quality of the credits, the procedures employed for
granting the credits, the management of credit risk and the routine handling of
credits. The alleged damages are equal to the allowances for doubtful debts we
made in our financial statements for 2002. Under Israeli law, the filing of a
derivative action must be approved by the court. Accordingly, the plaintiff has
filed an application to that effect. The parties' witnesses were cross-examined
on May 26, 2005 and the parties last written summations were filed during the
last quarter of 2005. On June 18, 2006, the Court rendered its decision
rejecting the motion to certify the derivative action and awarded us and our
current officers and directors legal fees in the amount of NIS 40,000. On
September 18, 2006 the plaintiff filed an appeal with the Supreme Court on the
decision to reject the motion to certify the derivative action. The parties to
the appeal submitted written summations and supplemental oral arguments were
heard on February 14, 2008. As of yet, the Supreme Court has not rendered its
decision. On June 1, 2005, we received notices from counsel to our directors and
officers insurers that our insurers have reservations as to the validity of the
insurance coverage for this action and that they reserve their rights in this
matter. We categorically reject these reservations and intend to act to exhaust
our rights against the insurers. In the opinion of the legal counsels handling
the claim on our behalf, since the claim is a derivative action, our exposure in
respect thereto is only for expenses (including court fees, expenses of the
plaintiff, fee to the attorney of the plaintiff and special compensation to the
plaintiff).

     (D) In September 2003, an Israeli oil company filed a claim against us and
two other banks, Israel Discount Bank Ltd. and United Mizrachi Bank Ltd., in the
amount of NIS 6 million, concerning the delivery of oil products by the
plaintiff to a power plant owned by a company that was a client of the three
defendant- banks. We, together with the other two named banks, financed the
building of the power plant. Our bank provided 26% of the financing for the
power plant and the management of the consortium of the bank financing was
performed by Israel Discount Bank Ltd. The plaintiff alleges that the
involvement of the three banks in the approval of the business plan and its
income and expense budget created a representation upon which the plaintiff
relied at the time that it provided its products to the plant, assuming that the
expenses included in the approved plan and/or budget would be paid by the above
banks. Due to the fact that the consideration for the products delivered was not
paid, the plaintiff claims that the banks are responsible to compensate it for
its losses. We and the other two banks reject the claim and our legal counsels
have filed the appropriate defenses. In July 2008, the matter was transferred to
a mediation proceeding.


                                       92`

`(E) On June 30, 2004, two of our former senior employees filed a claim in
the Labor Court, seeking NIS 2,346,200 in the aggregate (nominal). The claim is
for various additional payments which, according to the claim, are due to them
in connection with the cessation of their employment in 2002 pursuant to the
terms of their employment contracts. The plaintiffs claim that in return for
these additional payments that were granted to them in their employment
contracts, they agreed to forfeit wage increases that were due to them at the
time. Therefore, the plaintiffs have alternatively petitioned the court to award
them the value of the wage increases that they agreed to forfeit. Despite the
fact that, according to the plaintiffs' claim, the value of the wage increases
is greater than the amount of the claim, in order to reduce court fees, they
have set their value equal to the amount of the claim. The payment of these
additional payments was not approved by the Commissioner of Wages and Labor
Agreements of the Ministry of Finance, who was also named in the claim as a
defendant. Following the notice given by the Commissioner of Wages and Labor
Agreements of his consent to pay to the plaintiffs certain payments in
settlement of the claim settlement that he offered them in the past, without
conditioning this on their waiving further claims, the plaintiffs motioned for a
partial judgment, under which we would pay to the two plaintiffs a total of
approximately NIS 415,000, reflecting the consent of the Commissioner of Wages
and Labor Agreements. We objected to this motion. All of the testimony has been
heard and summations have been submitted and we are awaiting the Court's ruling
regarding the overall claim.


                                       93`

`(F) On September 28, 2004, 27 financial institutions that hold our C Shares
and/or CC Shares and/or CC1 Shares filed an action in the Tel Aviv District
Court, in which the court was petitioned, among other things, to direct us to
pay to our shareholders a dividend similar in amount and frequency as we had
paid until the payment of the last dividend for the second quarter of 2002. The
plaintiffs claim, among other things, that according to our Articles of
Association, we are bound to pay to our preferred shareholders an annual
dividend in the amount of 7.5%, that such dividend is not in essence a dividend,
but rather a payment which is paid in full by the State of Israel with respect
to the Perpetual Deposit and, therefore, such distribution is not subject to
distribution requirements prescribed by law, and that even if such requirements
should be applied, we should be ordered to pay the requested dividend because we
meet the solvency requirement prescribed by law, and in light of the fact that
the dividend is financed in full by the State of Israel and is not deducted from
our capital. Since the issue of the dividend is connected, in our opinion, to
the issue of the accrual of interest on the Bank's Perpetual Deposit, we filed,
on March 9, 2005, a motion for a declaratory judgment against the State of
Israel and the above financial institutions, stating that the interest on the
Perpetual Deposit does in fact accrue. The Court has decided to consolidate the
two motions for declaratory judgments. On December 27, 2005, the Minister of
Finance filed his answer to the two motions. The Minister's position is that the
interest on the Perpetual Deposit does not accrue (neither to our benefit nor to
the benefit of our shareholders) while we are not distributing dividends, and
that in light of our situation and regardless of the non-accrual of the
interest, a distribution of a dividend is not appropriate. On March 23, 2006,
the Court decided that it will first rule on the question of the accrual of
interest on the Perpetual Deposit. On August 5, 2007, a verdict was handed down
by the Tel Aviv District Court whereby it rejected the opening motion we filed
against the Finance Minister and against the aforementioned financial
institutions and determined that as long as a dividend is not distributed on our
preference shares, the interest on our Perpetual Deposit does not accrue. At its
meeting on October 9, 2007, our Board of Directors discussed the ramifications
of the verdict. The Board decided that since our originating motion related not
only to the issue of accrual of interest on the Perpetual Deposit, in the
absence of a dividend distribution, but also to the accrual and payment of a
dividend in arrears (including upon liquidation), in order to avoid what the
Board believes is an unintended result, where our right to accrued interest
against the payment of dividend in arrears on the Preferred Shares are also
denied, the Bank should file an appeal on the rejection of the claim with regard
to the payment of the accrued interest on the Perpetual Deposit against the
payment of the dividend in arrears. Notwithstanding the above, the Board of
Directors added in its decision that the appeal will not be filed if an adequate
clarification is provided by the State as to its consent to pay accrued interest
on the Perpetual Deposit against the payment of the dividend in arrears on the
preferred shares (Preferred C, CC, CC1, D and DD shares). Such clarification was
not forthcoming and our appeal was submitted to the Supreme Court on January 6,
2008. At the aforementioned meeting on October 9, 2007, our Board of Directors
also decided that in view of the ruling handed down by the Tel Aviv District
Court on our originating motion, it would be prudent for us to take steps
towards the renewal of the distribution of the dividends, such as convening a
general meeting of the Bank and recommending to the shareholders in the general
meeting to amend our by-laws in order to remove the existing impediment against
the renewal of the dividend distribution to the holders of Preferred Shares. The
general meeting of the Bank convened on January 7, 2008 and rejected the
proposed amendments to our by-laws. On February 5, 2008, the financial entities
that filed the originating motion against us submitted a request to the Court to
add the State as an additional respondent due to, among other reasons, the vote
of the State at the general meeting of the Bank against the proposed amendments
to our by-laws. On February 24, 2008, we responded to above request stating that
we have no objection to the addition of the State as an additional respondent.
On March 18, 2008 the above financial entities and the State signed an
"agreement document" by which the parties agreed, among other things, that
within the framework of the Section 350 Arrangement, which was hsubmitted by us
for the approval of the Court regarding the sale of our shares or alternatively,
a partial payment of the preferred dividend to the holders of our C Shares, CC
Shares and CC1 Shares, shall establish that with the approval of the arrangement
by the court, the originating motion filed by the above financial entities shall
be dismissed, as well as the appeal filed by us on the decision of the Tel Aviv
District Court regarding the dismissal of our originating motion, and that
subject to payment of the sums due to the holders of our C Shares, CC Shares and
CC1 shares (which includes the financial entities), pursuant to the arrangement,
they will waive their claims and demands concerning the dividend. The above
agreement was submitted to the Court on July 6, 2008. In the opinion of our
legal counsel, the likelihood that the Court will require us to pay the dividend
without its being financed by the State (as interest on the Perpetual Deposit)
is remote.


                                       94`

`(G) On October 10, 2005, a company that performs engineering and plumbing
work, filed a claim in the amount of NIS 1,356,459 against us, a receiver that
was appointed at our request to a residential and commercial project that
encountered difficulties, and the owner of the land that at the time had entered
into a joint venture with the promoter that had constructed the project with our
financing. The plaintiff company performed work on the project at the request of
the promoter, which had failed to repay its debt to the plaintiff company. The
claim states that the amount sought reflects the amount the promoter still owes
the plaintiff company in respect of the work it executed on the project with
interest and/or linkage differences. The plaintiff company contends that due to
the principles of construction loan financing and our having granted to the
promoter construction loans for construction of the project, we should be held
responsible for repayment of the debt. Furthermore, it contends that at the time
it had entered into the agreement with the promoter, we should have brought to
its attention the information the plaintiff contends was in our possession,
regarding the difficult condition of the promoter and the project. The handling
of the claim was transferred to the care of an attorney acting on our behalf. On
March 14, 2006, the action against the receiver was dismissed at the outset FOR
failure to show cause of action and the action is continuing, therefore, only
against us and the land-owner.

     (H) In May 2006, a suit was filed in the Rehovot Magistrates Court, against
us, the receiver that was appointed at our request in respect of a carpentry
workshop and the purchaser of the workshop from the receiver. According to the
statement of claim filed by the former owners of the workshop for an amount of
NIS 2.5 million, we and the receiver agreed with the acquirer of the workshop on
a purchase price lower than the amount that he originally undertook to pay the
plaintiffs. The plaintiffs also claim that we and the receiver did not insure
the premises and equipment of the workshop and, therefore, we are liable for the
damages that occurred to the premises and the equipment as a result of a fire
that broke out at the workshop. The handling of the suit was transferred to an
attorney on our behalf.

     (I) In December 2007, a suit was filed against us in the Tel Aviv- Jaffa
Magistrates Court for an amount of NIS 1.3 million. The suit was filed by a
customer of ours who received in the past credit from the Bank to finance a
construction project. The suit alleges that the Bank overcharged the plaintiff's
account for interest and commissions without its consent or in violation of the
agreements between the Bank and the customer. According to the plaintiff, if not
for these charges, its account with the Bank as of June 2007 would have had a
credit balance in the amount being sued for and not a debit balance. We
transferred the handling of this suit to an attorney. We filed a counter-claim
against the plaintiff for the outstanding balance in its account (which as of
February 2008 amounted to approximately NIS 2.2 million). The parties have
agreed to enter into mediation proceedings

     In addition, we are party to various pending legal proceedings which we do
not expect will have a material adverse effect on our business, financial
condition or results of operations.

DIVIDEND POLICY

     In the past, we paid an annual dividend on Ordinary A Shares, Preferred
Ordinary Shares, Ordinary B Shares and Ordinary B1 Shares, as well as on our
Preferred Shares. The Ordinary B Shares and Ordinary B1 Shares are held by the
State of Israel. We stopped paying dividends on these shares at the same time
that we stopped paying dividends on our Preferred Shares. For a discussion
regarding the cessation of the payment of dividends, see "Item 3. Key
Information-Risk Factors" above and "Item 13. Defaults, Dividend Arrearages and
Delinquencies" below.

B.   SIGNIFICANT CHANGES

     No significant changes have occurred since the date of the annual financial
statements included in this Annual Report on Form 20-F, except as described in
Item 4.B.


                                       95`

`ITEM 9. THE OFFER AND LISTING

A.   OFFER AND LISTING DETAILS

PRICE HISTORY OF LISTED STOCK

     Our Ordinary Preferred Shares, and our C Shares, CC Shares and CC1 Shares
are listed on the Tel Aviv Stock Exchange. The following table shows the high
and low closing price in NIS for our Ordinary Preferred Shares, and our C
Shares, CC Shares and CC1 Shares on the Tel Aviv Stock Exchange for the periods
indicated:

                                                                     IN  NIS

                        CLASS C CUMULATIVE       CLASS CC CUMULATIVE           CLASS CC1 CUMULATIVE
                          PARTICIPATING             PARTICIPATING                 PARTICIPATING               PREFERRED ORDINARY
                        PREFERENCE SHARES         PREFERENCE SHARES             PREFERENCE SHARES                  SHARES
                         ----------------        --------------------          --------------------          --------------------
                         HIGH        LOW         HIGH            LOW           HIGH            LOW           HIGH            LOW
                         ----       -----        -----          -----          -----          -----          -----          -----

2003                     123           58        1,142            700            990            550            229            143
2004                     158           95        1,590          1,000          1,449          1,001          1,174            194
2005                     169          107        1,400            960          1,500          1,089          1,058            578
2006
   1st Quarter           126           94        1,225          1,008          1,159            873            572            490
   2nd Quarter           193          142        1,885          1,339          1,977          1,386            525            390
   3rd Quarter           201          179        1,981          1,582          1,852          1,784            383            315
   4th Quarter           227          196        2,308          1,907          2,040          1,995            538            424
2007
   1st Quarter           260          190        2,499          1,900          2,099          1,720            536            450
   2nd Quarter           280          183        2,379          1,910          2,140          1,720          2,095            509
   3rd Quarter           400          234        3,853          2,376          3,600          2,100          1,775          1,265
   4th Quarter           429          356        4,112          3,601          3,980          3,250          1,790          1,231
2008
   January               438          392        4,112          4,112          3,901          3,901          1,840          1,066
   February              400          400        4,112          4,112          3,901          3,695          1,098            803
   March                 400          342        4,112          4,112          3,853          3,380          1,168            811
   April                 390          323        4,112          4,112          3,853          3,791          1,588          1,177
   May                   365          328        4,112          3,300          3,791          3,002          1,487          1,241
   June                  330          275        3,500          3,500          3,444          2,960          1,241            832
   July                  330          300        3,500          3,497          3,250          2,998            932            666
   August                322          290        3,497          3,497          3,250          3,200            750            750

     Neither our D Shares nor our DD Shares, are listed or traded on the Tel
Aviv Stock Exchange. None of our securities are listed or traded on any stock
exchange in the United States.


                                       96`

`B.   PLAN OF DISTRIBUTION

     Not applicable.

C.   MARKETS

     Our listed securities are traded only on the Tel Aviv Stock Exchange.

D.   SELLING SHAREHOLDERS

     Not applicable.

E.   DILUTION

     Not applicable.

F.   EXPENSES OF THE ISSUE

     Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A.   SHARE CAPITAL

     Not applicable.

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION

     Under the Companies Law, a company may define its purposes as to engage in
any lawful business. Section 2 of our Memorandum of Association, which outlines
our objects and purposes, states that we may undertake the following activities,
among others:

(a)  establish a financial institution to be instrumental in the encouragement
     of, and assistance to, the creation and expansion of efficient, useful and
     economically sound enterprises in Israel;

(b)  grant and provide banking services of any kind or nature;

(c)  grant credits of any kind or nature whatsoever, financial and any other
     assistance to any person in Israel and outside Israel, in such a manner and
     way and on such terms as we may deem proper and fit;

(d)  deal in investment, underwrite, acquire and hold securities issued or made
     by any company in Israel or abroad;

(e)  promote, further and encourage the issue of securities by industrial and
     other enterprises and promote and further the investment and participation
     of capital in industrial and other enterprises whatsoever;


                                       97`

`(f)  promote and assist in the creation and issuance of securities of all kinds;

(g)  lend money and provide credit to any enterprises;

(h)  guarantee loans obtained or to be obtained by any industrial and other
     enterprise; and

(i)  borrow and raise money and secure the repayment thereof in the manner and
     on the terms as we may deem advisable.

ARTICLES OF ASSOCIATION

     AMENDMENT OF ARTICLES OF ASSOCIATION. Under the Companies Law, a company
incorporated before the Companies Law went into effect (February 1, 2000) may
modify or amend its articles of association by a resolution adopted by either
75% of the shareholders at a general meeting participating in the vote and
excluding abstainees, or by a different percentage if so provided in the
company's memorandum and articles of association. We were incorporated in 1957;
our memorandum and articles of association do not prescribe any percentage for
amendment of our Articles of Association and so we may amend the Articles with
the approval of 75% of the shareholders.

     The Companies Law further provides that any amendment to the articles of
association of a company that obligates a shareholder to acquire additional
shares or to increase the extent of his liability shall not be effective against
the shareholder without his prior consent.

     RECORD DATE FOR NOTICES OF GENERAL MEETING AND OTHER ACTION. Under the
Companies Law and relevant regulations, for the purpose of a shareholder vote,
the record date for public companies, defined as companies traded on an exchange
or companies whose shares were offered to the public by prospectus and are held
by the public, such as us, can be set between four and twenty-one days before
the date of the meeting. However, for certain subjects which, pursuant to the
Companies Law, can be voted on by ballot, the record date shall be no more than
40 days and no less than 28 days before the date of the meeting.

     NOTICE OF GENERAL MEETINGS; OMISSION TO GIVE NOTICE. The Companies Law and
regulations thereunder provide that a public company, such as us, must give
notice of a general meeting to its shareholders of record at least twenty-one
days prior to the meeting, unless the company's articles of association provide
that a notice need not be sent. However if the agenda of the meeting includes
specific subjects which can be voted on by ballot, the notice must be given at
least thirty-five days prior to the meeting. Article 5 of our Articles of
Association provide that only the holders of Ordinary A Shares and Ordinary
Preferred Shares, will be entitled to receive notice of a general meeting and
that the holders of all other classes of shares will not enjoy such right.

     ANNUAL MEETINGS AND EXTRAORDINARY MEETINGS. Under the Companies Law, an
annual meeting of the shareholders should be held once in every calendar year
and not more than fifteen months from the last annual meeting. The Companies Law
provides that an extraordinary meeting of shareholders of a public company, such
as us, must be called by the board of directors upon the written request of (i)
two directors, (ii) one-fourth of the serving directors, (iii) one or more
shareholders who hold at least five percent of the issued share capital and at
least one percent of the voting rights of the company, or (iv) one or more
shareholders who have at least five percent of the voting rights of the company.
Within twenty-one days of receipt of such demand, the board of directors is
required to convene the extraordinary meeting for a time not later than
thirty-five days after notice has been given to the shareholders (unless
otherwise provided regarding a meeting having on its agenda a subject which can
be voted on by ballot). Article 58 of our Articles of Association provides that
our Board of Directors may call an extraordinary meeting at any time it sees
fit. In addition, Article 61 of our Articles of Association provides that our
Board of Directors shall convene an extraordinary meeting upon the written
request of a holder or holders of not less than 1/10 of our paid up capital that
carries with it voting rights at general meetings of shareholders.


                                       98`

`QUORUM AT GENERAL MEETINGS. Under Article 65 of our Articles of
Association, the required quorum for any general meeting of shareholders is two
or more shareholders present in person, by proxy or by attorney, who
collectively hold Ordinary A Shares representing at least thirty-three and
one-third percent (33(1)/3%) of the number of votes of the Company. Article 68
of our Articles of Association provides that if a quorum is not present within
half an hour from the time the meeting was set, then, if the meeting was called
at the request of the shareholders it will be cancelled; otherwise, it will be
adjourned and any shareholders present and entitled to participate in the
adjourned meeting shall constitute the required quorum.

     ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS. The Companies Law (as applied
to public companies, such as us) and Article 71 of our Articles of Association
provide for voting by poll only. In addition, the Companies Law provides that a
declaration by the chairman of the meeting that a resolution has been carried or
rejected, unanimously or by a particular majority, shall be prima facie evidence
of the fact.

     VOTING POWER; MODIFICATION OF CLASS RIGHTS. Article 77 of our Articles of
Association provides that every shareholder shall have one thousand votes for
each Ordinary A Share held by him and one vote for every Preferred Ordinary
Share held by him. Article 8 of our Articles of Association provides that if at
any time our share capital is divided into different classes of shares, the
rights attached to any class may be modified, abrogated or otherwise dealt with
by the company with the consent in writing of the holders of 75% of the issued
and outstanding shares of that class or by Special Resolution (a resolution
carried by at least 75% of the votes of those present and voting) in an
extraordinary meeting of the shareholders of that class. A shareholder may vote
in person, by proxy, by a duly authorized representative, or, regarding specific
subjects, by ballot.

     BALLOTS. Under the Companies Law and relevant regulations, a shareholder of
a public company, such as us, may vote by ballot, regarding the following
matters:

     (1)  the appointment and discharge of directors;

     (2)  approval of acts and transactions that require approval by the general
          meeting of shareholders pursuant to the provisions of sections 255 and
          268 through 275 of the Companies Law;

     (3)  approval of a merger pursuant to section 320 of the Companies Law;


                                       99`

`(4)  any other subject in respect of which it is provided in the by-laws or
          pursuant to them that decisions of the general meeting of shareholders
          also be adopted by voting by ballot;

     (5)  approval of a settlement or compromise between the company and its
          shareholders or creditors.

     ELECTION AND REMOVAL OF DIRECTORS. Under our Articles of Association, our
Board of Directors shall consist of not less than seven and not more than
fifteen directors. The appointment of our directors and their removal (except
for the "additional director" who is appointed by the other members of the Board
of Directors and who by virtue of his appointment becomes the Chairman of the
Board) shall be effected by the holders of our Ordinary A Shares.

     Our Articles provide that each shareholder or group of shareholders shall
be entitled to appoint one director for every 1,015 Ordinary A Shares held. The
appointer(s) of a director may at any time remove the director appointed by him
(them).

     Under our Articles of Association, a director is not required to retire at
a certain age and need not hold our shares. Under the Companies Law, a person
cannot serve as a director if convicted of certain offenses or been declared
bankrupt. In the event the appointer of a director shall cease to hold the
requisite number of Ordinary A Shares, the director appointed by him shall cease
to be a director according to Article 88 of our Articles of Association.

     QUALIFICATION OF DIRECTORS. Articles 96 and 97 of our Articles of
Association provide that no person shall be disqualified from serving as a
director by reason of not holding shares in the Company or by reason of having
served as director in the past. Our directors are not subject under the
Companies Law or our Articles of Association to an age limit requirement. Under
the Companies Law and in accordance with Article 100 of our Articles of
Association, a person cannot serve as a director if he or she has been convicted
of certain offenses, unless specifically authorized by the court, or if he or
she has been declared bankrupt. We implement both the directive of the
Securities Authority regarding directors having accounting and financial skills
as instructed by the Bank of Israel and the provisions of the Companies Law with
respect to directors having accounting and financial expertise.

     CHAIRMAN OF THE BOARD OF DIRECTORS. The Board of Directors may from time to
time appoint one additional director to serve as Chairman of the Board of
Directors in accordance with Article 89A of our Articles of Association.
Alternatively, the Board of Directors may, in accordance with Article 112 of our
Articles of Association, elect one of its members to serve as the Chairman of
the Board.

     CONFLICTS OF INTEREST. The Companies Law provides that a director, as well
as an officer, shall refrain from any act that creates a conflict of interest
between the performance of his function in the company and his performance of
any other function or his personal affairs. The Companies Law further provides
that if a director has a personal interest in the approval of a transaction
(other than a transaction that is not deemed to be extraordinary and does not
relate to the director's terms of service or his employment in other
assignments) brought for approval before a company's audit committee or the
board of directors, then such director must not be present at the discussion and
must not participate in the vote in the audit committee and at the board of
directors.


                                      100`

`DIRECTOR REMUNERATION. The Companies Law provides that director
remuneration must be approved by the Audit Committee, the Board of Directors and
by the shareholders in their general meeting.

     PROCEEDINGS OF THE BOARD OF DIRECTORS. Article 106 of our Articles of
Association provides that the Board of Directors may meet and adjourn its
meetings and otherwise regulate such meetings and proceedings as the directors
think fit. A meeting of directors may be called on three days' notice according
to Article 110 of our Articles of Association.

     Article 107 of our Articles of Association provides that 1/3 of the
directors then in office shall constitute a quorum for meetings of the Board of
Directors. No business shall be transacted at a meeting of the Board of
Directors unless the requisite quorum is present. At a twice adjourned meeting
(due to lack of the requisite quorum), two directors shall constitute a quorum
according to Article 107 of our Articles of Association.

     Except as provided in the next sentence, all questions arising at any
meeting of our Board of Directors shall be decided by a majority of votes, and,
in the case of equal votes for and against, the Chairman of the Board of
Directors shall be granted one additional vote in accordance with Article 113.
Article 114 provides that the consent of a special majority (consisting of the
consent of (a) a majority of the then serving directors and (b) at least half of
the directors appointed by the State of Israel) is required for the election of
a Chairman or Vice Chairman of the Board of Directors, for the appointment (in
accordance with Article 89A) of an additional director (who upon his appointment
becomes Chairman) or for the appointment (in accordance with Article 122) of a
managing director.

     BORROWING POWERS. The Companies Law authorizes the Board of Directors of a
company, among other things, to determine the credit limit of the company and to
issue bonds. Articles 51 and 52 of our Articles of Association state that our
Board of Directors may, from time to time, at its discretion, cause us to borrow
money and secure the payment of any sum or sums of money, and may secure or
provide for the repayment of such sum in such manner and upon such terms and
conditions as it deems fit.

     TRANSFER OF SHARES. Article 37 of our Articles of Association provides that
no Ordinary A Shares may be transferred without the consent of the Board of
Directors.

     ACQUISITION OF SHARES OVER CERTAIN THRESHOLDS. The Companies Law provides
that, subject to the provisions stipulated therein, an acquisition of shares of
a company such as ours must be made by means of a tender offer, if, as a result
of the acquisition, the purchaser would become a holder of twenty-five percent
or more of the voting rights. This rule does not apply if there is already
another holder of twenty-five percent of the voting rights. In addition, the
Companies Law provides that an acquisition of shares of a company such as ours
must be made by means of a tender offer, if, as a result of the acquisition, the
purchaser would become a holder of more than forty-five percent of the voting
rights, unless there is another person holding at that time, forty-five percent
of the voting rights.


                                      101`

`Regulations under the Companies Law provide that the Companies Law's tender
offer rules do not apply to a company whose shares are publicly traded either
outside of Israel or both in and outside of Israel if, pursuant to the
applicable foreign securities laws and stock exchange rules, there is a
restriction on the acquisition of any level of control of the company or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.

     REPURCHASE OF SHARES. The Companies Law, subject to certain limitations,
allows companies under certain circumstances to repurchase their own shares.

     FOREIGN OWNERSHIP. Neither our Articles of Association nor Israeli law
restrict in any way the ownership of our shares by nonresidents of Israel, or
restrict the voting or other rights of nonresidents of Israel. Notwithstanding,
nationals or residents of countries that are in a state of war with Israel or
entities incorporated, established or managed of such countries may not transfer
and/or acquire ownership of shares in Israel, and/or receive dividends in
respect thereto, without a special government permit.

     MERGERS. The Companies Law provides for mergers between Israeli companies,
if each party to the transaction obtains the appropriate approval of its board
of directors and (subject to certain exceptions) also the approval of the
shareholders in their general meeting. A "merger" is defined in the Companies
Law as a transfer of all assets and liabilities (including conditional, future,
known and unknown liabilities) of a target company to another company, the
consequence of which is the dissolution of the target company in accordance with
the provisions of the Companies Law. For purposes of the approval at the general
meeting of shareholders of each merging entity, unless a court rules otherwise,
the merger will not be deemed approved, if the shareholders who hold the
majority of the voting rights among the participants in the vote (excluding
abstainers) that are not held by the other merging entity or by any person who
holds 25% or more of the voting rights or the right to appoint 25% or more of
the directors of the other entity had objected to the merger. The Companies Law
further provides that with respect to companies incorporated prior to the
commencement of the Companies Law (such as us), the merger requires the approval
of a majority of three-quarters of the voting members present at the general
meeting of shareholders (excluding abstainers).

     DISTRIBUTION OF DIVIDENDS AND LIQUIDATION RIGHTS. Article 130 of our
Articles of Association provides that if we have sufficient profits, the Board
of Directors, (a) must recommend that dividends be paid to the holders of the C
Shares, CC Shares, and CC1 Shares, the holders of D Shares and DD Shares and the
holders of Ordinary Preferred Shares; and (b) may recommend the payment of any
other dividend that is payable on our share capital under our Articles of
Association, provided that if the payment of fixed cumulative preferred
dividends on our Preferred Shares or our Ordinary Preferred Shares, is in
arrears, the Board of Directors must recommend first the payment of the
arrearage. In the event of the winding up of our business, after satisfaction of
liabilities to creditors, our assets will be distributed in accordance with
Article 7 of our Articles of Association.

     Generally, pursuant to the Companies Law, the decision to distribute
dividends and the amount to be distributed, whether interim or final, is made by
the board of directors, subject to any other provision in the company's articles
of association.


                                      102`

`Under the Companies Law, dividends may be paid by a company only out of its
balance of net profits or out of its net profits for the two years preceding the
distribution of the dividends, whichever is greater, calculated in the manner
prescribed in the Companies Law. Pursuant to the Companies Law, any distribution
of dividends is subject to the proviso that there is no reasonable concern that
the distribution of dividends will prevent the company from meeting its existing
and foreseeable obligations as they become due. Article 133 of our Articles of
Association provides that no dividends shall be paid other than out of our
profits and that any such dividend shall carry no interest.

     INTERESTED PARTIES TRANSACTIONS. The Companies Law requires that certain
transactions, actions and arrangements be approved by a company's audit
committee as well as by its board of directors. In certain circumstances, in
addition to audit committee and board of directors' approval, approval by the
shareholders at their general meeting is required. In the case of our Company,
the approval of our Audit Committee, Board of Directors and shareholders is
required with respect to the following:

     (1) a director's terms of service and employment, including, among other
things, grant of exemptions, insurance and indemnification;

     (2) extraordinary transactions (as defined in the Companies Law) with (i) a
controlling shareholder or his relative, or (ii) another person or entity in
which transaction a controlling shareholder has a personal interest, including a
private placement that is an extraordinary transaction; and

     (3) the terms of engagement or employment with a controlling shareholder,
or his relative, who is also an office holder (including a director) or an
employee of the Company.

     The approval of our shareholders would be required in addition to the
approval of our Board of Directors, in (i) any transaction in which the majority
of our directors have a personal interest, and (ii) a private placement of
securities that will increase the holdings in our securities of a shareholder
that holds five percent or more of our outstanding share capital or our voting
rights or that will cause any person to become, as a result of the issuance, a
holder of five percent or more of our outstanding share capital or our voting
rights, if such privately placed securities grant the acquirer(s) twenty percent
or more of the total voting rights in our Company prior to its issuance, and the
consideration for it is neither in cash nor in securities registered for trading
on a stock exchange or is not at the market terms; and (iii) a private placement
of securities that will cause any person to become the controlling shareholder
in the Bank.

     For the purpose of approvals of interested parties transactions, a
"controlling shareholder" is defined under the Companies Law as: (i) a
shareholder having the ability to direct the acts of the company, excluding such
ability that stems only from serving as a director or holding another office in
the company (for this purpose, any person holding one half or more of the voting
rights of the company or of the right to appoint one half or more of the
directors of the company or the right to appoint the General Manager of the
company, is presumed to have control of the company); or (ii) the holder of
twenty five percent or more of the voting rights at the general meeting of
shareholders, if there is no other person holding more than fifty percent of
such rights (for this purpose, two or more holders having a personal interest in
the same transaction shall be deemed to be joint holders).


                                      103`

`The Companies Law requires a special majority of shareholder votes in
approving the transactions with a controlling shareholder referenced in
paragraphs (2) and (3) above. The special majority approval must comply with one
of the following: (a) it must include at least one-third of all of the votes of
the shareholders (excluding absentees) voting at the meeting who do not have a
personal interest in the transaction, or (b) the total number of opposing votes
from amongst the shareholders who do not have a personal interest in the
transaction does not exceed one percent of all of our voting power rights

     The disclosure provisions of the Companies Law require certain disclosure
to be made to us in connection with interested parties transactions, as follows:

     o an office holder (including a director) or a controlling shareholder must
promptly disclose any direct or indirect personal interest (excluding personal
interest that stems only from the personal interest of a relative and where the
transaction is not extraordinary) that such person may have, and all material,
related information or documents, in connection with any existing or proposed
transaction by us;

     o in the event of a private placement of securities that will increase the
holdings in our securities of a shareholder that holds five percent or more of
our outstanding share capital or our voting rights or that will cause any person
to become, as a result of the issuance, a holder of five percent or more of our
outstanding share capital or our voting rights, if such privately placed
securities grant the acquirer(s) twenty percent or more of the total voting
rights in our Company prior to its issuance, and the consideration for it is
neither in cash nor in securities registered for trading on a stock exchange or
is not at the market terms; and (ii) that will cause any person to become, as a
result of the issuance, a controlling shareholder, such shareholder or person
must promptly disclose to us any personal interest he or she may have in such
private placement, including all material, related information or documents; and

     o any of our shareholders voting on any transaction concerning a
controlling shareholder as set forth above must inform us prior to the vote, or
on the proxy card, if applicable, of any personal interest such person has in
the transaction. The vote of a shareholder who does not inform us with respect
to any such interest shall not be counted.

     In addition, a director who has a personal interest in a transaction
(whether with him or with another person), except a transaction that is not
extraordinary, may not be present or vote at a meeting of the Audit Committee or
the Board of Directors, unless a majority of directors in the Audit Committee or
the Board of Directors, as applicable, have a personal interest in the
transaction.

     EXEMPTION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS. The
Companies Law describes the fiduciary duty of an office holder (including a
director) as a duty to act in good faith and for the benefit of the company,
including by refraining from actions in which he or she has a conflict of
interest or that compete with the company's business, refraining from exploiting
a business opportunity of the company in order to gain a benefit for such person
or for another person, and disclosing to the company any information and
documents which are relevant to the company and that were obtained by such
person in his or her capacity as an office holder. The Companies Law provides
that an office holder (including a director) owes a duty of care to the company,
that requires the office holder, among other things, to act at a level of
competence at which a reasonable office holder would have acted in the same
position and under the same circumstances, including by adopting reasonable
means for obtaining information concerning the profitability of the act brought
for his approval or performed by such person in the scope of his or her office.


                                      104`

`Under the Companies Law, a company may not exempt an office holder
(including a director) from liability with respect to a breach of his fiduciary
duty, 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 duty of care,
except with respect to a distribution.

     Pursuant to the Companies Law, a company may indemnify an office holder
(including a director) against a monetary liability imposed on him by a court,
including in settlement or arbitration proceedings that were approved by a
court. Indemnification may cover reasonable litigation costs, including
attorneys' fees, incurred due to an investigation or a proceeding by an
authority competent to perform such investigation or proceeding, and which
terminated without the filing of an indictment and without a monetary liability
in place of a criminal proceeding, or which terminated without the filing of an
indictment but with a monetary liability in place of a criminal proceeding for
an offense which does not require proof of criminal intent, and reasonable
litigation expenses, including attorneys' fees, incurred in a civil proceeding
or in a criminal proceeding in which the office holder was found to be innocent
or in which he was convicted of an offense which does not require proof of a
criminal intent. The indemnification of an office holder must be expressly
allowed in the articles of association, under which the company may (i)
undertake in advance to indemnify its office holders (including directors) with
respect to events that in the board of director's opinion can be foreseen, in
view of the actual activity of the company, at the time of giving such
undertaking, and up to an amount or specific criterion determined by the board
of directors to be reasonable under the circumstances, which events and which
amount or criterion are to be stipulated in the company's undertaking and with
respect to expenses as specified above; or (ii) provide indemnification
retroactively.

     Pursuant to the Companies Law, a company may also procure insurance of an
office holder's (including a director's) liability for acts performed by him in
the scope of his office, in the following cases: (a) a breach of the duty of
care of such office holder, (b) a breach of the fiduciary duty, provided the
office holder acted in good faith and had reasonable grounds to believe that
such act would not be detrimental to the company, or (c) a monetary liability
imposed on the office holder for the benefit of another person.

     A company may not indemnify an office holder (including a director)
against, nor enter into an insurance contract which would provide an office
holder (including a director) coverage for, nor exempt an office holder
(including a director) from:


                                      105`

`o    a breach by the office holder of his fiduciary duty, except with
          respect to indemnification against and insurance for a breach of
          fiduciary duty where the office holder acted in good faith and had a
          reasonable basis to believe that the act would not be detrimental to
          the company;

     o    a breach by the office holder of his duty of care if such breach was
          done intentionally or recklessly, except in the case of negligence;

     o    any act or omission done with the intent to derive an illegal personal
          gain; or

     o    any fine or penalty levied against the office holder as a result of a
          criminal offense.

     In addition, under the Companies Law, exemption from, indemnification of,
and procurement of insurance coverage for a company's officers must be approved
by the company's audit committee and board of directors, and, with regard to
directors, also by the company's shareholders.

     The provisions of the Companies Law described above include certain
amendments enacted during 2005. Our Articles of Association were recently
amended so as to allow us to exempt officers and directors, to indemnify them
and to procure insurance for them, in accordance with the amended provisions of
the Companies Law, but require the additional approval of our shareholders even
with regard to exemption and undertaking to indemnify to be granted to our
office holders who are not directors.

C.   MATERIAL CONTRACTS

     The following is a summary of each material contract, other than contracts
entered into in the ordinary course of business and other than the Run-Off Plan
and the Special Line of Credit (which are described in "Item 4. Information on
the Company - Business Overview - Proposed Sale of the Bank and Extension of
Special Line of Credit by Bank of Israel" and "Adoption of Run-Off Plan and
Amendment of the Special Line of Credit" above), and the indemnification and
exemption agreements for directors and senior officers (which are described in
"Item 6. Directors, Senior Management and Employees - Compensation") to which we
are a party, for the two years preceding publication of this Annual Report on
Form 20-F.

     o Rental Agreement - On June 26, 2003, we signed a rental lease for new
offices, located at 82 Menachem Begin Road, Tel Aviv, Israel 67138. We rent
approximately 12,000 square feet, plus parking spaces and additional storage
space. In 2006, we exercised an option to extend the agreement until August 31,
2009. We pay rent of approximately $15,600 per month for office space and
approximately $5,500 more per month for parking and storage space. In addition,
we pay maintenance, municipal property tax and other related expenses.

     o Perpetual Deposit Agreement - Pursuant to agreements (by way of exchange
of letters) that were entered into at various times between us and the Israeli
Treasury, we deposited with the Israeli Treasury the capital from the offerings
of our Preferred Shares (C Shares, CC Shares, CC1 Shares, D Shares and DD
Shares). The total principal amount of these deposits with the Treasury was NIS
848.8 million, as of December 31, 2007, as compared with NIS 825.8 million, as
of December 31, 2006. Pursuant to these agreements, we are entitled, regarding
the amounts so deposited, to receive dollar-interest at the annual rate of 7.5%
of the dollar value of the deposits (as of the date of their deposit), which
will be paid net to us by the Treasury, on the dates that we will declare the
payment of a dividend for the Preferred Shares, in such manner that after the
payment of taxes and other charges, the net amount of interest that we receive
from the Treasury will be at the above rate of 7.5%.


                                      106`

`The deposit agreements do not expressly stipulate how the interest on the
Perpetual Deposit should be handled during periods in which the Bank is
prevented from distributing dividends on these Preferred Shares, and whether the
interest will accrue and be paid when the Bank pays the accrued preferred
dividends in arrears or upon liquidation. See Note 15 to our financial
statements in Item 17 of this Annual Report on Form 20-F for details on the
cessation of dividend distribution and the matter of the accrued interest on the
Perpetual Deposit with the Israeli Treasury.

     According to the deposit agreements, the principal amounts that we so
deposited will be returned to us by the Israeli Treasury only upon our
liquidation or for the purpose of redemption of D Shares and DD Shares (which
were offered as redeemable shares), with the principal amounts being linked to
the U.S. dollar from the date of their deposit with the Treasury and until
October 1987, and linked to the higher of the CPI or the U.S. dollar, from
October 1, 1987 until the date of repayment. The deposit agreements establish
that the Treasury shall not have a right of set-off as to amounts that we will
receive regarding the deposits thereby deposited.

     o Computer Outsourcing Agreement - Pursuant to an agreement dated December
23, 2003 between us and NESS A.T. Ltd. ("NESS"), NESS has undertaken to provide
us with IT outsourcing services, including ongoing management and operation of
our information systems, maintenance and operation of hardware, computers,
peripheral equipment, communications and software infrastructure (I.E.
databases, operations systems, etc.), application operation and maintenance,
modification and adaptation of our applications, information security services
etc.

     The agreement was for an initial period of three years beginning from
January 1, 2004 and during 2006 we extended it for an additional two years. We
are entitled to terminate the agreement by a prior notice of four months. In
2007, the cost of the service was NIS 2.3 million. In 2008, the cost of the
service will amount to NIS 2.1 million each year. Half of the above service cost
amounts is linked to the Israeli CPI and half is linked to the exchange rate of
the U.S. dollar.

     During the term of the agreement, we are entitled to order from NESS
modifications to our information systems and/or development of new applications
and for such purpose, we have available to us a "bank of hours".

     o Special Collective Agreement With Employees - On December 26, 2002, a
collective agreement was signed between us, the General Federation of Labor and
our employee committee, which applies to those of our workers to which
collective agreements apply (and not to those with personal employment
contracts). The collective agreement was signed for a three-year period, with a
possible extension for an additional year. The collective agreement established,
among other things: (1) the right of management to terminate the employment of
employees within the framework of the reduction of our banking services, as well
as the termination procedure; (2) the special benefits and payments to which an
employee is entitled if his employment is terminated, including additional
severance payments beyond those set by law and the conversion of the right to
additional severance (for employees with particular seniority and with a
particular number of years until their reaching retirement age) into early
old-age pension rights; and (3) certain reductions to be made in the salaries of
the employees and the related benefits to which they are entitled.


                                      107`

`On March 14, 2005, the parties signed a new collective agreement which
extended the term of the prior collective agreement until the termination date
of our Run-Off Plan (including any modification or extension to the Plan
approved by the Government) or until December 31, 2007, whichever is first. This
new agreement also established and clarified that employees who under the
original agreement were entitled to an early old-age pension due to the
termination of their employment, will be entitled to the pension until they
reach the age from which they will be entitled to receive a regular old-age
pension from the pension fund in which they are members. This certification was
required in light of the reform in the pension field which took place after the
signing of the original agreement. The new collective agreement also established
that some of the limited-time concessions to which the employees agreed in the
original agreement will continue to apply during the term of the new agreement.

     On July 12, 2006, an additional collective agreement (the "Second Extension
Agreement") was signed between the aforementioned parties, extending once again
the aforementioned collective agreement until July 31, 2008 (the date on which
the Run-Off Plan is to conclude). The Second Extension Agreement also stipulates
that if the Run-Off Plan is extended beyond July 31, 2008, the collective
agreement will also be extended until such date, but not beyond December 31,
2008.

     In connection with the discussions regarding the privatization of the Bank,
negotiations are currently taking place between the parties to the
above-mentioned collective agreement regarding its extension for another term.
As part of this prospect, our Board of Directors approved an additional payment
of NIS 10 million for the employees at the termination of their employment (both
those covered by the collective agreement as well as those employed under
personal contracts). As at December 31, 2007, the balance of the provision
relating to the employees included in the aforementioned collective agreement
amounted to NIS 18.2 million (excluding salary tax), compared with NIS 20.8
million in December 2006. We have recorded an additional NIS 10 million approved
by our Board of Directors as aforesaid. The agreements that were signed in the
past were approved by the Commissioner of Wages and Labor Agreements in the
Ministry of Finance and we also intend to bring for his approval the new
extended collective agreement once it is signed.

     The waivers and part of the benefits which were set out in the
aforementioned collective agreements will also apply to some of our employees
who are employed under personal contracts.

     o The Kibbutzim Debt Agreement - Following the difficulties experienced by
the kibbutzim in Israel and the organizations affiliated with them during the
1980's, several agreements were entered into over the course of 1989 and 1999
among the kibbutzim, their bank creditors and the State of Israel.


                                      108`

`The purpose of these agreements was to reorganize the debt of the kibbutzim
and the organizations affiliated with them and to conform it to their actual
repayment ability. The agreements include a detailed and complex apparatus to
handle these debts. Within this framework, it was established that the kibbutzim
that were defined as requiring assistance shall be entitled to refunds of
certain interest differentials for unpaid credit which they were granted by the
banks who were parties to the agreement, to a waiver of part of these credits
and to long-term rescheduling of the remainder.

     The Government financed 35% of the waivers and deposited funds with the
banks to serve as a source for the rescheduling. Kibbutzim that were defined as
owners of real estate with potential for development, were required pursuant to
these agreements to assign their rights in the land in consideration for a
portion of the waivers that were approved for them.

     See Note 4 to our financial statements in Item 17 of this Annual Report on
Form 20-F for further details of the Kibbutzim debt agreement.

     o Credit to the Israel Electric Corporation Ltd. - Pursuant to a series of
agreements entered into at various times during the 1990's, we granted long-term
credits to the Israel Electric Corporation Ltd. in a total amount of
approximately 1.5 billion U.S. dollars and with final payment dates falling due
in the years 2020-2025. These credits were granted from deposits which were
deposited with us by the State of Israel, in identical amounts and having
identical maturity dates as the credits. These credits are fully guaranteed
(principal and interest)_by the State of Israel. The outstanding balance of
these credits as of December 31, 2007 was approximately 1.29 billion U.S.
dollars, comprising approximately 90% of the total credit to the public at that
date.

D.   EXCHANGE CONTROLS

     There are no Israeli laws, decrees or regulations that restrict or affect
our export or import of capital or the remittance of dividends, interest or
other payments to non-resident holders of our securities, including the
availability of cash and cash equivalents for use by us, except as set forth
under "Item 10.Additional Information - Memorandum and Articles of Association -
Foreign Ownership" above, and under "Taxation" below.

E.   TAXATION

ISRAELI TAXATION

     The following is general information regarding Israeli tax laws to which
U.S. and other non-Israeli shareholders may be subject. It does not cover all
possible tax considerations and therefore you should not rely on this
information as legal or professional tax advice. You should consult your own tax
advisor as to the particular tax consequences of an investment in our shares and
notes including the effects of applicable Israeli or foreign or other tax laws
and possible changes in the tax laws. The discussion is based on Israeli tax
laws in force as of June 11, 2008.


                                      109`

`To the extent that the discussion is based on legislation yet to be
judicially or administratively interpreted, we cannot assure you that the views
we express herein will accord with any such interpretation in the future.

     Under current Israeli law, individual or corporate shareholders or
noteholders that are foreign residents and that do not maintain a permanent
establishment in Israel are exempt from capital gains tax on the sale (including
redemption) of traded securities of Israeli companies. Subject to the following
paragraph, upon the sale of unlisted securities, an individual shareholder or
noteholder is subject to a 20% tax rate, and a corporate shareholder or
noteholder is subject to a 25% tax, on any capital gain accrued after January 1,
2003.

     Foreign residents are exempt from tax on capital gains on the sale of
securities (traded or untraded) (provided the company does not hold rights in
Israeli real estate) acquired between July 1, 2005 and December 31, 2008 subject
to certain conditions, the principal ones being that: (a) the capital gain is
not attributable to a permanent establishment of the seller in Israel; (b) the
seller has been a resident of a country having a tax treaty with Israel for ten
years preceding the date of acquisition; and (c) the securities were not
purchased from a relative.

     Notwithstanding the foregoing, dealers in securities in Israel are taxed at
regular tax rates applicable to business income.

     Pursuant to the convention between the Government of the United States of
America and the Government of Israel with respect to taxes on income, which we
refer to as the treaty or the U.S.-Israel tax treaty, the sale, exchange or
disposition of our shares or notes by a person who qualifies as a resident of
the United States under the treaty and who is entitled to claim the benefits
afforded to him by the treaty, will generally not be subject to Israeli capital
gains tax. This exemption does not apply to the sale of shares by a person who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company during any part of the 12-month period preceding the sale,
exchange or disposition, subject to certain conditions. A sale, exchange or
disposition of our shares by a U.S. resident qualified under the treaty, who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company at any time during the preceding 12-month period would be
subject to Israeli tax, to the extent applicable; however, under the treaty,
this U.S. resident would be permitted to claim a credit for these taxes against
U.S. income tax due with respect to the sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits in accordance
with tax treaties.

     Non-residents of Israel are subject to income tax on passive income accrued
or derived from sources in Israel, such as dividends, royalties and interest, as
well as non-passive income from services rendered in Israel, subject to the
relevant tax treaty.

     On distributions of dividends other than bonus shares (stock dividends) to
non-residents of Israel, we would generally withhold at source income tax at a
rate of 20%, unless a different rate applies under a treaty between Israel and
the shareholder's country of residence. Under the U.S.-Israel tax treaty, the
maximum tax on dividends paid to a holder of our shares who is a resident of the
United States will be 25% or 12.5% if certain conditions are met, including,
among others, that the holder is a corporation which holds, directly or
indirectly, shares representing 10% or more of the voting power in our company
during any part of the 12-month period preceding the date of payment of the
dividend.


                                      110`

`On payments of interest on listed notes to non-residents of Israel, we
generally withhold at source income tax at a rate of 20% when the noteholder is
an individual, the note was issued on or after May 8, 2000 and certain further
conditions are met; at a rate of 35% when the noteholder is an individual and
the note was issued before May 8, 2000; and at a rate of 25% when the noteholder
is a corporation, in each case unless a different rate applies under a treaty
between Israel and the noteholder's country of residence. Under the U.S.-Israel
tax treaty, the maximum tax on interest paid to a noteholder who is a resident
of the United States will be 17.5%, or 10% if the interest is derived from a
loan granted by a bank, savings institution, or insurance company or the like.
Alternatively, the noteholder may elect under the treaty to pay tax at the full
rate on the net profit deriving from the interest payment although this is
generally subject to filing a tax return in Israel.

U.S. TAXATION

     The following is a summary of certain U.S. federal income tax consequences
applicable to the acquisition, ownership and disposition of our shares and notes
by a "U.S. Holder" (as defined below). This summary is based on the Internal
Revenue Code of 1986, as amended(the "Code"); Treasury Regulations; Internal
Revenue Service ("IRS") rulings; the U.S.-Israel tax treaty; and judicial
decisions, all as now in effect. All of these are subject to change, possibly
with retroactive effect, or different interpretations. For purposes of this
summary, "U.S. Holder" means the beneficial owner of a share or a note who or
that, for U.S. federal income tax purposes, is:

     o    a citizen or individual resident of the United States;

     o    a corporation, partnership or other entity treated as such formed in
          or under the laws of the United States, any state thereof or the
          District of Columbia;

     o    an estate the income of which is subject to U.S. federal income
          taxation regardless of its source; or

     o    a trust if a court within the United States is able to exercise
          primary supervision over the administration of such trust and one or
          more "U.S. persons" (within the meaning of the Code) have the
          authority to control all substantial decisions of the trust, or if a
          valid election is in effect to be treated as a U.S. person.

     This summary does not cover all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Holders in light of their specific
circumstances (for example, U.S. Holders subject to the alternative minimum tax
provisions of the Code) or to investors that may be subject to special treatment
under U.S. federal income tax law, including:

     o    dealers or traders in stocks, securities or currencies;

     o    securities traders that use a mark-to-market accounting method;


                                      111`

`o    banks and other financial institutions or financial services entities;

     o    insurance companies;

     o    tax-exempt organizations;

     o    qualified retirement plans;

     o    real estate investment trusts;

     o    regulated investment companies;

     o    persons holding our shares or notes as part of a hedging or conversion
          transaction or a straddle;

     o    persons who or that are not U.S. Holders;

     o    persons whose functional currency is not the U.S. dollar; and

     o    direct, indirect or constructive owners of 10% or more of our
          outstanding voting shares.

     The summary also does not discuss any aspect of state, local or non-U.S.
law, or U.S. federal estate and gift tax law as applicable to U.S. Holders. In
addition, it is limited to U.S. Holders who or that acquire and hold our shares
or notes as "capital assets" within the meaning of the Code - generally,
property held for investment and, in the case of our notes, who or that acquired
notes in connection with their original issuance. This discussion also does not
consider the tax treatment of persons or partnerships who or that hold our
shares or notes through a partnership or other "pass-through" entity.

     YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL
AND NON-U.S. TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
OUR SHARES OR NOTES.

     A U.S. Holder generally will be required to include in gross income, as
ordinary dividend income, the amount of any distributions paid on our shares,
including the amount of any Israeli taxes withheld, to the extent that those
distributions are paid out of our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of our
earnings and profits will be applied against and will reduce the U.S. Holder's
tax basis in our shares and, to the extent they exceed that tax basis, will be
treated as gain from a sale or exchange of those shares. Our dividends will not
qualify for the dividends-received deduction applicable in certain cases to
dividends received by U.S. corporations.

     In general, a U.S. Holder generally will be required to include in gross
income, as ordinary interest income, the amount of stated interest, including
the amount of any Israeli taxes withheld, on our notes as that interest is
received or accrued under that U.S. Holder's usual method of tax accounting.


                                      112`

`A U.S. Holder that purchased a note at a premium (generally, at a cost in
excess of its stated principal amount) may elect to amortize such premium over
the term of the note, with a corresponding decrease in tax basis. A U.S. Holder
that makes the election to amortize premium must apply it to the notes and to
all debt instruments acquired at a premium held at the beginning of the taxable
year in which the election was made, and to all debt instruments subsequently
purchased at a premium, unless IRS consent to a change is obtained.

     Dividends or interest paid in NIS, including the amount of any Israeli
taxes withheld, will be includible in the income of a U.S. Holder in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
they are received by the U.S. Holder. Any gain or loss resulting from currency
exchange fluctuations during the period from the date the dividend or interest
is includible in the income of the U.S. Holder to the date that payment is
converted into U.S. dollars will be treated as ordinary income or loss.

     Any dividends or interest we pay to a U.S. Holder with respect to our
shares or notes generally will be treated as foreign source income for U.S.
foreign tax credit purposes. Subject to the limitations set forth in the Code,
as modified by the treaty, U.S. Holders may elect to claim a foreign tax credit
against their U.S. federal tax liability for Israeli income tax withheld from
dividends or interest received in respect of our shares or notes. These
limitations include, among others, rules that limit foreign tax credits
allowable with respect to specific classes of income to the U.S. federal income
taxes otherwise payable with respect to each such class of income. The total
amount of foreign tax credits allowable to a U.S. Holder in any year cannot
exceed the regular U.S. tax liability for the year attributable to that U.S.
Holder's total foreign source taxable income (determined under the Code and, as
applicable, the U.S.-Israel tax treaty and other income tax conventions to which
the United States is a party). In certain cases, a U.S. Holder will be denied a
foreign tax credit with respect to Israeli income tax withheld from dividends
and interest received in respect of our shares and notes if the U.S. Holder has
not held those shares for a minimum period or to the extent the U.S. Holder is
under an obligation to make certain related payments with respect to
substantially similar or related property. U.S. Holders who or that do not elect
to claim a foreign tax credit may instead claim a deduction for Israeli income
tax withheld, but only for a tax year in which the U.S. Holder does the same
with respect to all foreign income taxes.

     Except as described below, upon a sale or other disposition of our shares
or notes, a U.S. Holder generally will recognize capital gain or loss equal to
the difference between the amount realized on the disposition (less amounts
attributable to accrued but unpaid dividends or interest, if any, which will be
taxed as dividends or interest, respectively) and the holder's adjusted tax
basis in the shares or notes sold or otherwise disposed of. A U.S. Holder using
the cash method of accounting must calculate the U.S. dollar value of the
proceeds received on the sale date as of the date that the sale settles, while a
U.S. Holder using the accrual method of accounting is required to calculate the
value of the proceeds of the sale as of the "trade date," unless the U.S. Holder
has elected to use the settlement date to determine the proceeds of the sale.
Gain or loss upon the disposition of our shares or notes will be treated as
long-term if, at the time of the sale or disposition, the shares or notes
disposed of were held for more than one year. Long-term capital gains realized
by individual U.S. Holders are generally subject to a lower marginal U.S.
federal income tax rate than ordinary income. The deductibility of capital
losses by a U.S. Holder is subject to limitations.


                                      113`

`If a U.S. Holder purchases one or more of our notes with more than a de
minimis amount of "market discount" and recognizes gain upon a later disposition
or retirement of those notes (or receives a partial principal payment on those
notes), then the lesser of (i) that gain (or of that principal payment) and (ii)
the portion of the market discount that accrued while the U.S. Holder held the
notes generally will be treated as ordinary interest income at that time. In
addition, the U.S. Holder may be required to defer a portion of any otherwise
deductible interest expense on indebtedness incurred or maintained to purchase
or carry the notes until that interest income is realized.

     The notes will be considered to have been purchased with market discount if
they are purchased at a price below their stated redemption price at maturity.
The amount of accrued market discount will be determined (i) on a ratable basis
by multiplying the market discount times a fraction, the numerator of which is
the number of days the U.S. Holder held the notes and the denominator of which
is the total number of days after the date the U.S. Holder acquired the notes up
to and including the date of its maturity or (ii) if the U.S. Holder elects, on
a constant interest rate method. The U.S. Holder may make that election with
respect to any notes, but that election is irrevocable.

     The foregoing rules do not apply to a U.S. Holder that elects to include
the accrued market discount income currently. This election, once made, applies
to all market discount obligations acquired during the election year or
thereafter and may not be revoked without IRS consent. If this election is made,
the basis of the notes in the U.S. Holder's hands will be increased by the
market discount thereon as it is included in income.

     If a U.S. Holder acquires one or more of our notes with premium and does
not make the election described above to amortize that premium, upon maturity
the U.S. Holder will have a capital loss for U.S. federal income tax purposes,
equal to the amount of the premium, unless the note has previously been disposed
of. If the U.S. Holder disposes of the note before maturity, the premium will be
included in the "tax basis" of the note and therefore will decrease the gain, or
increase the loss, that the U.S. Holder would otherwise realize upon the
disposition of the note.

     In general, any gain recognized by a U.S. Holder on the sale or other
disposition of our shares or notes will be U.S. source income for U.S. foreign
tax credit purposes (except for any portion taxable as market discount, which
should constitute non-U.S. source income for these purposes). Pursuant to the
treaty, however, gain from the sale or other disposition of our shares by a
holder who is a U.S. resident for treaty purposes and who sells those shares
within Israel may be treated as foreign source income for U.S. foreign tax
credit purposes. A loss on the sale or other disposition of our shares or notes
may have to be allocated against foreign source income for those purposes.


                                      114`

`Special U.S. federal income tax rules apply to U.S. Holders owning shares
of a so-called "passive foreign investment company," or "PFIC." A foreign
corporation will be considered a PFIC for any taxable year in which either 75%
or more of its gross income consists of certain types of passive income, or 50%
or more of the average value of its assets consists of assets that generate
those types of passive income. These tests are applied annually, but once
classified as a PFIC a foreign corporation remains one with respect to its U.S.
Holders except to the extent that those U.S. Holders are able to elect and elect
to purge their shares of that classification, with a possible tax cost. If we
were classified as a PFIC, a U.S. Holder could be subject to increased tax
liability, possibly including an interest charge, upon the sale or other
disposition of our shares or upon the receipt of amounts treated as "excess
distributions." Although several elections may be available to alleviate that
potential increased tax liability, there can be no assurance that the conditions
necessary for those elections to be made with respect to our shares will be
satisfied.

     A U.S. Holder of our shares or notes may be subject to "backup withholding"
with respect to certain "reportable payments," including dividend payments and,
under certain circumstances, proceeds from the sale or disposition of our shares
or notes. These backup withholding rules apply if the U.S. Holder, among other
things:

     o    fails to furnish a social security number or other taxpayer
          identification number (a "TIN") certified under penalty of perjury
          within a reasonable time after the request for the TIN;

     o    furnishes an incorrect TIN;

     o    fails to report properly interest or dividends; or

     o    under certain circumstances, fails to provide a certified statement,
          signed under penalties of perjury, that the TIN furnished is the
          correct number and that the U.S. Holder is not subject to backup
          withholding.

     A U.S. Holder that does not provide us with its correct TIN also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment to a
U.S. Holder under the backup withholding rules is creditable against the U.S.
Holder's federal income tax liability, provided that the required information is
furnished to the IRS. Backup withholding will not apply with respect to payments
made to certain U.S. Holders, including corporations and tax-exempt
organizations, provided their exemptions from backup withholding are properly
established. We are required to report to U.S. Holders and to the IRS the amount
of any "reportable payments" for each calendar year and the amount of tax
withheld, if any, with respect to these payments.

F.   DIVIDENDS AND PAYING AGENTS

     Not applicable.

G.   STATEMENT BY EXPERTS

     Not applicable.

H.   DOCUMENTS ON DISPLAY

     All documents referred to in this Annual Report on Form 20-F may be
inspected at our offices at 82 Menachem Begin Road, Tel Aviv, Israel. Any
reports and other information that we file electronically with the U.S.
Securities and Exchange Commission may be found at www.sec.gov. They can also be
inspected without charge and copied at prescribed rates at the public reference
facilities maintained by the Securities and Exchange Commission in Room 1580,
100 F Street, N.E., Washington, D.C. 20549.


                                      115`

`I.  SUBSIDIARY INFORMATION

     Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FINANCIAL RISK

     The asset and liability management policy is designed to keep the risks of
linkage bases and interest risks within the boundaries of exposure set by our
Board of Directors.

     The implementation of this policy is discussed by a committee in which the
GM and members of management participate. The committee usually meets weekly. In
accordance with the approval of the Supervisor of Banks from November 26, 2003,
this management committee acts as our financial risk manager.

     In 1997, the Bank of Israel issued instructions regarding management and
control of financial risks. We act in accordance with such instructions. For
purposes of implementing the asset and liability management policy and the
financial risk management policy, our Board of Directors set out a number of
limits. In addition, it set out dates and formats for reporting and control
regarding compliance with the limits it set. On a quarterly basis, a report on
financial risk management is presented to the plenary session of our Board of
Directors and as part of the discussions held, an updated exposure document is
presented. This document also addresses the exposure limits set and such limits
are updated on the basis of the decisions taken.

     The following is a breakdown of the major risks, the limits that were set,
and the reporting dates and formats in connection with the level of the risks
and the compliance with the limits:

BASE RISK - The exposure to base risk is measured as the difference between the
assets and liabilities (including the impact of futures transactions) in each of
the linkage bases. We, as does the overall banking system, act in three major
activity segments: the Index-linked segment, the foreign currency (and linked
thereto) segment, and the shekel unlinked segment. The exposure to a base risk
relates to exposure to changes in inflation and to changes in the exchange rates
of the various currencies.

     In respect of each of the linkage segments listed above, we set out
frameworks of maximum permissible surpluses and deficits. These restrictions are
set taking into consideration the composition of our capital and our current
activity.


                                      116`

`The limits sets by our Board of Directors for each of the linkage segments
are as follows (in NIS millions):

INDEX-LINKED SEGMENT* - A maximum surplus of NIS 500 million, and a maximum
deficit of NIS 50 million.

UNLINKED SHEKEL SEGMENT - A maximum surplus of NIS 100 million, and a maximum
deficit of NIS 550 million.

FOREIGN CURRENCY/FOREIGN CURRENCY LINKED SEGMENT - A maximum surplus of NIS 50
million, and a maximum deficit of NIS 25 million.

*    In the Index-linked segment, the permissible surplus/deficit is net of the
     equity of the Bank (including preference shares classified from an
     accounting standpoint as liabilities).

     The report on the base exposure is included as part of the report on our
operations that is presented to the plenary of our Board of Directors. In
addition, the report is included as part of the management committee that meets,
as mentioned above, on a weekly basis.

     The following table presents the surplus of assets over liabilities
(liabilities over assets) broken down by linkage segment. The data include
off-balance sheet items. The data below are computed after neutralizing
liabilities in respect of our preference shares which are classified from an
accounting standpoint as liabilities, since our asset and liability management
policy is to relate to the surplus of assets over liabilities that are unrelated
to our equity.. The following data are in NIS millions:

                                                         FOREIGN
                                                         CURRENCY
                         UNLINKED        CPI-LINKED     DENOMINATED/   NON-MONETARY
                      SHEKEL SEGMENT     SEGMENT (*)      LINKED          ITEMS          TOTAL
                      --------------     -----------      ------          -----          -----

December 31, 2007         (350.6)           854.6            5.5           47.2          556.7
December 31, 2006         (456.0)           888.9           26.8           50.9          510.6

(*)  Including the Perpetual Deposit with the Treasury (December 31, 2007 in an
     amount of NIS 848.8 million, December 31, 2006 - NIS 825.8 million).

     The data presented below indicate that in all of the linkage segments, the
exposure is within the limits set by our Board of Directors.

     An examination conducted on the impact of an increase of 1% in the Consumer
Price Index indicates that the calculated addition to equity amounts to NIS 8.7
million. A decrease of 1% in the Index would result in a decrease in equity of
the same amount.

     The following table presents the sensitivity of the impact of changes in
the exchange rate of the dollar as of December 31, 2007 (in NIS millions) on the
results of our operations:

Percentage change in dollar rate                       (5)%          (10)%             5%           10%
------------------------------------------- -------------   ------------    ------------   -----------
Impact on the results of operations                  (0.4)          (0.8)            0.4           0.8


                                      117`

`Our exposure to other currencies is small and, therefore, the impact on the
results of our operations is marginal.

     The abovementioned data are net of the liabilities in respect of our
preference shares. In addition, the data presented below are calculated without
the impact of such changes on other variables (such as interest rates).

     INTEREST RISK - The interest rate risk derives from the impact of future
changes in interest rates on the present value of our assets and liabilities.
Such changes may cause erosion of our income and equity.

     In order to reduce the risk deriving from possible changes in interest
rates, we implement a policy of matching, to the extent possible, between the
dates of change of interest on the assets to the dates of change of interest on
liabilities.

     The exposure to interest risk is measured by the gap of the average
lifespan in each linkage segment.

     The following table presents the major data pertaining to the average
lifespan in the various linkage segments (in years):

                                                                                                FOREIGN CURRENCY
                               UNLINKED SHEKEL SEGMENT        INDEX-LINKED SEGMENT             AND LINKED THERETO
                            ----------------------------- ------------------------------ -----------------------------
                               12/31/07       12/31/06       12/31/07        12/31/06       12/31/07       12/31/06
                            -------------- -------------- -------------- --------------- -------------- --------------

Total assets                     0.08           0.20           4.13           3.73            6.28           6.52
Total liabilities                0.09           0.09           2.97           3.20            6.34           6.64
Discrepancy in years            (0.01)          0.11           1.16           0.53           (0.06)         (0.12)

     The major interest risk exists mainly in the Index-linked segment, since
most of the assets and liabilities in this segment are long-term and at fixed
interest. The average lifespan of the assets in this segment as of December 31,
2007 is 4.13 years versus an average lifespan of the liabilities of this segment
of 2.97 years. The gap in the average lifespan, therefore, is 14 months. A
longer average lifespan of assets generates an exposure to the risk of an
increase in interest rates in this segment. This exposure to interest risk is
within the framework set by our Board of Directors.

     In the unlinked shekel segment, the average lifespan gap is smaller and
derives from the fact that the average lifespan of both assets and liabilities
is short, since most of the assets and liabilities have variable rates of
interest.

     In the foreign currency segment, the average lifespan is affected by the
large volume of credit, which is characterized by low risk and which has a fixed
rate of interest. The average lifespan of the liabilities of this segment is
0.06 years longer than the average lifespan of the assets of the segment.


                                      118`

`As part of the limits on the rate of exposure to changes in interest rates,
the Board of Directors of the Bank set limits to the maximum calculated
impairment to the equity of the Bank in the event of a change in interest rate
of 1%, versus the accepted interest rates as of the date of the report. The
following are the limits set for the maximum possible decrease in the calculated
value of the Bank's equity, as established by the Board of Directors:

     UNLINKED SEGMENT - a maximum decrease of NIS 4 million.

     INDEX-LINKED SEGMENT - a maximum decrease of NIS 14 million.

     FOREIGN CURRENCY/FOREIGN CURRENCY-LINKED SEGMENT - a maximum decrease of
NIS 3 million.

     The following table presents the central data in connection with the
sensitivity of our capital (in NIS millions) to changes of 1% in the interest
curve (the theoretical change in the economic value as a result of the
scenario):


LINKAGE SEGMENT                       INCREASE ON INTEREST BY 1%    DECREASE OF INTEREST BY 1%
---------------------------------    ----------------------------  ---------------------------

Index-linked                                    10.2                           8.7
Foreign currency / linked thereto                1.2                          (1.3)

     In the unlinked segment, the impact of a change in interest of 1% is
marginal and therefore, not included in the table.

     The above calculation and the calculation in the following table are based
on accepted calculations for the measurement of the average lifespan of assets,
i.e., discounting the future cash flows, including interest to accrue until the
earlier of maturity, or the date of a change in the interest rate. The
calculation of the change in the value of these assets and liabilities is only
in respect of a change in the interest rate, without the impact of a change in
interest on other factors (such as the rate of forecasted inflation, etc.).

     It is worth noting that such a calculation measures only the impact of a
change in interest and is not connected with credit risks.

     The following table is an analysis of our exposure to fluctuations in
interest rates as of December 31, 2007. The table includes the fair value of our
assets and liabilities, calculated as explained below:


                                      119`

`ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS AT DECEMBER 31, 2007
Reported amounts

                                                                                                          DECEMBER 31, 2007
                                     -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                       ON         FROM          FROM        FROM           FROM          FROM           FROM                      WITHOUT
                                     DEMAND       ONE TO      THREE TO     ONE TO        THREE TO       FIVE TO        TEN TO          OVER        FIXED                                  INTERNAL
                                    AND UP TO     THREE        TWELVE       THREE          FIVE          TEN           TWENTY         TWENTY      MATURITY                      FAIR       RATE OF  AVERAGE
                                    ONE MONTH     MONTHS        MONTHS      YEARS           YEARS        YEARS          YEARS          YEARS       DATE *        TOTAL         VALUE       RETURN   DURATION
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------        -------    -------    -------
                                                                                                      NIS millions                                                                           %        YEARS
                                     -------------------------------------------------------------------------------------------------------------------------------------------------    -------    -------

 ISRAELI CURRENCY - UNLINKED
 TOTAL ASSETS                          130.3            -          0.1            -              -            -              -              -            -        130.4          138.8       5.67       0.08
Total liabilities                      504.9         22.3          0.2            -              -            -              -              -          0.1       (527.5)        (527.5)      4.19       0.09
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------        -------    -------    -------
Difference                            (374.6)       (22.3)        (0.1)           -              -            -              -              -         (0.1)      (397.1)        (388.7)      1.48      (0.01)
Effect of futures
transactions                            16.5         20.1          9.9            -              -            -              -              -            -         46.5
Exposure to interest rate
fluctuations                          (358.1)        (2.2)         9.8            -              -            -              -              -         (0.1)      (350.0)
Cumulative segment exposure           (358.1)      (360.3)      (350.5)      (350.5)        (350.5)      (350.5)        (350.5)        (350.5)      (350.6)      (350.6)
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------
 ISRAELI CURRENCY -
 LINKED TO THE CPI
Total assets                             6.3         11.6         54.0        105.2           65.9         72.7           33.3              -        848.8      1,197.7        1,215.0       5.78       4.13
Total liabilities                        1.2         12.5         48.5        124.0           84.3         41.3            1.4              -            -        313.3          306.5       2.62       2.97
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------        -------    -------    -------
Difference                               5.1         (0.9)         5.5        (18.8)         (18.4)        31.4           31.9              -        848.8        884.6          908.5       3.16       1.16
Effect of futures transactions             -        (20.1)        (9.9)           -              -            -              -              -            -        (30.0)
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------
Exposure to interest rate
fluctuations                             5.1        (21.0)        (4.4)       (18.8)         (18.4)        31.4           31.9              -        848.8        854.6
Cumulative segment exposure              5.1        (15.9)       (20.3)       (39.1)         (57.5)       (26.1)           5.8            5.8        854.6        854.6
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------
 FOREIGN CURRENCY AND
 LINKED THERETO
Total assets                            41.6        140.9        397.3        969.4          816.5      1,586.8        1,154.2              -            -      5,106.7        5,113.5       6.90       6.28
Total liabilities                        1.7        137.0        397.5        970.7          818.1      1,596.7        1,163.0              -        446.6      5,531.3        5,545.9       6.88       6.34
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------        -------    -------    -------
Difference                              39.9          3.9         (0.2)        (1.3)          (1.6)        (9.9)          (8.8)             -       (446.6)      (424.6)        (432.4)      0.02      (0.06)
Effect of futures transactions         (16.5)           -            -            -              -            -              -              -            -        (16.5)
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------
Exposure to interest rate
fluctuations                            23.4          3.9         (0.2)        (1.3)          (1.6)         9.9           (8.8)             -       (446.6)      (441.1)
Cumulative segment exposure             23.4         27.3         27.1         25.8           24.2         14.3            5.5            5.5       (441.1)      (441.1)
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------
OVERALL EXPOSURE TO
  FLUCTUATIONS
 IN INTEREST RATES
Total assets**                         178.2        152.5        451.4      1,074.6          882.4      1,659.5        1,187.5              -        848.8      6,434.9        6,467.3       6.81       6.01
Total liabilities                      507.8        171.8        446.2      1,094.7          902.4      1,638.0        1,164.4              -        446.7      6,372.0        6,379.9       6.44       5.64
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------        -------    -------    -------
Difference                            (329.6)       (19.3)         5.2        (20.1)         (20.0)        21.5           23.1              -        402.1        (62.9)          87.4       0.37       0.37
Exposure to interest rate
fluctuations                          (329.6)       (19.3)         5.2        (20.1)         (20.0)        21.5           23.1              -        402.1        (62.9)
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------
Cumulative exposure                   (329.6)      (348.9)      (343.7)      (363.8)        (383.8)      (362.3)        (339.2)        (339.2)        62.9        (62.9)
                                     -------      -------      -------      -------        -------      -------        -------        -------      -------      -------

General notes -

1.   The data classified according to maturity date, presented above, represent
     the present value of future flows, discounted at the internal rate of
     return, for each balance sheet item. Such discounted future flows include
     interest, which will accrue until the earlier of the maturity date or the
     date of change in the interest rate.

2.   The effect of hedging transactions is included in the total of assets or
     liabilities, as the case may be.

3.   The table does not include the effect of early repayments.

*    The amounts stated in the "without fixed maturity date" column are the
     amounts as stated in the balance sheet.

**   Including shares, which are stated in the "without fixed maturity date"
     column.


                                      120`

`The fair value of our assets and liabilities as presented in the table
above was calculated in accordance with the following principles, assumptions
and methods:

     o Since most of our assets and liabilities are not traded on active
markets, and thus market quotations are not available, the fair value is arrived
at by using accepted pricing models, such as the present value of future cash
flows discounted at interest rates, which reflect the level of risk intrinsic to
the financial instrument. Estimating the fair value by way of determining the
future cash flows and setting the discount interest rate is subjective.
Therefore, regarding most of the financial instruments, the fair value estimate
is not necessarily an indication of the instrument's realizable value on balance
sheet date. The estimate of the fair value was made at interest rates prevailing
at balance sheet date and did not take interest rate fluctuations into
consideration. The use of other interest rates could result in significantly
different fair values. This is especially true in regard to non-interest bearing
financial instrument or those bearing fixed interest rates. Furthermore,
commissions receivable or payable as a resultof the business activity, were not
taken into account, and neither was the tax effect. Moreover, the difference
between the book value and fair value of the financial instruments may not be
realized, since in most cases, we may hold the financial instruments until
redemption. In view of the above, it should be emphasized, that the data
contained in the above table should not be considered as an indication of our
value as a going concern. Furthermore, considering the wide range of valuation
and estimation techniques, which may be applied in arriving at fair values,
caution should be used in comparing the fair values arrived at by different
banks.

     o As mentioned in Item 4, the Bank of Israel has granted us a Special Line
of Credit, bearing interest equal to the Bank of Israel rate of interest. The
discount rate of the cash flows of our deposits is set by us, for purposes of
the fair value of the liabilities, on the basis of the said interest rate.

     o The fair value of deposits with banks and credit to the Government is
arrived at by use of the method of discounting future cash flows at interest
rates used by us in similar transactions proximate to balance sheet date.

     o Marketable securities are valued at market value. Shares for which no
market value is readily available are stated at cost.

     o The fair value of the balance of credit to the public was arrived at by
using the method of the present value of future cash flows discounted at an
appropriate interest rate. The balance of such credit was segmented into several
categories. The future aggregate cash flows of each category (principal and
interest) were calculated. Such cash inflows were discounted at an interest
rate, which reflects the level of risk inherent in the credit. Generally, this
interest rate is set on the basis of the rate at which similar transactions were
effected by us as at balance sheet date. For short-term balances of credit (for
an initial period of up to three months), or balances at variable market
interest rates (prime, Libor, etc.), which change at intervals of up to three
months, their stated value is considered to be their fair value.


                                      121`

`o The fair value of problematic debts was calculated by using discount
rates reflecting their intrinsic high credit risk. In any event, such discount
rates were not less than the highest interest rate used by us in our operations
proximate to balance sheet date. The future cash flows of problematic debts were
calculated net of the specific allowances for doubtful debts. The general and
supplementary allowances for doubtful debts in an aggregate amount of NIS 45.2
million as of December 31, 2007 (on December 31, 2006 - NIS51.7 million), were
not deducted from the balance of credit to the public for cash flows purposes in
assessing the fair value.

     o Regarding the Perpetual Deposit, the accepted pricing models cannot be
applied to such deposits. Therefore, their book value is considered to be their
fair value. See "Item 3. Key Information-Risk Factors" above for details of the
terms of these deposits.

     o The fair value of deposits, debentures and capital notes was arrived at
by the method of discounting the future cash flows at the interest rate paid by
us in obtaining similar deposits, or the interest rate of similar debentures and
capital notes if they were issued by us, prevailing as of balance sheet date.

     o Regarding deposits from the Bank of Israel, the balance in the balance
sheet is a close approximation of the fair value since the deposits are at
variable rates of interest.

     o Regarding non-participating preference shares, the common costing models
do not address this type of share. As a result, the fair value is presented as
book value (for information pertaining to the rights of these shares and the
dividend in arrears, see Notes 14 and 16 of the financial statements).

     o Regarding participating preference shares, the common costing models do
not address this type of share. As a result, the fair value is presented as book
value (for information pertaining to the rights of these shares and the dividend
in arrears, see Notes 15 and 16 of the financial statements).

     o Regarding derivative financial instruments, instruments having an active
market, were valued at market value. Where these instruments are traded on
several markets, valuation was based on quotations in the most active market.
Derivatives that are not traded on an active market, were valued based on models
used by us in our current operations which take into consideration the inherent
risk of the financial instrument (market risk, credit risk etc.).

     o Regarding financial instruments (other than derivative marketable
financial instruments) for an initial period not exceeding three months and
bearing variable market interest rates, the amount stated in the balance sheet
represents an approximation of the fair value subject to changes in credit risks
and our interest margins in transactions at variable interest rates.


                                      122`

`As part of the limits on the rate of exposure to changes in interest rates,
our Board of Directors set limits to the maximum calculated impairment to our
equity in the event of a change in interest rate of 1%, versus the accepted
interest rates as of the date of the report. The following are the limits set
for the maximum possible decrease in the calculated value of our equity, as
established by our Board of Directors:

UNLINKED SEGMENT - a maximum decrease of NIS 4 million.

INDEX-LINKED SEGMENT - a maximum decrease of NIS 14 million.

FOREIGN CURRENCY/FOREIGN CURRENCY-LINKED SEGMENT - a maximum decrease of NIS 3
million.

The frequency of reporting on compliance with the limits in connection with
exposure to changes in interest rates was, until 2004, on a quarterly basis, As
a result of the decrease in the volume of the Bank's activity, the frequency of
such reports was changed to twice a year (semi-annual reports).

     The rate of the net changes in all the linkage segments is low in
comparison with the volume of assets of the segment.

     DERIVATIVE FINANCIAL INSTRUMENTS - As part of its asset and liability
management policy, the Bank conducts transactions in derivative financial
instruments.

     As a result of the events that occurred in the second half of 2002, our
activity in derivative financial instruments was reduced to a minimum and, at
present, it is designed solely for the closure of our position exposure, through
the use of forward transactions, Swap transactions and the purchase of foreign
currency options.

     The risk to which we are exposed due to the derivative financial instuments
is not material to our financial position.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.


                                      123`

`PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

CESSATION OF DIVIDEND DISTRIBUTION

     Our issued and outstanding share capital includes, among others, our
Preference C Shares, CC Shares and CC1 Shares and our D Shares and DD shares.
The C Shares, CC Shares and CC1 Shares entitle the holders thereof to a
cumulative preferred dividend of 6% per annum plus a participating dividend. The
D Shares and DD Shares entitle the holders thereof to a cumulative preferred
dividend of 7.5% per annum.

     According to Article 6 of our Articles of Association, the C Shares, CC
Shares, CC1 Shares, D Shares and DD Shares rank first (pari passu with each
other) and prior to all of our other classes of shares, in any distribution of
preferential dividends, provided, however, that if there are arrears of any
fixed cumulative preferential dividends, then according to Article 130 of our
Articles of Association, our Board of Directors is bound to recommend to the
general meeting of shareholders the payment of arrears prior to any other
distribution. The payment of cumulative preferential dividends to the holders of
our Ordinary Preferred Shares, totaling approximately $25 per annum, is prior to
the dividend on our Ordinary A Shares and Ordinary B Shares.

     According to Article 7 of our Articles of Association, upon liquidation of
the Bank, the assets available for distribution to the shareholders will be
first distributed to pay cumulative preferred dividends in arrears to all
classes of Preferred shares, I.E. the C Shares, CC Shares, CC1 Shares, D and DD
shares.

     According to the Companies Law, a company is entitled to distribute
dividends only from its profits (as defined therein), on condition that there is
no reasonable fear that such distribution would prevent the company from meeting
its existing liabilities and its expected liabilities when they come due
(hereinafter - the "repayment ability test"). Nevertheless, the Court is
permitted to approve the distribution of a dividend not from the company's
profits, if it is convinced that the company meets the "repayment ability test".
According to the Directives of Proper Banking Procedures, the Supervisor of
Banks prohibited distribution of dividends by a banking institution if, among
other things, one or more of the last three calendar years ended in a loss, or
the aggregate results of the three quarters ending on the last day of the
interim period for which the last financial statements were issued reflected a
loss. Article 133 of our Articles of Association provides that no dividends may
be paid other than out of our profits and that any such dividends shall not
carry interest.


                                      124`

`We ended the years 2001 through 2003 with a loss, the year 2004 with a
profit and the years 2005 and 2006 with a loss. Commencing with the financial
statements for the first quarter of 2002, we had no profits from which we could
distribute dividends pursuant to the Companies Law. The last quarterly dividend
that we paid in respect of our C Shares, our CC Shares, our CC1 Shares, our D
Shares and our DD Shares was the dividend for the second quarter of 2002, which
payment of dividends was made with court approval and approval of the Supervisor
of Banks. In accordance with our Articles of Association, we may distribute a
dividend only out of earnings. As from the second quarter of 2002, we did not
remain even with nominal earnings.

     The proceeds of the issuance of our C Shares, our CC Shares, our CC1
Shares, our D Shares and our DD Shares, were deposited by us with the Ministry
of Finance of the State of Israel pursuant to deposit agreements. In our
financial statements, we refer to our deposits with the Ministry of Finance as
the Perpetual Deposit. According to the deposit agreements, our Perpetual
Deposit earns interest at a rate of 7.5% per annum (plus differentials of
linkage to the U.S. dollar), which interest must be paid by the Ministry of
Finance to us on the payment dates for the dividends to be paid by us on our
Preferred Shares.

     When we ceased making dividend payments on our Preferred Shares, the
Ministry of Finance also ceased paying us the interest payments on the Perpetual
Deposit. The deposit agreements do not expressly stipulate how the interest on
the Perpetual Deposit with the Ministry of Finance should be handled during
periods in which we are prevented from distributing dividends on our Preferred
Shares, and whether the interest will accrue and be paid if we ultimately pay
accrued dividends on such Preferred Shares in arrears, or upon liquidation.

     Immediately prior to the publication of our financial statements for the
third quarter of 2002, our Board of Directors, assisted by legal advice, decided
not to distribute, for the time being, a dividend for the third quarter of 2002.
The decision was reached after considering, among other things, the following
issues:

     o our results of operations of the third quarter of 2002 and the liquidity
crisis which affected us during the third quarter of 2002;

     o our lack of distributable profits (as required by the Companies Law);

     o the prohibition on the distribution of dividends according to our
Articles of Association when there are no profits, not even nominal profits;

     o the prohibition on distribution of dividends according to the Directives
of Proper Banking Procedures, as long as the Supervisor of Banks did not permit
the distribution; and

     o the possibility that the interest on the Perpetual Deposit would continue
to accrue even if not actually paid, if no dividend is distributed.


                                      125`

`On December 1, 2002, we received the reply of the Supervisor of Banks to
our request for the position of the Supervisor on the matter of distributing a
dividend in respect of the third quarter of 2002. The Supervisor's answer
stipulated, among other things, that in the existing circumstances (as detailed
in the letter), the Supervisor of the Banks believes that "it is inappropriate
to distribute a dividend at this time". Nevertheless, the Supervisor of Banks
noted that it was still not completely clear as to the legal aspects of various
questions connected with the distribution of the dividend and the accrual of the
interest on the Perpetual Deposit, and as to what the position of the State of
Israel is on this issue. The Supervisor of Banks added that a copy of the letter
had been sent to the GCA and the Accountant General, and that following receipt
of clarifications from them and from us to the questions raised, the Supervisor
will notify the Bank as to his position.

     In view of the lack of clarity as to the matter of the accrual of interest
on the Perpetual Deposit during the period in which we were prevented from
distributing a dividend (the lack of clarity to which the Supervisor of Banks
referred to in his letter) and in view of the possible ramifications of this
matter on the distribution of the dividends in respect of the preferred shares,
our Board of Directors deliberated the matter, taking into consideration a
comprehensive legal opinion presented to the Board. Our Board reached the
conclusion that the interest not paid to us due to the non-distribution of the
dividend should accrue to our credit and, accordingly, in the event of the
Bank's liquidation, the interest will be paid to the receiver. In a letter dated
January 22, 2003, we requested from the Ministry of Finance and the GCA to issue
their positions on this matter as soon as possible.

     In its reply dated March 13, 2003, the Ministry of Finance stated, among
other things, that the monies paid on the Perpetual Deposit for purposes of
distributing the dividend will be transferred to us solely for purposes of
redeeming the D Shares and DD Shares, or upon liquidation. In order to clarify
matters and to avoid doubt, we once again petitioned the Ministry of Finance to
confirm that it accepts the position of our Board of Directors as described in
the preceding paragraph. Despite requests that were sent by the Bank to the
Ministry of Finance regarding this issue, the requested clarification still was
not obtained. The Board of Directors has deliberated the matter of the dividend
on the said preferred shares several times, and after taking into account all of
the considerations and circumstances described above, has decided to abide by
its previous decision and to refrain from distributing any further dividend for
the time being.

     As stated above, from the date we stopped paying the dividend on the
aforementioned preferred shares, the State has stopped paying to us the interest
on the Perpetual Deposit.

     The cumulative amount of the dividend, at a rate of 7.5% per annum, in
respect of the aforementioned preference shares (including a 1.5% participating
dividend in respect of class C, CC, and CC1 shares) which has not been paid
since we ceased paying dividends is, as of December 31, 2007, an amount of NIS
185.4 million. This amount was not recorded in the financial statements and is
equal to the amount of the interest on the Perpetual Deposit which was also not
recorded in the financial statements.


                                      126`

`The cumulative amount of NIS 185.4 million is broken down as follows: NIS
113.8 million in respect of non-participating shares (D and DD), and an amount
of NIS 71.6 million in respect of participating shares (C, CC, and CC1). Of this
amount, an amount of NIS 33.4 million is in respect of 2007, as follows: NIS
20.7 million in respect of non participating shares (D and DD), and an amount of
NIS 12.7 million in respect of C, CC, and CC1 shares which are participating
shares. See "Item 3. Key Information-Risk Factors" above for a discussion.

     On September 28, 2004 various financial entities that hold our class C,
class CC and/or class CC1 Shares filed with the Tel Aviv District Court an
originating motion in which the Court is requested to instruct us to pay to our
shareholders back dividends at the same rate and relevant quarterly dates as was
paid until the second quarter of 2002. As of March 31, 2008, this would amount
to approximately NIS 105.1 million. The petitioners contend, among other things,
that, according to our Articles of Association, we are required to pay to the
holders of our Preferred Shares an annual dividend at the rate of 7.5%, and that
this annual dividend is not actually a dividend but rather a payment made in
full by the State of Israel in respect of the Perpetual Deposit. The petitioners
contend that the annual dividend is not subject to the distribution conditions
provided by law, since the dividend is not paid from our profits but rather by a
third party (the State of Israel) and therefore its payment does not lessen our
assets. Moreover, they contend that even if the distribution conditions should
be applied to the annual dividend, we should still be ordered to distribute the
annual dividends, because we have met the repayment ability test because the
annual dividend is being fully financed by the State of Israel and not being
deducted from our capital.

     Whereas management was of the opinion that the matter relating to dividends
distribution is connected to the question of whether under the circumstances of
a non-distribution of dividends, the interest on the Perpetual Deposit is
accrued in our favor, and whereas the answers received from the Ministry of
Finance in this matter have been unclear and insufficient, we have requested
from the Tel Aviv District Court a declaratory judgment against the State, by
which the interest on the Perpetual Deposit is indeed accrued in our favor, as
was the position of our Board of Directors on this matter. Following the
requests of our bank and the aforementioned financial entities, the Court
ordered that the hearing on the two originating motions be consolidated. In the
reply of the Minister of Finance to the originating motions prior to a
preliminary hearing that was held on January 12, 2006, the Minister of Finance
announced that his position is that the interest on the Perpetual Deposit does
not accrue in our favor when we do not distribute a dividend, and that in any
event, in light of our circumstances, there is no justification for our
distributing a dividend.

     On March 23, 2006, the Court ruled that in the first stage the question of
interest accumulated on the Perpetual Deposit will be discussed and determined,
on the grounds that determining this question will further the discussion and
ruling on the remaining questions on the agenda. At the time, our Board of
Directors expressed its position in principle that if it was ruled that the
interest on the Perpetual Deposit would not accumulate, the Board of Directors
would reconsider the distribution of dividends, subject to the legal and
regulatory restrictions that bound the bank on this matter, and in this context
the need to obtain permission and amendments to our Articles of Association. On
August 5, 2007 the Tel Aviv District Court dismissed our originating motion
against the Minister of Finance and against the abovementioned financial
institutions, and ruled that so long as no dividend was distributed to our
preferred shareholders, there would be no interest accumulated on the Perpetual
Deposit.


                                      127`

`At its meeting on October 9, 2007, our Board of Directors discussed the
ramifications of the ruling. The Board of Directors decided that since our
originating motion referred not only to the issue of the accumulated interest on
the Perpetual Deposit in the absence of the distribution of a dividend, but also
to its accumulation and payment when the dividend in arrears is paid (including
at the time of liquidation), in order to avoid what the Board believes is an
unintended result, where our right to the accumulated interest against payment
of the dividend in arrears on the Preferred Shares are also denied, the Bank
should file an appeal on the dismissal of the claim with regard to the payment
of accumulated interest on the Perpetual Deposit against payment of the dividend
in arrears. However, our Board of Directors added in its decision that no appeal
would be filed if we were given adequate clarification by the State on its
consent to pay the accumulated interest on the Perpetual Deposit against payment
of the dividend in arrears on Preferred Shares (Preferred shares C, CC, CC1, D,
and DD). This clarification was not provided and we filed an appeal with the
Supreme Court on January 6, 2008.

     At the abovementioned meeting on October 9, 2007, our Board of Directors
discussed the ramifications of the abovementioned ruling on the board's
continued policy regarding the distribution of dividends on Preferred Shares. In
view of the ruling with regard to the non-accumulation of interest on the
Perpetual Deposit at the Ministry of Finance so long as no dividend is
distributed (a ruling that the bank does not dispute), and since the Board of
Directors considered the interests of both our shareholders and of our creditors
(who in view of the ruling no longer benefit from the non-distribution of the
dividend), the Board of Directors concluded that we should act to renew the
distribution of dividends. In this context, our Board of Directors decided (at
the abovementioned meeting) to undertake a number of measures: 1) to recommend
at our General Meeting to amend our Articles of Association with regard to two
matters relating to the renewal of the distribution of dividends, one, to
authorize the distribution of dividends not only from profits (which do not
exist at this stage) but also from the interest that will be paid to us on the
Perpetual Deposit, and the other, to authorize the distribution of a current
preferred dividend on our Preferred Shares even without a distribution - either
preceding or simultaneously - of preferred dividends in arrears (since, in view
of the wording of the ruling, a claim is liable to be made that we are not
entitled to the accumulated interest on the Perpetual Deposit against the
distribution of dividends in arrears, a result that will prevent us from
distributing dividends in arrears in the absence of sufficient profits); 2) to
summon a General Meeting of the bank to amend our Articles of Association as
mentioned above, and to authorize the Chairman of the Board of Directors to set
the date for this meeting; 3) to ask the Supervisor of Banks for permission for
the distribution the Preferred shareholders, subject to the above amendments of
the Articles of Association and the approval of the Court for the proposed
distribution (in accordance with the Companies Law - 5759-1999, distribution of
dividends in cases in which there are no profits suitable for distribution
requires a court approval, and on that date we had no profits suitable for
distribution). A detailed description of our Board of Directors' decisions at
the abovementioned meeting October 9, 2007 is found in the immediate report
published by us on October 10, 2007. In accordance with the abovementioned
decision of our Board of Directors, a General Meeting of the bank was convened
on January 7, 2008. On the agenda were the abovementioned proposals to amend our
Articles of Association so that the Articles of Association would not continue
to constitute a hindrance to the renewal of the distribution of dividends. The
proposals for amending the Articles of Association were submitted to a vote, but
were rejected by the majority of voters. On February 5, 2008, the financial
institutions that had filed the abovementioned originating motion against us,
motioned the court to attach the State as an additional respondent, in part
because of the vote of the State at the General Meeting of the bank against the
proposals to amend our Articles of Association as mentioned above.


                                      128`

`The "agreement document" signed between the State and the financial
institutions that filed the originating motion against us, which follows the
document of principles of March 18, 2008 signed between the State, the
abovementioned financial institutions, and some of our holders of Preferred
Ordinary shares and which states the undersigned parties' consent to implement a
blueprint for the sale of our shares and to cooperate in its implementation, the
abovementioned financial institutions and the State agreed that in the framework
of the Section 350 Arrangement, which would be filed with the Court as part of
the sale blueprint would include, among other things, the following
stipulations:

     o    The State and the abovementioned financial institutions will not
          object to the return to us of the Perpetual Deposit on July 31, 2008
          or on the date that the arrangement is approved, whichever comes
          later.

     o    If the sale of the bank is not completed by December 31, 2009 or if an
          order for liquidation against us is issued before then or if our
          General Meeting decides to voluntarily liquidate it (all of these
          "liquidation of the bank"), the following provisions will apply:

          E)   The State will pay us 50% of the interest at 6% a year
               accumulated on the Perpetual Deposit with regard to C Shares, CC
               Shares, and CC1 Shares for the period from July 1, 2002 through
               July 31, 2008. This amount will be paid on the date that the bank
               is liquidated, or on December 31, 2009, whichever comes first
               ("the Payment Date").

               This amount will bear the linkage and interest differentials in
               accordance with the Adjudication of' Interest and Linkage Law
               5721-1961 beginning on July 31, 2008 and until the Payment Date,
               which will be paid by the State on the Payment Date. The payment
               by the State will be grossed-up in accordance with the Perpetual
               Deposit agreements.

          F)   We will pay holders of C Shares, CC Shares, and CC1 Shares on the
               Payment Date a dividend at the rate of 50% of the preferred
               dividend accumulated at a rate of 6% a year for the period from
               July 1, 2002 through July 31, 2008 plus linkage and interest
               differentials in accordance with the Adjudication of' Interest
               and Linkage Law 5721-1961 beginning on July 31, 2008 and until
               the Payment Date.


                                      129`

`G)   The State will forego its demands and claims against us and/or
               our liquidator with regard to payment of 50% of the dividend to
               the state, as the shareholder of preferred D Shares and DD
               Shares, for the period beginning on July 1, 2002 and ending on
               July 31, 2008.

          H)   Subject to full payment accruing to them in accordance with
               section B) above, the holders of C Shares, CC Shares, and CC1
               Shares will have no claims with regard to the non distribution of
               dividends during the period beginning on July 1, 2002 and ending
               on the Payment Date. To remove all doubt, nothing stated above
               derogates from the rights of the abovementioned shareholders to
               the accumulated preferred dividends on their shares in accordance
               with our Articles of Association, including with regard to the
               abovementioned period.

     o    Subject to payment of the amounts owed to them from the proceeds of
          the sale of our shares, or - if the sale is not executed - subject to
          the payment of 50% of the abovementioned dividend, the holders of C
          Shares, CC Shares, and CC1 Shares will forego their demands and claims
          towards the State with regard to the payment of the dividend for any
          past period or future period or with regard to the Perpetual Deposit
          and the return of its proceeds to us.

     o    Upon approval of the arrangement by the Court, the originating motion
          filed by the abovementioned financial institutions and the appeal
          filed by us on January 6, 2008 to the Supreme Court will be dismissed.
          Dismissal of the appeal will be binding on us and on the State only
          for the relations between the two parties with regard to that part of
          the Perpetual Deposit that relates to the various C class shares.

     On April 29, 2008, the Ministerial Committee for Privatization Issues made
its decision regarding the privatization of the bank. This decision stipulated,
among other things, that on the basis of the document of principles of March 18,
2008 signed between our shareholders (and for the abovementioned subsequent
agreement document), we will submit the Section 350 Arrangement.

     At the meeting on May 26, 2008, our Board of Directors approved the
submission of the Section 350 Arrangement.


                                      130`

`ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

     None, except as described in the Section 350 Arrangement in Item 4.B.

ITEM 15. CONTROLS AND PROCEDURES

     Disclosure controls and procedures

     We have evaluated, with the participation of our General Manager and
Comptroller, the effectiveness of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as
of the end of the period covered by this Annual Report on Form 20-F. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives.Based upon our evaluation, our General
Manager and Comptroller concluded that our disclosure controls and procedures,
as of December 31, 2007, were effective to provide reasonable assurance that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported as
required by the applicable rules and forms, and that it is accumulated and
communicated to our management, including our General Manager and Comptroller,
as appropriate to allow timely decisions regarding required disclosure.

     Management's annual report on internal control over financing report

     Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule 13a-
15(f) of the Exchange Act. Our internal control system was designed to provide
reasonable assurance to our management and our Board of Directors regarding the
reliability of financial reporting and the preparation and fair presentation of
published financial statements for external purposes in accordance with
generally accepted accounting principles. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurances with
respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may decline.


                                      131`

`Our management (with the participation of our General Manager and
Comptroller) conducted an evaluation, pursuant to Rule 13a-15(c) under the
Securities Exchange Act, of the effectiveness, as of the end of the period
covered by this Annual Report, of our internal control over financial reporting
based on the criteria set forth in the framework in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the results of this evaluation, management
assessed the effectiveness of our internal control over financial reporting as
at December 31, 2007 and concluded that our internal control over financial
reporting was effective as of December 31, 2007. This annual report does not
include an attestation report of our registered public accounting firm regarding
internal control over financial reporting. Management's report was not subject
to attestation of our reigistered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us, as a
non-accelerated filer, to provide only management's report in our annual report
for the year ended December 31, 2007.

     Changes in internal control over financial reporting

     There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15 or 15d-15 under the Exchange Act) that occurred during
the period covered by this annual report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

     It should be noted that our management has identified certain issues
relating to the processing and reporting of information as required by the rules
and regulations of the Securities and Exchange Commission (the "SEC"). In
particular, our system of financial reporting was not designed to reconcile our
financial statements (which are prepared in accordance with Israeli GAAP) with
U.S. GAAP in accordance with the requirements of Form 20-F. This issue primarily
resulted from our lack of qualified financial and accounting personnel with
knowledge and expertise in U.S. GAAP and the requirements of the SEC and the
Public Company Accounting Oversight Board (the "PCAOB"). In addition, the severe
liquidity crisis that we faced in 2002 and the subsequent implementation of the
run-off plan negatively affected our ability to address and correct this issue.

     Our accounting personnel have outlined the issues relevant to the
reconciliation of our financial statements to U.S. GAAP and the methods of
preparing such a reconciliation. In addition, we have retained U.S. counsel to
advise as to the requirements of Form 20-F and related SEC rules and
regulations. In preparing the U.S. GAAP reconciliation of our financial
statements, our accounting personnel were guided by the experience they acquired
in the previous annual reports. Our accounting personnel regularly consult with,
and seek the assistance of, outside advisors in connection with the required
reconciliation of our financial statements to U.S. GAAP. Moreover, they
periodically seek from such outside advisors relevant updates regarding SEC and
PCAOB rules and regulations relating to reconciliation to U.S. GAAP.


                                      132`

`ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our Board of Directors has determined that we have two Audit Committee
financial experts (as defined in the instructions to Item 16A of Form 20-F)
serving on the Audit Committee, Mr. Yacob Eizner and Ms. Shulamit Eshbol. Mr.
Eizner is an appointee of Bank Leumi le-Israel B.M and Ms. Eshbol is an
appointee of the State of Israel. Both Mr. Eizner and Ms. Eshbol are
"independent" (as defined by NASDAQ Rules 4200(a)(15) and 4350(c) and (d)).

ITEM 16B. CODE OF ETHICS

     We have adopted a code of ethics (as defined in Item 16B of Form 20-F) that
applies to all our directors, officers and employees (the "Code of Ethics"). We
have filed a copy of this code of ethics as Exhibit 11.1 to our annual report on
Form 20-F for the fiscal year ended December 31, 2003. No amendments have been
made to the Code of Ethics in the most recent fiscal year.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     According to the Companies Law, the remuneration of the independent auditor
for auditing work shall be established by the shareholders at the general
meeting, by the board of directors if the shareholders so authorize, or, if the
matter is prescribed in the articles of association, as prescribed therein. Our
shareholders authorized our Board of Directors to establish the remuneration of
the independent auditors for auditing work done in 2007, subject to the fee
schedule of the GCA.

     Furthermore, the Companies Law stipulates that the remuneration of the
independent auditors for services other than auditing work shall be established
by the board of directors unless the articles of association state that
remuneration for such services shall be established by the shareholders at the
general meeting.

     Pursuant to the above, the remuneration of our independent auditors for
audit work and other services in 2006 and 2007 was established by our Board of
Directors.

     KPMG - Somekh Chaikin, Certified Public Accountants (Isr.), served as our
independent public accountant for the fiscal years 2005 and 2006. For the year
ending December 31, 2006, Kesselman & Kesselman, Certified Public Accountants
(Isr.), a member of PricewaterhouseCooopers International Ltd. (hereinafter:
"Kesselman & Kesselman) served together with KPMG as joint auditors, for the
auditing of our Israeli financial statements only. For the year ending December
31, 2007, Kesselman & Kesselman served as our independent public accountant. For
the years ended December 31, 2007 and 2006, the aggregate fees billed and/or
agreed to by KPMG and its affiliates and to Kesselman & Kesselman are as
follows:


                                      133`

`2007         2006
                            -----       -----
                          (IN THOUSANDS OF NIS)
                            -----------------

Audit Fees(1)               1,056       1,145
Audit-related Fees(2)           -          35
Tax Fees(3)                    30          30
                            -----       -----

TOTAL                       1,086       1,210
                            =====       =====

(1)  Audit Fees consist of fees billed for the annual audit of the company's
     financial statements or services that are normally provided by the
     accountant in connection with statutory and regulatory filings or
     engagements. They also include fees billed for services that only the
     external auditor reasonably can provide, and include the provision of
     comfort letters and consents and the review of documents filed with the
     SEC.

(2)  Audit-related Fees consist of fees billed for assurance and related
     services that are reasonably related to the performance of the audit or
     review of the company's financial statements or that are traditionally
     performed by the external auditor, and include consultations concerning
     financial accounting and reporting standards.

(3)  Tax Fees include fees billed for tax compliance services, including the
     preparation of original and amended tax returns and claims for refund; tax
     consultations, such as assistance and representation in connection with tax
     audits and appeals, and requests for rulings or technical advice from
     taxing authorities; tax planning services; consultation and planning
     services

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     Not applicable.

                                      134`

`PART III

ITEM 17. FINANCIAL STATEMENTS

     The following financial statements are filed as part of this annual report:

     Our audited balance sheets as of December 31, 2007 and December 31, 2006
and the statements of income (loss), shareholders' equity and cash flows for the
years ended December 31, 2007, 2006 and 2005, including the notes thereto and
together with the Report of Independent Registered Public Accounting Firm
thereon, are included at pages F-1 to F-101 to this annual report.

     OUR FINANCIAL STATEMENTS CONFORM WITH ISRAELI GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND THE INSTRUCTIONS OF THE SUPERVISOR OF BANKS (ISRAEL) ("ISRAELI
GAAP"), WHICH DIFFER IN CERTAIN RESPECTS FROM THOSE GENERALLY ACCEPTED IN THE
UNITED STATES ("U.S. GAAP") AS DESCRIBED BELOW IN NOTE 32 TO THE FINANCIAL
STATEMENTS.

ITEM 18. FINANCIAL STATEMENTS

     See Item 17 above.

ITEM 19. EXHIBITS


  EXHIBIT
   NUMBER                          DESCRIPTION
  --------                         -----------

     1.1       Memorandum and Articles of Association of Israel Development Bank
               of Israel Ltd. (translation).

     4.1       Summary of run-off plan (incorporated by reference to the
               applicable exhibit to the Annual Report on Form 20-F of
               Industrial Development Bank of Israel Limited for fiscal year
               ended December 31, 2005).

     4.2       Summary of Lease Agreement (incorporated by reference to the
               applicable exhibit to the Annual Report on Form 20-F of
               Industrial Development Bank of Israel Limited for fiscal year
               ended December 31, 2005).

     4.3       Summary of the Special Line of Credit from the Bank of Israel
               (incorporated by reference to the applicable exhibit to the
               Annual Report on Form 20-F of Industrial Development Bank of
               Israel Limited for fiscal year ended December 31, 2005).

     4.4       Summary of Perpetual Deposit Agreement (incorporated by reference
               to the applicable exhibit to the Annual Report on Form 20-F of
               Industrial Development Bank of Israel Limited for fiscal year
               ended December 31, 2005).

     4.5       Summary of Computer Services Outsourcing Agreement (incorporated
               by reference to the applicable exhibit to the Annual Report on
               Form 20-F of Industrial Development Bank of Israel Limited for
               fiscal year ended December 31, 2005).


                                      135`

`4.6       Summary of Special Collective Agreement with Employees
               (incorporated by reference to the applicable exhibit to the
               Annual Report on Form 20-F of Industrial Development Bank of
               Israel Limited for fiscal year ended December 31, 2005).

     4.7       Summary of Indemnification Agreement for Directors and Senior
               Officers.

     4.8       Summary of Kibbutz Debt Agreement (incorporated by reference to
               the applicable exhibit to the Annual Report on Form 20-F of
               Industrial Development Bank of Israel Limited for fiscal year
               ended December 31, 2005).

     4.9       Summary of Credit to the Israel Electric Corporation Ltd.
               (incorporated by reference to the applicable exhibit to the
               Annual Report on Form 20-F of Industrial Development Bank of
               Israel Limited for fiscal year ended December 31, 2005)

    11.1       Code of Ethics (incorporated by reference to the applicable
               exhibit to the Annual Report on Form 20-F of Industrial
               Development Bank of Israel Limited for fiscal year ended December
               31, 2003).

    12.1       Certification of Uri Galili, General Manager of Industrial
               Development Bank of Israel Ltd., pursuant to 15 U.S.C. Section
               78(m)(a), as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002.

    12.2       Certification of Rimon Shmaya, Comptroller of Industrial
               Development Bank of Israel Ltd., pursuant to 15 U.S.C. Section
               78(m)(a), as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002.

    13.1       Certification of Uri Galili, General Manager of Industrial
               Development Bank of Israel Ltd., pursuant to 18 U.S.C. Section
               1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
               of 2002.

    13.2       Certification of Rimon Shmaya, Comptroller of Industrial
               Development Bank of Israel Ltd., pursuant to 18 U.S.C. Section
               1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
               of 2002.

    99.1       Proposed Plan for the Possible Sale and/or Transfer of all of the
               Bank's Issued and Paid Share Capital (incorporated by reference
               to the Report on Form 6-K of Industrial Development Bank of
               Israel Limited filed on June 19, 2007).


                                      136`

`SIGNATURES

     The Registrant hereby certifies that it meets all the requirements for
filing on Form 20-F and has duly caused and authorized this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.

     INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED

By: /s/ Uri Galili                        By: /s/ Natan Atlas
------------------                        -------------------
Uri Galili, General Manager               Natan Atlas, General Secretary

Dated: September 11, 2008.


                                      137`

`THE INDUSTRIAL DEVELOPMENT BANK
                               OF ISRAEL LIMITED

                              FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2007`

`Industrial Development Bank of Israel Limited

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2007
--------------------------------------------------------------------------------

CONTENTS

                                                                          PAGE

Reports of Independent Registered Accounting Firms                         F-1

Balance Sheets                                                             F-5

Statements of Income                                                       F-6

Statement of Changes in Shareholders' Equity                               F-7

Statement of Cash Flows                                                    F-8

Notes to the Financial Statements                                          F-9`

`--------------------------------------------------------------------------------
                                            |KESSELMAN & KESSELMAN
                                            |Certified Public Accountants (Isr.)
                                            |Trade Tower, 25 Hamered Street
                                            |Tel Aviv 68125 Israel
                                            |P.O Box 452 Tel Aviv 61003
                                            |Telephone +972-3-7954555
                                            |Facsimile +972-3-7954556

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM TO THE SHAREHOLDERS OF
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED

We have audited the balance sheet of Industrial Development Bank of Israel
Limited ("the Bank") as of December 31, 2007 and the related statements of
income, shareholders' equity, and cash flows, for the year then ended. These
financial statements are the responsibility of the Bank's Board of Directors and
of its Management. Our responsibility is to express an opinion on these
financial statements, based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Such standards require that we plan
and perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and by Management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of the Bank as of December 31,
2007 and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in Israel.
Furthermore, in our opinion, the statements that were audited by us, as above,
have been prepared in accordance with the directives and guidelines of the
Supervisor of Banks.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States.
Information relating to the nature and effect of such differences is presented
in note 32 to the consolidated financial statements.

As explained in Note 1C, the aforementioned financial statements are presented
in new Israeli shekels in accordance with Accounting Standards of the Israel
Accounting Standards Board and the provisions of the Supervisor of Banks.


                                      F - 1`

`Without qualifying our opinion, we draw attention to the following:

A.   Notes 1A and 33 to the financial statements refers to the severe liquidity
     problems experienced by the Bank in August 2002. These liquidity problems
     were caused by increased withdrawal of deposits by the public, the
     interest-bearing special line of credit provided to the Bank by the Bank of
     Israel, the decisions of the Bank's Board of Directors to adopt the
     "Run-Off" plan for the supervised sale of the Bank's credit assets and to
     extend the plan until July 31, 2008, the agreement of the Bank's Board of
     Directors to restrict the license of the Bank and to limit its duration
     until the end of the "Run-Off " plan, the announcement of the Governor of
     Bank of Israel regarding the restriction of the Bank's license and the
     revocation of the license as from August 1, 2008, and the decision of the
     Ministerial Committee for Social and Economic Affairs (the Social Economic
     Cabinet) to approve and extend the duration of the "Run-Off" plan, as
     above, (hereinafter - the Government decision extending the duration of the
     "Run-Off" plan), and the blueprint for the proposed sale of all the shares
     of the Bank and any further arrangements with it's shareholders, all this
     as detailed in the above note.

     The factors above raise substantial doubt as to the ability of the Bank to
     continue operating as a going concern.

     The financial statements do not contain any changes in the value or
     classification of assets or liabilities that would be required should the
     Bank cease to operate as a going concern.

B.   Note 21 of the financial statements regarding the litigation pending
     against the Bank and senior officers thereof, all as detailed in the
     aforementioned note.

                                             Kesselman & Kesselman
                                             Certified Public Accountants (Isr.)

Tel-Aviv, Israel
February 26, 2008 (except for Notes 32 and 33,
as to which the date is September 11, 2008)


                                      F - 2`

`SOMEKH CHAIKIN                   Telephone  972 3 684 8000
                    KPMG Millennium Tower            Fax        972 3 684 8444
                    17 Ha'arba'a Street, PO Box 609  Internet   www.kpmg.co.il
                    Tel Aviv 61006 Israel

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS OF
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED

We have audited the accompanying financial statements of Industrial Development
Bank of Israel Limited (the Bank), detailed hereunder:

a.   Balance sheet as at December 31, 2006

b.   Statements of income (loss), changes in shareholders' equity, and cash
     flows, for each of the years ended December 31, 2006 and 2005

These financial statements are the responsibility of the Bank's Board of
Directors and of its Management. Our responsibility is to express an opinion on
these financial statements, based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Such standards require that we plan
and perform the audits to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and by Management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Bank as at December 31,
2006 and the results of its operations, the changes in the shareholders' equity
and its cash flows for each of the years ended December 31, 2006 and 2005, in
conformity with accounting principles generally accepted in Israel. Furthermore,
in our opinion, these statements have been prepared in accordance with the
directives and guidelines of the Supervisor of Banks in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States.
Information relating to the nature and effect of such differences is presented
in Note 32 to the financial statements.

As explained in Note 1C, the aforementioned financial statements are presented
in reported amounts in accordance with accounting standards of the Israel
Accounting Standards Board and the directives and guidelines of the Supervisor
of Banks in Israel.

The accompanying financial statements have been prepared assuming that the Bank
will continue as a going concern. As discussed in Note 1 and 16A to the
financial statements we draw attention to the following:

A.   The severe liquidity problems the Bank experienced in August 2002, which
     were caused by increased withdrawals of public deposits. Following these
     liquidity problems, on

     August 22, 2002, the Bank turned to the Governor of the Bank of Israel with
     a request for a special line of credit.


                                      F - 3`

`B.   The special line of credit granted to the Bank by the Bank of Israel, as
     discussed in Note 1.

C.   The decision of the Bank's Board of Directors to adopt a "Run-Off" plan for
     the supervised sale of the Bank's credit assets, and to extend the plan
     until July 31, 2008, and the decision of the Ministerial Committee for
     Social and Economic Affairs (The Social Economic Cabinet) to extend the
     "Run Off" plan (hereunder - the Government's decision extending the "Run
     Off" plan), as discussed in Note 1.

D.   The agreement of the Bank's Board of Directors to restrict the license of
     the Bank and to limit its duration until the end of the "Run-Off" plan, and
     the announcement of the Governor of the Bank of Israel regarding the
     restriction of the Bank's license and its being revoked as from August 1,
     2008, as discussed in Note 1.

E.   The minimum capital ratio of the Bank as at December 31, 2006, that has
     fallen below the minimum of 9% set by the Supervisor of Banks in Israel in
     Proper Banking Procedures Regulations.

The foregoing factors listed above raise substantial doubts as to the ability of
the Bank to continue operating as a going concern. The ability of the Bank to
repay its liabilities is contingent upon the continuation of the special line of
credit from the Bank of Israel and the implementation of the "Run-Off" plan, in
addition to the continued forbearance by the Bank of Israel.

The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed when the Bank ceases
operating as a banking entity.

As well, we call attention to the following:

A.   Note 21 to the financial statements regarding the litigation pending
     against the Bank and its executive officers, as detailed in the said Note.

B.   Note 1D to the financial statements regarding the initial implementation of
     Standard No. 22, "Financial Instruments: Disclosure and Presentation"
     effective January 1, 2006 which resulted in a reduction in shareholders'
     equity in an amount of NIS 204.1 million, as a result of the classification
     of participating preference shares of Class C, CC, and CC1 which were
     previously classified as shareholders' equity, as liabilities under the
     item of "Participating preference shares".

Somekh Chaikin
Certified Public Accountants (Isr.)

July 31, 2007

                                      F - 4`

`The Industrial Development Bank of Israel Limited

BALANCE SHEETS AS AT DECEMBER 31
--------------------------------------------------------------------------------

Reported amounts
                                                                2007           2006
                                                              -------        -------
                                                   NOTE    NIS MILLIONS   NIS MILLIONS
                                                  -------     -------        -------


ASSETS

Cash and deposits with banks                         2           33.8           66.4

Securities                                           3           46.3           50.4

Credit to the public                                 4        5,521.1        6,519.1

Credit to governments                                5           24.7           41.5

Fixed assets                                         6            0.8            1.1

Other assets                                         7            7.2           12.1

Perpetual deposits with the Israeli Treasury         8          848.8          825.8
                                                              -------        -------

Total assets                                                  6,482.7        7,516.4
                                                              =======        =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits of the public                               9           54.6           66.9

Deposits of banks                                   10          481.2          768.3

Deposits of the Government                                    5,319.2        6,087.4

Perpetual deposit                                   11            0.1            0.1

Capital notes                                       12           20.2           24.9

Other liabilities                                   13           50.7           58.2

Non-participating shares                            14          276.0          303.2

Participating preference shares                     15          170.6          187.4
                                                              -------        -------

Total liabilities                                             6,372.6        7,496.4

Shareholders' equity                                16          110.1           20.0
                                                              -------        -------

Total liabilities and shareholders' equity                    6,482.7        7,516.4
                                                              =======        =======

----------------------------------------      ----------------------------       --------------------------
Dr. Raanan Cohen - Chairman of the Board      Uri Galili - General Manager       Rimon Shmaya - Comptroller

Date of approval of the financial statements: February 26, 2008 (except for
Notes 32 and 33, as to which the date is September 11, 2008)

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


                                      F - 5`

`The Industrial Development Bank of Israel Limited

STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------

Reported amounts

                                                                  2007        2006         2005
                                                                -------      -------      -------
                                                                  NIS           NIS          NIS
                                                          NOTE  MILLIONS     MILLIONS     MILLIONS
                                                        ------- -------      -------      -------


Profit from financing operations
 before allowance for doubtful debts                       23      29.3         18.2         61.6
Allowance for doubtful debts                               4C     (13.8)        21.7         44.2
                                                                -------      -------      -------
Profit (loss) from financing operations
 after allowance for doubtful debts                                43.1         (3.5)        17.4
                                                                -------      -------      -------
OPERATING AND OTHER INCOME
Operating commissions                                      24       1.1          1.3          2.2
Gains from investments in shares                           25       8.7         16.4         11.3
Other income                                               26       1.7          3.8          4.7
                                                                -------      -------      -------
Total operating and other income                                   11.5         21.5         18.2
                                                                -------      -------      -------

OPERATING AND OTHER EXPENSES
Salaries and related expenses                              27      18.5         17.6         18.2
Expenses in respect of employee  retirement                           -          0.5          5.5
Maintenance and depreciation of buildings
 and equipment                                                      2.9          2.7          3.8
Other expenses                                             28       9.4         14.3         16.5
                                                                -------      -------      -------
Total operating and other expenses                                 30.8         35.1         44.0
                                                                -------      -------      -------
Income (loss) from ordinary operations before taxes                23.8        (17.1)        (8.4)
Provision for taxes on operating income                    29       1.6            -            -
                                                                -------      -------      -------

NET INCOME (LOSS) FOR THE YEAR                                     22.2        (17.1)        (8.4)
                                                                =======      =======      =======

                                NET INCOME (LOSS) PER SHARE
                           --------------------------------------
                            2007           2006             2005
                           -------       --------          ------
                             NIS            NIS              NIS
                           -------       --------          ------

"A" ordinary shares        1,470.2       (1,132.4)         (556.3)
                           =======       ========         =======

                       WEIGHTED QUANTITY OF SHARES USED IN COMPUTING
                                   INCOME PER SHARE
                           ---------------------------------
                             2007         2006         2005
                           -------      -------      -------

"A" ordinary shares          1,510        1,510        1,510
                           =======      =======      =======

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


                                      F - 6`

`The Industrial Development Bank of Israel Limited

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY*
--------------------------------------------------------------------------------

Reported amounts

                                                                        ACCUMULATED                        FROM
                                                                         DIFFERENCE      ADJUSTMENTS   PRESENTATION
                                                                             ON          ACCUMULATED        OF
                                                                        TRANSLATION     DIFFERENCE ON   AVAILABLE-
                                                                             OF          TRANSLATION     FOR-SALE                      TOTAL
                                                                           DOLLAR            OF         SECURITIES                     SHARE-
                                         ORDINARY      PREFERENCE         LINKED          CPI LINKED      AT FAIR   ACCUMULATED       HOLDERS'
                                          SHARES         SHARES           DEPOSIT(*)      DEPOSIT(*)       VALUE        LOSS           EQUITY
                                          -------        -------           -------         -------        -------      -------         -------
                                                                                 NIS MILLIONS
                                          ----------------------------------------------------------------------------------------------------

BALANCE AS AT JANUARY 31,
2005                                        131.4        1,068.0            (697.5)          202.5            0.3       (505.5)          199.2

CHANGES DURING 2005
Net loss                                        -              -                 -               -              -         (8.4)           (8.4)
Adjustments from
 presentation of available-for
-sale securities at fair
value                                           -              -                 -               -            5.8            -             5.8
Translation differences
 relating to CPI-linked
 perpetual  deposit (*)                         -              -                 -             0.5              -            -             0.5
                                          -------        -------           -------         -------        -------      -------         -------

BALANCE AS AT DECEMBER 31,
2005                                        131.4        1,068.0            (697.5)          203.0            6.1       (513.9)          197.1

CHANGES DURING 2006
Adjustments as of January 1,
 2006 caused by initial
 implementation of
 Accounting Standard No. 22                     -         (992.3)            697.5            90.7              -            -          (204.1)
                                          -------        -------           -------         -------        -------      -------         -------
Balance as at January 1,
 2006 following the
 implementation of
 Standard No. 22                            131.4           75.7                 -           293.7            6.1       (513.9)           (7.0)
Net loss                                        -              -                 -               -              -        (17.1)          (17.1)
Adjustments from
 presentation of available-for-
 sale securities at fair value                  -              -                 -               -            2.6            -             2.6
Translation differences
 relating to CPI-linked
 perpetual deposit (*)                          -              -                 -            41.5              -            -            41.5
                                          -------        -------           -------         -------        -------      -------         -------

BALANCE AS AT DECEMBER 31,
2006                                        131.4           75.7                 -           335.2            8.7       (531.0)           20.0
                                          -------        -------           -------         -------        -------      -------         -------

CHANGES DURING 2007
Net income                                      -              -                 -               -              -         22.2            22.2
Adjustments from
 presentation of available-for
-sale securities at fair value                  -              -                 -               -            0.8            -             0.8
Translation differences
 relating to CPI-linked
 perpetual deposit (*)                          -              -                 -            67.1              -            -            67.1
                                          -------        -------           -------         -------        -------      -------         -------

BALANCE AS AT DECEMBER 31,
2007                                        131.4           75.7                 -           402.3            9.5       (508.8)          110.1
                                          =======        =======           =======         =======        =======      =======         =======

*    See Note 8 to the financial statements.

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


                                      F - 7`

`The Industrial Development Bank of Israel Limited

STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------

REPORTED AMOUNTS

                                                                         2007             2006               2005
                                                                      ---------         ---------         ---------
                                                                     NIS MILLIONS     NIS MILLIONS       NIS MILLIONS
                                                                      ---------         ---------         ---------


CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net income (loss) for the year                                             22.2             (17.1)             (8.4)
Adjustments to reconcile net income/loss to net cash flows
 generated by operating activities:
Depreciation on equipment                                                   0.4               0.4               1.1
Allowance for doubtful debts                                              (13.0)             22.9              44.5
Gain on sale of available-for-sale securities                              (3.3)            (10.3)            (11.3)
Provision for severance pay and pensions, net                              (4.9)             (0.6)              0.3
Inflationary erosion of capital notes and perpetual deposit                (3.0)             (1.8)              1.6
                                                                      ---------         ---------         ---------
Net cash provided by (used in) operating activities                        (1.6)             (6.5)             27.8
                                                                      ---------         ---------         ---------

CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Deposits with banks, net                                                    9.2               6.5               3.0
Available-for-sale securities, net                                          8.2              25.7              13.9
Credit to the public, net                                               1,010.5           1,139.6             269.2
Credit to governments, net                                                 16.8              17.5              13.7
Other assets, net                                                           4.9               3.5              10.4
Acquisition of fixed assets                                                (0.1)             (0.3)             (0.4)
                                                                      ---------         ---------         ---------

Net cash provided by activities related to assets                       1,049.5           1,192.5             309.8
                                                                      ---------         ---------         ---------

CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
 LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes                                                (1.7)             (0.2)                -
Deposits of the public, net                                               (12.3)           (111.3)           (227.1)
Deposits of banks, net                                                   (287.1)           (280.5)           (379.2)
Deposits of the Government, net                                          (768.2)           (795.6)            228.4
Other liabilities, net                                                     (2.0)              1.6              (1.7)
                                                                      ---------         ---------         ---------
Net cash used in activities
 relating to liabilities and shareholders' equity                      (1,071.3)         (1,186.0)           (379.6)
                                                                      ---------         ---------         ---------

DECREASE IN CASH                                                          (23.4)                -             (42.0)

BALANCE OF CASH AS AT BEGINNING OF YEAR                                    53.4              53.4              95.4
                                                                      ---------         ---------         ---------

BALANCE OF CASH AS AT END OF YEAR                                          30.0              53.4              53.4
                                                                      =========         =========         =========

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


                                      F - 8`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

     A.   THE "RUN OFF" PLAN, THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL
          AND THE BLUEPRINT FOR THE SALE OF THE SHARES OF THE BANK

     Due to increased withdrawals of deposits of the public during the third
     quarter of 2002, the Bank experienced severe liquidity problems, following
     which the Bank turned to the Governor of the Bank of Israel (hereinafter -
     the "Governor") on August 22, 2002, with a request for a special line of
     credit.

     DECISIONS OF THE MINISTERIAL COMMITTEE FOR SOCIAL AND ECONOMIC AFFAIRS
     REGARDING APPROVAL AND EXTENSION OF THE RUN-OFF PLAN

     On October 10, 2005 the Ministerial Committee for Social and Economic
     Affairs (the Social Economic Cabinet) approved the extension of the Bank's
     "Run-Off" plan, after two years earlier, on July 29, 2003, it had decided
     to adopt it. The main principles of the Committee's decision from October
     10, 2005 are as follows:

          >>   The assets of the Bank are to be realized of in a supervised
               process and over a period ending by July 31, 2008, in the
               framework of the "Run-Off" plan approved by the Bank's Board of
               Directors and with the changes to be determined by the Accountant
               General and the Government Companies Authority.

          >>   The maximum amount of the special line of credit will at no time
               exceed NIS 1.25 billion and over the period of executing the
               Run-Off plan it will not exceed the amounts approved by the Bank
               of Israel.

          >>   The Bank will not use the special line of credit or other sources
               for the purpose of providing new credit.

          >>   The Government is responsible for the repayment of the special
               line of credit as from July 1, 2005, on the condition that the
               interest on the credit line until the end of the plan shall not
               exceed the Bank of Israel interest rate.

          >>   If, at the end of the Run-Off plan, there remains an unpaid
               balance of the special line of credit, the Government will repay
               the balance to the Bank of Israel until July 31, 2008. The
               Government has noted before it the notice of the Governor of Bank
               of Israel that in exchange for its repayment of the credit
               balance, the collateral that was provided by the Bank for
               repayment of the credit line will be assigned in its favor (the
               debenture dated November 14, 2002 by which the Bank created a
               general floating lien in favor of the Bank of Israel, which was
               amended on December 29, 2005).

     The Bank is presently in the process of implementing the "Run-Off" plan as
     described in more detail below.

     THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL

     Following the liquidity problems encountered by the Bank in the third
     quarter of 2002, the Bank of Israel had provided it a special line of
     credit, which was recently extended until July 31, 2008 in accordance with
     the letter of the Governor from October 30, 2005. The terms of the special
     line of credit were determined by the Governor of the Bank of Israel and
     over time they underwent changes. The present terms of the special line of
     credit are specified in the letter of the Governor from October 30, 2005,
     and the principal terms are as follows:


                                      F - 9`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     >>   The credit line will be in effect until no later than July 31, 2008.

     >>   The maximum amount of the credit line will at no time exceed NIS 1.25
          billion and it will decline in accordance with a forecast that was
          attached to the notice of the Governor of the Bank of Israel regarding
          extension of the line until July 31, 2008.

     >>   The Bank will be allowed to continue to use the credit line in order
          to meet the liquidity needs it has for fulfilling its current banking
          obligations.

     >>   The interest on the utilized credit will be the "Bank of Israel
          interest rate" (it is noted that before July 29, 2003 the utilized
          credit bore a higher rate of interest).

     >>   Any significant administrative expense that deviates from the Bank's
          ordinary course of business and has an effect on its business results
          will require the approval of the Bank of Israel.

     >>   Limitations were set on the Bank's volume of activity with respect to
          making and pledging deposits with banks.

     The letter of the Governor dated October 30, 2005 noted that, should the
     Bank of Israel, in its sole and exclusive discretion, see fit so to do,
     consideration will be given to the imposition of further restrictions upon
     the operations of the Bank in addition to those contained in the
     above-mentioned letter, whether or not those further restrictions relate to
     non-compliance with the provisions of the "Run-off plan."

     The utilized balance of the special line of credit of the Bank of Israel
     (not including accrued interest) was NIS 476 million as at December 31,
     2007 (compared with NIS 751 million as at December 31, 2006).

     THE COMPONENTS OF THE RUN-OFF PLAN

     The principal components of the "Run-Off" plan that was approved by the
     Bank's Board of Directors are a supervised sale of the Bank's assets by the
     end of the plan period and a significant reduction in manpower and in
     operating expenses, subject to the continued granting of the special line
     of credit by the Bank of Israel. As a part of this process the Bank also
     implemented an extensive and detailed efficiency plan.

     In accordance with the "Run-Off" plan and the efficiency plan implemented
     by the Bank, the Bank refrains from granting new credit and concentrates
     its activities on collecting the existing credit.

     As part of the implementation of its plans, the Bank has significantly
     reduced or completely discontinued the following activities: foreign
     currency and foreign trade activity, maintenance of a dealing room (for
     customers), maintenance of current accounts, checking accounts and
     securities accounts, processing grants, operating cash and clearing
     facilities (independently) and credit cards. The Bank also refrains from
     accepting new deposits and it has recently stopped (subject to certain
     exceptions) renewing existing deposits that reach maturity.

     The reduction in the Bank's operations was also accompanied by a reduction
     in the Bank's staff.


                                     F - 10`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     On July 26, 2005 the Bank's Board of Directors discussed a document that
     had been prepared regarding the extension of the "Run-Off" plan. In light
     of the document's conclusion regarding the advantages of extending the
     plan, the Board of Directors approved extension of the plan until July 31,
     2008. The Bank's Board of Directors also decided on the same occasion that
     due to the reduction in the Bank's activity according to the "Run-Off" plan
     and the date to which the plan was extended, the Bank would notify the
     Governor of the Bank of Israel that it agrees that its banking license be
     restricted in a manner that reflects its reduced activity as derived from
     the "Run-Off" plan, and to the restricted license specifying that it is
     valid until the end of the plan (July 31, 2008).

     In his letter from January 29, 2006 the Bank was notified by the Governor
     of the Bank of Israel as follows:

          >>   The banking license the Bank received on June 4, 1989 will be
               restricted so that the Bank cannot engage in any business it did
               not engage in prior to the date of the license (until the date of
               the license the Bank acted as an investment bank) and without
               derogating from the generality of the aforementioned, the Bank
               will not receive new deposits and will not renew deposits
               reaching their current date of maturity, other than from the
               shareholders.

          >>   The Bank's banking license will be revoked as from August 1,
               2008.

     In a letter dated May 1, 2007, the Bank of Israel announced that if the
     blueprint set out below for the sale of the shares of the Bank is
     implemented prior to July 31, 2008, the banking license of the Bank will be
     cancelled on the date the blueprint is carried out.

     BLUEPRINT FOR THE SALE OF THE SHARES OF THE BANK

     The Finance Ministry and the Government Companies Authority are in the
     process of assessing and taking steps to advance the blueprint for the sale
     of all of the issued share capital of the Bank to a third party purchaser.
     As part of this, on June 17, 2007, the Government Companies Authority
     issued a request for information (RFI) in which it announced, among other
     things, that the Government of Israel, through the Government Companies
     Authority, was requesting information from parties interested in purchasing
     the Industrial Development Bank of Israel Ltd. and was requesting that
     those interested parties submit their requests on July 3, 2007. The RFI
     also included a description of the proposed blueprint for the sale whereby,
     among other things, the holdings of the State in the shares of the Bank,
     including the controlling shares (ordinary shares A) and the holdings of
     the other holders of controlling shares (the three large bank groups: Bank
     Discount, Bank Hapoalim, Bank Leumi, and also First International Bank,
     IDB, and the Association of Industrialists) will be transferred to the
     designated buyer, the shares of the Bank that are traded on the Tel Aviv
     Stock Exchange and which are held by the public will be purchased by the
     designated buyer, as part of the creditors agreement pursuant to article
     350 of the Companies Law - 1999, whereas preferred Shares D and DD held by
     the public will be redeemed and the accrued preferred dividend in arrears
     will be paid in respect thereof. A detailed description of the blueprint
     that was included in the RFI can be found in the Immediate Report issued by
     the Bank on June 17, 2007. As reported to the Bank by the Government
     Companies Authority, on the date stipulated for submission of the requests,
     July 3, 2007, eleven requests were received at the offices of the Authority
     from companies and individuals.


                                     F - 11`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     At the beginning of 2008, at the request of the State and other
     shareholders, Professor A. Barnea prepared a proposal for the distribution
     of the proceeds to be received upon the realization of the blueprint (if
     and when it is implemented), among the various shareholders of the Bank.
     Professor Barnea's document, which contains the proposed distribution
     formula and which is dated January 13, 2008, was attached to the Immediate
     Report issued by the Bank on January 15, 2008. Among the ordinary
     shareholders of the Bank who requested the proposal are Bank Leumi, Bank
     Hapoalim, Discount Bank, the financial institutions which filed the suit
     against the Bank regarding the renewal of the dividend distribution, and
     part of the holders of the Bank's ordinary preferred shares. Please note
     that the Bank is not in possession of information that the State and the
     aforementioned shareholders have given their consent to the distribution
     formula and even at this stage, it is impossible to know if and when the
     blueprint will be implemented. In addition, the sale of the holdings of the
     State in the Bank necessitates passage of a privatization resolution by the
     Ministerial Committee on Privatization, a resolution which has not yet been
     passed.

     As mentioned above, the decision of the Government stipulates that the
     Run-off Plan shall conclude on July 31, 2008. As of the date of approval of
     these financial statements, it is not known whether the sale of the shares
     of the Bank will be implemented

The financial statements do not contain any changes in the value or
classification of assets or liabilities that may be required should the Bank
cease to operate as a "going concern".

As to subsequent events, see Notes 33 A. and B.

     B.   DEFINITIONS

     In these financial statements -

     ADJUSTED AMOUNT - The nominal historical amount adjusted to the effect of
     the changes in the general purchasing power of the Israeli currency in
     accordance with the opinions of the Institute of Certified Public
     Accountants in Israel.

     REPORTED AMOUNT - The adjusted amount as at the date of transition with the
     addition of amounts in nominal values that were added after the date of
     transition and less amounts subtracted after the date of transition.

     DATE OF TRANSITION - December 31, 2003.

     ADJUSTED FINANCIAL REPORTING - Financial reporting in amounts adjusted to
     the effect of the changes in the general purchasing power of the Israeli
     currency in accordance with the opinions of the Institute of Certified
     Public Accountants in Israel.


                                     F - 12`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     C.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS

     GENERAL

     The financial statements have been prepared in accordance with directives
     and guidelines of the Supervisor of Banks in Israel and in accordance with
     generally accepted accounting principles in Israel.

     In October 2001 the Israel Accounting Standards Board published Accounting
     Standard No. 12, "Discontinuance of Adjustment of Financial Statements".
     Pursuant to this standard and in accordance with Accounting Standard No. 17
     that was published in December 2002, the adjustment of financial statements
     was discontinued as at January 1, 2004. Until December 31, 2003, the Bank
     continued to prepare adjusted financial statements in accordance with the
     directives of the Supervisor of Banks, on the basis of the principles of
     the Opinion No. 36 of the Institute of Certified Public Accountants in
     Israel. The adjusted amounts presented in the financial statements as at
     December 31, 2003 are the basis for the financial statements in reported
     amounts. Any additions made during the period are included according to
     their nominal values.

     BALANCE SHEET

     Non-monetary items are stated at reported amounts.

     Monetary items are stated in the balance sheet at their nominal historical
     values as at balance sheet date.

     Amounts of non-monetary assets do not necessarily reflect their realizable
     value or current economic value, but only the reported amounts of such
     assets.

     The term "cost" in these financial statements means the reported amount of
     cost.

     STATEMENTS OF INCOME

     Income and expenses deriving from non-monetary items or from provisions
     included in the balance sheet are derived from the difference between the
     reported amount of the opening balance and the reported amount of the
     closing balance. All other operating items are stated at their nominal
     historical values.

     D.   STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

     On January 1, 2006, the Bank implemented for the first time accounting
     Standard No. 22, "Financial Instruments: Disclosure and Presentation'
     (hereinafter - the "Standard"). The Standard sets forth the presentation
     provisions of financial instruments in the financial statements and details
     the required fair disclosure thereof. In addition, the Standard stipulates
     the manner of classification of financial instruments as financial
     liabilities and equity, classification of interest, dividends, and related
     losses and gains, and the circumstances under which an entity can set off
     financial assets and liabilities. The Standard cancelled Opinion No. 53,
     "The Accounting Treatment of Convertible Liabilities" and Opinion No. 48,
     "the Accounting Treatment of Option Warrants".

     In respect of certain issues relating to the aforementioned treatment,
     there exist directives of the Supervisor of Banks. In such cases, the Bank
     is subject to those directives.


                                     F - 13`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     D.   STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)

     The initial implementation of the Standard resulted in a reduction in
     shareholders' equity in an amount of NIS 204.1 million, as a result of the
     classification of participating preference shares of Class C, CC, and CC1
     which were previously classified as shareholders' equity, to a liability in
     respect of participating preference shares.

     Adoption of the Standard was prospective. Comparative amounts relating to
     previous periods were not restated.

     The difference generated until May 6, 1996 between the adjustment of the
     special deposit with the Israeli Treasury which, up to May 6, 1996, was
     linked to the exchange rate of the US dollar, in respect of the
     participating preference shares similarly linked to the exchange rate of
     the US dollar, and the adjustment of the said deposit on the basis of the
     CPI, is reflected in the statement of changes in shareholders' equity in
     the item entitled "Accumulated difference on translation of a dollar linked
     deposit".

     Further to the initial implementation of Standard No. 22, the balance of
     the accumulated difference from the dollar-linked deposit was cancelled as
     from January 1, 2006, due to the fact that the participating preference
     shares were classified to a liability in respect of participating
     preference shares and are measured, as from that date, on the basis of
     their dollar-linked value (see Note 8).

     The difference generated from May 7, 1996, between the adjustment of the
     perpetual deposit with the Israeli Treasury, linked from that date to the
     CPI (which in no event will be less than its dollar value as it was on
     October 1, 1987) and the adjustment of the non-participating shares linked
     to the exchange rate of the dollar, is reflected in the statement of
     changes in shareholders' equity in the item entitled "Accumulated
     difference on translation of CPI-linked deposit" (see Note 8).

     E.   EXCHANGE RATES AND LINKAGE

     (1)  Assets and liabilities denominated in, or linked to, foreign currency,
          are stated on the basis of the representative exchange rates,
          published by Bank of Israel, in effect on balance sheet date or on a
          date relevant to the particular transaction.

     (2)  Assets and liabilities linked to the CPI are stated according to the
          contractual linkage terms of each balance.

     (3)  Assets and liabilities, which are optionally linked to the CPI or to
          foreign currency, are stated in the financial statements using the
          relevant basis under the terms of the respective transactions.

     (4)  Interest and linkage differences accrued in respect of assets and
          liabilities are included in the balance sheet under the items to which
          they relate.


                                     F - 14`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     E.   EXCHANGE RATES AND LINKAGE (CONT'D)

     (5)  Following are details of exchange rates and the CPI and the rates of
          change therein:

                                  DECEMBER 31                           RATE OF CHANGE DURING
                        ---------------------------------         ----------------------------------
                        2007         2006            2005         2007           2006           2005
                        ----         ----            ----         ----           ----           ----
                                                                    %              %              %
                                                                  ----           ----           ----

Representative
 exchange rate
 of US$1
 (in NIS)               3.846        4.225           4.603        (9.0)          (8.2)          6.8

CPI in points
 for:
 December               191.1        184.9           185.0         3.3           (0.1)          2.4

 November               190.0        184.9           185.4         2.8           (0.3)          2.7

     F.   SECURITIES

     In accordance with the directives of the Supervisor of Banks securities are
     to be classified into three groups, and principles of measurement were
     provided for each group as follows:

     HELD-TO-MATURITY DEBENTURES

     Such debentures are stated at their amortized cost as at balance sheet
     date. Such cost represents the par value plus linkage increments and
     interest accrued since acquisition. It also includes the unamortized
     discount or premium, generated upon acquisition. Income from
     held-to-maturity debentures is recognized on the accrual basis.

     AVAILABLE-FOR-SALE SECURITIES

     Such securities are stated at their fair value. Income therefrom is
     recognized on the accrual basis. The difference between the fair value and
     the amortized cost of available-for-sale securities, net of the related tax
     effect, is recorded as a capital reserve. Non-marketable shares are stated
     at their reported cost.

     SECURITIES FOR TRADING

     Such securities are stated at their fair value. Gains or losses arising
     from changes in the fair value are recognized in the statement of income.
     The fair value of securities for trading is determined based on their stock
     market prices as at balance sheet date.


                                     F - 15`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     F.   SECURITIES (CONT'D)

     IMPAIRMENT IN VALUE OF INVESTMENTS

     From time to time the Bank examines whether there has been an impairment in
     the value of its investments in securities which is not of a temporary
     nature. This examination is performed when there are signs that may
     indicate the possibility of an impairment in the value of an investment,
     including a decline in their stock market prices, the business of the
     investee, the industry in which the investee operates and additional
     parameters. Provisions for the adjustment in value of these investments,
     which in accordance with the opinion of the Management are based on an
     examination of the overall relevant aspects and the significance of each,
     and which are not of a temporary nature, are recorded in the statement of
     income.

     G.   ALLOWANCE FOR DOUBTFUL DEBTS

     The financial statements include specific allowances for doubtful debts,
     which, in Management's opinion, fairly present the anticipated loss on the
     credit portfolio, including off-balance sheet credit.

     In determining the adequacy of the allowances, Management based itself upon
     the evaluation of the risk involved in the credit portfolio using available
     information on the customers' financial position, volume of activity, past
     record and adequacy of the collaterals received.

     The directives of the Supervisor of Banks require that, commencing with
     1992, banks include, in addition to the specific allowance for doubtful
     debts, a supplementary allowance for doubtful debts, which replaces the
     general allowance, which had been required up to that time. The
     supplementary allowance for doubtful debts is based upon excessive credit
     balances, measured according to specified quality characteristics of the
     credit portfolio, as provided in the directives of the Supervisor of Banks.
     In accordance with the aforementioned requirements, a portion of the
     general allowance, as at December 31, 1991, equal to 1% of the total debt
     to which it was related at that date, is to be maintained in inflation
     adjusted values. According to a directive of the Supervisor of Banks the
     adjustment to inflation of the general allowance was discontinued as at
     January 1, 2005.

     According to Directive 315 of Proper Banking Procedures, a banking
     corporation must record a supplementary allowance for doubtful debts in
     respect of debts of customers which deviate from limits stipulated by the
     Supervisor of Banks, which are calculated as a certain percentage of the
     Bank's capital, as stipulated for purposes of calculating the minimum
     capital ratio. These limits relate to the indebtedness of an individual
     borrower or a borrower group, to the indebtedness in respect of financing
     the acquisition of means of control of corporate entities and to the
     indebtedness of related parties.

     As a result of the decline in the "first tier capital" of the Bank and the
     limitation on the amount of "second tier capital" that may be taken into
     consideration, a part of the customers' debts to the Bank exceed the
     amounts of the aforementioned limits.

     Furthermore, Directive 315 of the Proper Banking Procedures provides that a
     banking corporation is required to make a supplementary allowance for
     doubtful debts if the total liabilities of a certain sector to the banking
     corporation exceed 20% of the total liabilities of the public to the
     banking corporation (hereinafter - "the limit on sector indebtedness").


                                     F - 16`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     G.   ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)

     Since the Bank has stopped providing new credit and is focusing on the
     collection of the existing credit to its customers, its ability to spread
     the indebtedness of its customers between the various sectors has decreased
     and it may on occasion deviate from the limit on sector indebtedness.

     The Bank applied to the Bank of Israel requesting an exemption from
     recording the supplementary allowance for doubtful debts deriving from
     deviations from the aforementioned various debt limits.

     In his letters dated May 28, 2003 and August 21, 2003, the Supervisor of
     Banks exempted the Bank from the requirement to increase the supplementary
     allowance for doubtful debts in its financial statements as at March 31,
     2003 and June 30, 2003, in respect of deviations from the debt limits of an
     individual borrower and a borrower group and in respect of deviations from
     limits in respect of financing means of control in corporate entities.

     In his letter of November 26, 2003, the Supervisor of Banks announced that
     in light of the Government's decision on the affairs of the Bank, the
     Bank's plan to reduce its activity and the commitment of the Government to
     repay the special line of credit, which was granted to the Bank by the Bank
     of Israel and which is being used by the Bank to repay its liabilities to
     its depositors, he approves the following relief with respect to
     implementation of the Proper Banking Procedures:

     A.   As from the financial statements as at September 30, 2003 and
          thereafter, the Bank is exempt from increasing the supplementary
          allowance for doubtful debts in respect of deviations from debt limits
          of an individual borrower and a borrower group and deviations from
          debt limits in respect of financing means of control in corporate
          entities, and in respect of deviations from the limit of sector
          indebtedness.

     B.   The Bank is allowed to reduce the supplementary allowance it recorded
          in respect of the deviation from the aforementioned limits in the last
          quarter of 2002.

     C.   The Bank is allowed to reduce the supplementary allowance it recorded
          in the past in respect of the deviation from indebtedness of related
          parties.

     Accordingly, in the Bank's financial statements as at December 31, 2003,
     the Bank did not record a supplementary allowance for doubtful debts in
     respect of deviations from the aforementioned limits, and the supplementary
     allowance for doubtful debts in the amount of NIS 7.5 million that was
     included in the financial statements of the Bank on December 31, 2002 and
     thereafter, in respect of the deviation from these limits, was cancelled in
     the third quarter of 2003.

     It is noted that if the Supervisor of Banks had not granted the exemption,
     the Bank would have been required to record a supplementary allowance in
     significant amounts in respect of these deviations, which would have had a
     material impact on its financial results for those periods. In addition,
     the adjustment of the supplementary allowance for changes occurring from
     time to time in the volume of the deviations would have impacted on the
     financial results of the Bank in the subsequent reporting periods.

     The aggregate balance of the general allowance and the supplementary
     allowance for doubtful debts in accordance with the directives of the Bank
     of Israel, as at December 31, 2007, constitutes 5.94% of the credit to the
     public risk, which includes credit risk and off-balance sheet credit risk
     as calculated for purposes of individual borrower and group of borrowers
     limitations (December 31, 2006 - 4.82%).


                                     F - 17`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     G.   ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)

     The Bank's policy is not to write-off doubtful debts until all collection
     efforts, with respect thereto, have been exhausted. If Management concludes
     that recovery of a debt is no longer possible, then cases involving
     significant amounts are brought before the authorized bodies of the Bank,
     which decide upon their being written-off.

     H.   FIXED ASSETS

     Fixed assets are stated at cost net of accumulated depreciation.
     Depreciation is calculated using the "straight-line" method, at rates
     deemed adequate to write off the assets over their estimated useful lives.

     I.   CONTINGENT LIABILITIES

     The accounting treatment of contingent legal claims is based on an opinion
     received by management of the Bank from its legal counsel, on which
     management of the Bank relies, which provides the probability of occurrence
     of the exposure to risk relating to contingent claims. The claims were
     classified in accordance with the probability ranges of occurrence of the
     exposure to risk as follows:

     1)   Probable - when the probability is over 70%.

     2)   Reasonably possible - when the probability is over 20% and less than
          or equal to 70%.

     3)   Remote - when the probability is less than or equal to 20%.

     Only in rare cases is a banking institution allowed to state in the
     financial statements that in the opinion of the bank's management, based
     upon its legal counsel, it is unable to evaluate the probability of
     realization of the exposure to risk in respect of a claim for which a
     petition was filed to have the claim certified as a class action, this in
     the four financial statements that are published after the filing of the
     petition. The Bank has provided disclosure with respect to material legal
     proceedings pending against the Bank. Note 21D provides disclosure
     regarding contingencies in respect of which the risk of occurrence of the
     exposure is not remote and for which no provision was made. The Bank's
     practice is to include in its financial statements appropriate provisions
     in respect of claims which in the opinion of management of the Bank will
     not be rejected or cancelled and the risk of their occurrence is probable.

     J.   BASIS OF RECOGNITION OF INCOME AND EXPENSES

     (1)  Income and expenses are recognized on the accrual basis.

     (2)  As to the basis of recognition of income and expenses with respect to
          trading securities and derivative financial instruments defined as
          other transactions, see F and L, respectively.


                                     F - 18`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     K.   EMPLOYEE RIGHTS

     Appropriate provisions cover the Bank's liability for payment of severance
     pay and other benefits to its employees, according to labor agreements.

     In December 2002, the Bank, the General Federation of Labor and the Bank's
     employee committee signed a special collective agreement regarding a
     reduction in the number of the Bank's employees. According to this
     agreement some of the employees are entitled to a pension as from the date
     of termination of their employment. In respect of such employees, the Bank
     signed an agreement with a pension fund which arranges the payment of the
     pensions. In accordance with the agreements, on the date on which the
     employment of each such employee is terminated, the Bank deposits with the
     pension fund the amount required in order to purchase the pension rights
     for the employee. The Bank included a provision in respect of the
     anticipated cost of acquisition of the pension rights, as calculated by a
     pension consultant.

     L.   DERIVATIVE FINANCIAL INSTRUMENTS

     The Bank implements the directives of the Supervisor of Banks regarding
     derivative financial instruments and hedging activities. The directives are
     based on the principles stipulated in U.S. Accounting Standard FAS 133. In
     accordance with these directives, the Bank presents all the derivative
     instruments, including certain derivative instruments embedded in other
     contracts, as assets or liabilities in the balance sheet and measures them
     according to fair value. The change in the fair value of a derivative
     instrument is recorded in the statement of income or included as a separate
     component in the shareholders' equity, according to the designated purpose
     of the instrument.

     M.   OFF-SETTING OF FINANCIAL INSTRUMENTS

     Pursuant to the directives of the Supervisor of Banks, amounts of
     designated deposits, the repayment of which to the depositor is contingent
     on the collection of the loans granted therefrom, are offset against the
     amounts of the related loans and, therefore, are not reflected in the
     balance sheet. Income earned from such collection-based loan operations is
     classified as operating commissions.

     In accordance with the instructions of the Supervisor of Banks, assets and
     liabilities in respect of financial instruments with the same counter party
     are set-off against one another and presented net in the balance sheet when
     the following cumulative conditions are fulfilled:

     (1)  In respect of such liabilities the Bank has the legal right to enforce
          the set-off of the liabilities from the assets.

     (2)  The Bank intends to pay the liabilities and realize the assets on a
          net basis or simultaneously.


                                     F - 19`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     N.   TAXES ON INCOME

     The provision for taxes on the income of the Bank, which is classified as a
     financial institution for value-added tax purposes, includes a provision
     for profit tax leviable on the Bank's income under the provisions of the
     Value-Added Tax Law. Value-added tax on payroll ("Payroll Tax"), which is
     leviable on the payroll costs of financial institutions, is reflected in
     the statement of income under the "payroll and related expenses" item. In
     the period between 2002 and 2006, the payroll and related expenses item was
     not charged with any expense relating to payroll tax due to losses for
     profit tax purposes.

     O.   STATEMENT OF CASH FLOWS

     Cash flows from activity in assets and liabilities are presented net,
     except for securities, fixed assets, and capital notes. "Cash", for
     purposes of the cash flow statement, includes cash balances and cash
     deposits with banks for an initial period not exceeding three months.

     P.   USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires Management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     the disclosure of contingent assets and liabilities as at the date of the
     financial statements and the reported amounts of income and expenses during
     the reported period. Actual results may differ from such estimates.

     Q.   NET INCOME (LOSS) PER SHARE

     Commencing on January 1, 2006, the Bank implemented Accounting Standard No.
     21 "Income Per Share" of the Israel Accounting Standards Board. This
     standard, which is based on International Accounting Standard No. 33,
     replaces Opinion No. 55 of the Institute of Certified Public Accountants in
     Israel on this issue and sets out new rules regarding the calculation of
     income per share and the presentation thereof in the financial statements.
     According to the provisions of the Standard, the Bank computes income per
     share in respect of income from continuing operations allocated to ordinary
     shareholders. Income per share is computed by dividing the income or loss
     allocated solely to the ordinary shareholders, by the weighted average of
     the number of ordinary shares in circulation during the reported period. In
     the past, income per share was computed in relation to an amount which
     equals US$1 of the par value of the shares, according to the basic exchange
     rate to which they are linked. Comparative amounts of income per share in
     these financial statements were restated in respect of the retroactive
     implementation of the calculation provisions of the new standard.

     R.   IMPAIRMENT OF ASSETS

     Accounting Standard No. 15, "Impairment in value of assets" stipulates the
     procedures to be implemented by the corporation in order to ensure that its
     assets in the balance sheet are not presented at amounts higher than their
     recoverable value. Such value is the higher of the net selling price and
     the present value of the estimated future cash flows expected to be
     generated from the use and disposal of the asset. The Standard also
     stipulates principles of presentation and disclosure regarding assets which
     have been impaired.


                                     F - 20`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     S.   BUSINESS SEGMENTS

     In accordance with an approval received from Bank of Israel, the Bank is
     not required to report according to business segments.

     T.   DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
          PRIOR TO THEIR APPLICATION

     1.   In July 2006, the Israel Accounting Standards Board issued Accounting
          Standard No. 29, "Adoption of International Financial Reporting
          Standards ("IFRS")" (hereinafter - the "Standard"). The Standard
          provides that entities subject to the Securities Law - 1968 that are
          required to report according to the regulations of this law, are to
          prepare their financial statements for periods beginning as from
          January 1, 2008 according to IFRS. This does not apply to banking
          institutions, the financial statements of which are presented in
          accordance with the directives and guidelines of the Supervisor of
          Banks.

          In addressing the manner in which the Standard is to be implemented by
          banking institutions, the Supervisor of Banks notified the banking
          institutions that:

          a.   He intends on regularly issuing directives for the implementation
               of Israeli standards issued by the Israel Accounting Standards
               Board, which are based on IFRS that do not relate to the core
               banking business.

          b.   In the second half of 2009 he will render his decision regarding
               the date of implementation of IFRS that relate to the core
               banking business, taking into account the results of the process
               of adoption of these standards in Israel on the one hand and the
               progress of the process of convergence of IFRS and U.S. standards
               on the other.

          c.   Therefore, in addressing the core banking business, the financial
               statements of a banking institution presented in accordance with
               the directives and guidelines of the Supervisor of Banks will
               continue to be presented on the basis of U.S. standards that were
               set out in the public reporting directives.

     2.   In December 2006, the Israel Accounting Standards Board published
          Accounting Standard No. 23, "The Accounting Treatment of Transactions
          between an Entity and Its Controlling Shareholder" (hereinafter - the
          "Standard"). The Standard replaces the Securities Regulations
          (Financial Statement Presentation of Transactions between a
          Corporation and its Controlling Shareholder) - 1996 as adopted in the
          public reporting directives of the Supervisor of Banks. The Standard
          stipulates that assets and liabilities that were the subject of a
          transaction between an entity and its controlling interest shall be
          measured at the date of the transaction at fair value and that the
          difference between the fair value and the proceeds of the transaction
          are to be carried to shareholders' equity. A debit difference is in
          essence a dividend, thereby reducing retained earnings. A credit
          difference is in essence an owners' investment and shall be presented
          as a separate item in shareholders' equity entitled "Capital reserve
          from a transaction between the entity and its controlling
          shareholder".


                                     F - 21`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     T.   DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
          PRIOR TO THEIR APPLICATION (CONT'D)

          The Standard discusses three issues relating to transactions between
          an entity and its controlling interest, as follows: the transfer of an
          asset from the controlling shareholder to the entity or alternatively,
          the transfer of an asset from the entity to the controlling
          shareholder; a controlling shareholder's assumption of a liability, in
          whole or in part, to a third party on behalf of the entity, the
          indemnification of the entity by a controlling shareholder in respect
          of an expense, or the waiver by the controlling shareholder to the
          entity of a debt, in whole or in part, due to the shareholder from the
          entity; and loans granted to the controlling shareholder or received
          from the controlling shareholder. In addition, the Standard stipulates
          the disclosure that must be made in the financial statements in
          connection with transactions between the entity and its controlling
          shareholder during the period.

          The Standard applies to transactions between an entity and its
          controlling shareholder that were made after January 1, 2007, as well
          as to loans granted to or received from a controlling shareholder
          prior to the effective date of the Standard, as of the effective date.

          As of the date of the release of the financial statements, the
          Supervisor of Banks has not yet issued a directive regarding the
          manner of adoption of the Standard by banking institutions, if at all.

     3.   A directive on the issue of measurement and disclosure of impaired
          debts, credit risk and the allowance for credit losses - On December
          31, 2007, the Supervisor of Banks issued a draft directive on the
          issue of "Measurement and Disclosure of Impaired Debts, Credit Risk
          and the Allowance for Credit Losses". The directive was raised for
          discussion at the Advisory Committee of the Bank of Israel regarding
          banking matters.

          The directive is based on accounting principles accepted among U.S.
          banks. The principles behind the draft directive constitute a
          significant change over the current directives regarding the
          classification of problematic debts and the measurement of allowances
          for doubtful debts in respect of credit losses. The new directive sets
          out explicit rules in connection with the classification of impaired
          debts, credit risk, measurement of allowances for credit losses, the
          accounting write-off of debts and the recognition of income in respect
          of debts. In addition, the new guidelines set out explicit
          requirements for maintaining a systematic process for setting up
          provisions for credit losses and preservation of documentation that
          supports the process and the allowances.

          The new directive is supposed to go into effect commencing with the
          financial statements as of January 1, 2010. The directive set out
          transition provisions for implementation in the annual financial
          statements for 2007 and in the financial statements to be issued
          during 2008 and 2009. The transition provisions for the annual
          financial statements of 2007 relate to setting out the major features
          of the directive, information regarding the preparations of a banking
          entity to implement the directive and data in respect of the expected
          impact (direction and scope) of initial implementation of the
          directive on shareholders' equity as of January 1, 2010. The
          transition provision for the annual financial statements of 2009
          includes, in addition to the above, the requirement to provide
          quantitative information regarding the adoption of the new guidelines
          on:

          -    The recorded balance of credit debt as of January 1, 2010, with a
               breakdown into its various components.


                                     F - 22`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)

     T.   DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
          PRIOR TO THEIR APPLICATION (CONT'D)

          -    The balance of the provision for credit losses as of January 1,
               2010, with a breakdown into its various components.

          -    The balance included in the required disclosure for the report of
               the board of directors as of January 1, 2010.

          -    The balance of the provision for credit losses in respect of
               off-balance sheet credit instruments as of January 1, 2010.

          -    The balance of current or deferred taxes receivable or payable in
               respect of the provision for credit losses and accounting
               write-offs as of January 1, 2010.

          -    The impact on shareholders' equity as of January 1, 2010.

     In its letter dated August 12, 2007, the Bank of Israel notified the Bank
     that the Bank is entitled not to take steps toward implementation of this
     directive.

NOTE 2 - CASH AND DEPOSITS WITH BANKS

                                                DECEMBER 31 DECEMBER 31
                                                    2007      2006
                                                  -------   -------
                                                  REPORTED  REPORTED
                                                  AMOUNTS   AMOUNTS
                                                  -------   -------
                                                    NIS       NIS
                                                 MILLIONS   MILLIONS
                                                  -------   -------


Cash and deposits with Bank of Israel                 5.9       8.1
Deposits with commercial banks (1)                   24.1      50.6
Deposits in special banking institutions              3.8       7.7
                                                  -------   -------

Total                                                33.8      66.4
                                                  =======   =======

Including cash, deposits with Bank of Israel
 and with banks for an initial period not
 exceeding three months                              30.0      53.4
                                                  =======   =======

     (1)  As to the pledge on deposits with commercial banks - see Note 17
          below.


                                     F - 23`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 3 - SECURITIES

     A.   COMPOSITION

                                                       DECEMBER 31, 2007
                             -------------------------------------------------------------------------
                                                           NON-REALIZED      NON-REALIZED
                                                            GAINS FROM        LOSSES FROM
                             CARRYING       ADJUSTED     ADJUSTMENTS TO     ADJUSTMENTS TO      FAIR
                              VALUE         VALUE (1)      FAIR VALUE         FAIR VALUE      VALUE (2)
                             -------         -------         -------            -------        -------
                                                        REPORTED AMOUNTS
                             -------------------------------------------------------------------------
                                                          NIS MILLIONS
                             -------------------------------------------------------------------------

AVAILABLE-FOR-
 SALE SECURITIES

Other debentures                 0.5             0.5               -                  -             0.5
Shares of others                45.8            36.3             9.5                  -            45.8 (3)
                             -------         -------         -------            -------         -------
Total available-
 for-sale securities            46.3            36.8             9.5 (4)              -            46.3
                             -------         -------         -------            -------         -------

Total securities                46.3            36.8             9.5                  -            46.3 (3)
                             =======         =======         =======            =======         =======

                                                       DECEMBER 31, 2006
                             -------------------------------------------------------------------------
                                                          NON-REALIZED       NON-REALIZED
                                                           GAINS FROM        LOSSES FROM
                             CARRYING        ADJUSTED     ADJUSTMENTS TO     ADJUSTMENTS TO       FAIR
                               VALUE         VALUE (1)      FAIR VALUE        FAIR VALUE         VALUE (2)
                             -------         -------         -------            -------         -------
                                                        REPORTED AMOUNTS
                             -------------------------------------------------------------------------
                                                          NIS MILLIONS
                             -------------------------------------------------------------------------

AVAILABLE-FOR-
 SALE SECURITIES

Other debentures                 0.7             0.7               -                  -             0.7
Shares of others                49.7            41.0             8.7                  -            49.7 (3)
                             -------         -------         -------            -------         -------
Total available-
 for-sale securities            50.4            41.7             8.7 (4)              -            50.4
                             -------         -------         -------            -------         -------
Total securities                50.4            41.7             8.7                  -            50.4 (3)
                             =======         =======         =======            =======         =======

     (1)  In the case of shares - cost less provision for impairment in value,
          where required.

     (2)  Fair value data are based, generally, on stock market prices, which do
          not necessarily reflect the price which would be received on the sale
          of a large quantity of shares.

     (3)  Includes shares, the fair value of which is not readily determinable,
          which are stated at cost in the amount of NIS 11.8 million (December
          31, 2006 - NIS 16.7 million).

     (4)  Included in shareholders' equity in the category "adjustment from
          presentation of available-for-sale securities at fair value".

     B.   See Note 4E regarding the classification of a customer's debt to the
          securities item.

     NOTE: For detail regarding results of investments in debentures - see Note
          23E, and for detail regarding results of investments in shares - see
          Note 25.


                                     F - 24`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (1)

     A.   COMPOSITION OF CREDIT

                                                                 DECEMBER 31      DECEMBER 31
                                                                    2007             2006
                                                                   -------         -------
                                                                      REPORTED AMOUNTS
                                                                   -----------------------
                                                                NIS MILLIONS    NIS MILLIONS
                                                                   -------         -------

Credit                                                             5,566.3         6,570.8
General and supplementary allowances for doubtful debts(1)            45.2            51.7
                                                                   -------         -------

Total                                                              5,521.1         6,519.1
                                                                   =======         =======

     B.   CREDIT TO THE PUBLIC INCLUDES:

     1.   CREDIT TO PROBLEMATIC BORROWERS (2) WHICH ARE NOT INCLUDED IN THE
          AGRICULTURAL SECTOR AND ARE NOT LOCAL AUTHORITIES

                                                                                     DECEMBER 31    DECEMBER 31
                                                                                       2007            2006
                                                                                      -------         -------
                                                                                          REPORTED AMOUNTS
                                                                                      -----------------------
                                                                                    NIS MILLIONS    NIS MILLIONS
                                                                                      -------         -------
a.       Non-income bearing credit to problematic borrowers -
         Unlinked Israeli currency                                                       41.1           123.7
         Israeli currency linked to the CPI                                               3.9             7.0
         Denominated in or linked to foreign currency                                     3.5            10.9
                                                                                      -------         -------
                                                                                         48.5           141.6
                                                                                      =======         =======
b.       Credit restructured during the year, without waiver of income -
         Unlinked Israeli currency                                                       23.3            21.7
         Israeli currency linked to the CPI                                               1.1            38.2
         Denominated in or linked to foreign currency                                     1.0             5.1

c.       Credit to borrowers regarding which there is an as-yet
         unimplemented Management decision to restructure
         their debt                                                                       9.3            26.5

d.       Credit temporarily in arrears                                                    8.7            14.5
         Interest income recorded in respect thereof                                      0.7             0.4

e.       Credit under special supervision                                               139.8           156.2

     (1)  The specific allowance for doubtful debts was deducted from the
          relevant credit categories.

     (2)  The balance of problematic debts, less credit covered by collateral
          that is deductible for purposes of individual borrower and group of
          borrowers limitations.


                                     F - 25`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     B.   CREDIT TO THE PUBLIC INCLUDES: (CONT'D)

     2.   CREDIT TO THE AGRICULTURAL SECTOR

     In 1991, the Bank joined the Kibbutz Debt Arrangement, signed in 1989 by
     the banks, the Government and the Kibbutz movements. This Arrangement
     includes the implementation of a rehabilitation program prepared by the
     borrowers, the waiver by the Bank of part of the loans granted by it,
     receipt of Government grants designated for the early repayment of a part
     of the Kibbutz debts, and a rescheduling of another portion of the debts
     for a period of up to 25 years, in respect of which the Government provided
     less costly financing which leaves the Bank with a margin of 2% p.a.

     During 1991 through 1996, the Bank received from the Government the grants
     under the Kibbutz Arrangement of 1989, designated for the early repayment
     of the Kibbutz debts, as noted above, and reduced the outstanding Kibbutz
     debt accordingly. Furthermore, the Bank also received from the Government,
     the deposits required for the rescheduling of part of the Kibbutz debts in
     accordance with the Bank's proportionate share of the overall arrangement.

     In 1993, the Bank commenced the implementation of the Arrangement at the
     individual Kibbutz level for some Kibbutzim, reflecting the results thereof
     on its books.

     During 1996, a supplementary arrangement was signed by the banks, the
     Government and the Kibbutz movements for the arrangement of the debts of
     the Kibbutzim. In April 1999, an amendment to the supplementary arrangement
     was signed by the said parties. The main principles of the supplementary
     arrangement, including the amendment thereto, are as follows:

     -    The arrangement relates to a part of the Kibbutzim and organizations
          included in the first arrangement, in respect thereof it has become
          evident that after full execution of the financial arrangement
          contemplated by the first arrangement, debts remain regarding which
          the repayment ability envisioned, with respect thereto, under that
          agreement, does not allow them to fulfill their obligations (the
          "balloon" debt). Such "balloon" debt is to be written off.

     -    In respect of most of the "balloon" debts, the writing-off shall be
          covered as to 65% from bank sources and as to 35% from Government
          sources.

     -    Kibbutzim will assign part of their rights in land to the Israel Lands
          Administration. Upon each Kibbutz joining the arrangement, its land,
          which was found in the land survey to have an alternative value
          compared to agricultural use, will revert to the Israel Lands
          Administration, without attaching to it an obligatory price tag. A
          caveat is to be registered in favor of the banks with respect to such
          land. In the future, when the land is sold, part of the net proceeds
          to be received, which represents the value of the original rights of
          the Kibbutz in the land, will be paid over to the banks and the
          Government in proportion to their share in the writing-off of the
          debt, as stated above. The funds transferred by the Government for the
          purpose of the writing-off of the debts of each Kibbutz, as stated
          above, are conditional upon the consent of each individual Kibbutz to
          the said arrangement and its subsequent joining as a party to the
          supplementary arrangement, including the reversion of the land to the
          Israel Lands Administration. The abovementioned payments will be made
          in five annual installments: the first - an immediate payment and the
          remaining payments to be linked to the CPI with annual interest at a
          rate of 1.5%.

          The Bank set up a provision for doubtful debts in respect of all of
          the amounts it believes will be required taking the above into
          consideration.


                                     F - 26`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     B.   CREDIT TO THE PUBLIC INCLUDES: (CONT'D)

     2.   CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)

          During 2007, principles were formulated regarding the transfer of the
          receipts that the Kibbutzim are supposed to receive in respect of the
          sale of their holdings in Tnuva on account of the repayment of their
          debts included in the Kibbutz Debt Arrangement with the banks. At the
          beginning of 2008, further to the completion of the Tnuva transaction,
          debts of Kibbutzim were repaid as part of the implementation of the
          abovementioned principles, in an amount of NIS 50 million. In
          addition, at the same date, an amount of NIS 7.5 million was received
          in account of debts written off in the past, which will be included in
          the Bank's income for the first quarter of 2008.

          Composition of the credit to the agricultural sector:

                                                                   DECEMBER 31        DECEMBER 31
                                                                      2007               2006
                                                                     -------         -------
                                                                        REPORTED AMOUNTS
                                                                     -----------------------
                                                                  NIS MILLIONS     NIS MILLIONS
                                                                     -------         -------

Kibbutzim (including regional enterprises and organizations)           168.3           202.5
Moshavim                                                                 5.5             6.4
                                                                     -------         -------

Total credit for kibbutzim and moshavim                                173.8           208.9
                                                                     =======         =======


                                     F - 27`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     B.   CREDIT TO THE PUBLIC INCLUDES: (CONT'D)

     2.   CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)

     THE CREDIT (1) TO THE AGRICULTURAL SECTOR (2) INCLUDES:

                                                                         DECEMBER 31  DECEMBER 31
                                                                            2007         2006
                                                                          -------       -------
                                                                             REPORTED AMOUNTS
                                                                          ---------------------
                                                                        NIS MILLIONS  NIS MILLIONS
                                                                          -------       -------

a.   Non-income bearing loans to problematic borrowers -
     Unlinked Israeli currency                                                1.2           1.3
     Denominated in or linked to foreign currency                             1.0             -
     Israeli currency linked to the CPI                                      19.0          28.3
                                                                          -------       -------
                                                                             21.2          29.6
                                                                          =======       =======
b.   Restructured credit to borrowers-

     1.   Credit restructured during the current
          year with waiver of income -
          Israeli currency linked to the CPI                                  4.8           6.8
          Average repayment period (years)                                    3.0           3.5
          Expected interest margin from the credit                            2.0%          2.0%
          Unlinked Israeli currency                                           0.9             -
          Average repayment period (years)                                    0.5             -
          Weighted interest margin in respect of                              3.0%            -

     2.   Credit restructured in prior years
          with waiver of income -
          Israeli currency linked to the CPI                                  0.4           2.3

c.   Credit to borrowers in respect of which
     there is an as-yet unimplemented
     management decision to restructure their debt                            8.0           0.4

d.   Credit under special supervision                                        41.9          52.3

e.   Credit not included in above credit to problematic borrowers            96.6         117.5
     Interest income recorded in the income statements in respect
     Of this credit                                                           7.1           5.2

     (1)  The balance of problematic debts less credit covered by collateral
          that is deductible for purposes of individual borrower and group of
          borrowers limitations.

     (2)  Including industrial enterprises and other organizations related to
          the Kibbutz sector.


                                     F - 28`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     B.   CREDIT TO THE PUBLIC INCLUDES: (CONT'D)

     3.   CREDIT TO LOCAL AUTHORITIES

     Following is the composition of credit to local authorities:

                                                                                                 DECEMBER 31  DECEMBER 31
                                                                                                   2007         2006
                                                                                                 -------       ---------
                                                                                                    REPORTED AMOUNTS
                                                                                                 -----------------------
                                                                                                NIS MILLIONS  NIS MILLIONS
                                                                                                 -------         -------

Balance of credit to local authorities at balance sheet date                                        4.0             6.5

CREDIT (1) GRANTED TO LOCAL AUTHORITIES INCLUDES:

 b.  Credit not included in above credit to problematic borrowers                                   4.0             6.5
     Interest income recorded in income statements with respect of such credit                      0.4             0.5

     (1)  The balance of problematic debts less credit covered by collateral
          that is deductible for purposes of individual borrower and group of
          borrowers limitations.


                                     F - 29`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     C.   ALLOWANCE FOR DOUBTFUL DEBTS

                                                                             2007
                                                          -----------------------------------------
                                                          SPECIFIC     SUPPLEMENTARY
                                                        ALLOWANCE (1)   ALLOWANCE (2)        TOTAL
                                                          -------          -------          -------
                                                                      REPORTED AMOUNTS
                                                          -----------------------------------------
                                                                        NIS MILLIONS
                                                          -----------------------------------------

Balance of allowance at beginning of year                   658.3             51.7            710.0
                                                          -------          -------          -------

Current allowances                                           13.1                -             13.1
Reduction in allowances                                     (19.6)            (6.5)           (26.1)
Collection of debts written-off in previous years            (0.8)               -             (0.8)
                                                          -------          -------          -------
Amount carried to the income statement                       (7.3)            (6.5)           (13.8)
                                                          -------          -------          -------

Debts written-off                                           (79.2)               -            (79.2)
                                                          -------          -------          -------

Balance of allowance at end of year                         572.6             45.2            617.8
                                                          =======          =======          =======

Amount of allowance not deducted from credit
to public                                                     1.3                -              1.3
                                                          -------          -------          -------

                                                                             2006
                                                          -----------------------------------------
                                                          SPECIFIC     SUPPLEMENTARY
                                                         ALLOWANCE (1)  ALLOWANCE (2)        TOTAL
                                                          -------          -------          -------
                                                                      REPORTED AMOUNTS
                                                          -----------------------------------------
                                                                        NIS MILLIONS
                                                          -----------------------------------------

Balance of allowance at beginning of year                   675.6             57.6            733.2
                                                          -------          -------          -------

Current allowances                                           40.8                -             40.8
Reduction in allowances                                     (12.0)            (5.9)           (17.9)
Collection of debts written-off in previous years            (1.2)               -             (1.2)
                                                          -------          -------          -------
Amount carried to the income statement                       27.6             (5.9)            21.7
                                                          -------          -------          -------

Debts written-off                                           (46.1)               -            (46.1)
                                                          -------          -------          -------

Balance of allowance at end of year                         658.3             51.7            710.0
                                                          =======          =======          =======

Amount of allowance not deducted from credit
to public                                                     1.9                -              1.9
                                                          -------          -------          -------


                                     F - 30`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     C.   ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)

                                                                             2005
                                                          -----------------------------------------
                                                          SPECIFIC     SUPPLEMENTARY
                                                         ALLOWANCE (1)  ALLOWANCE (2)        TOTAL
                                                          -------          -------          -------
                                                                      REPORTED AMOUNTS
                                                          -----------------------------------------
                                                                        NIS MILLIONS
                                                          -----------------------------------------

Balance of allowance at beginning of year                   714.4             69.6            784.0
                                                          -------          -------          -------

Current allowances                                           82.9                -             82.9
Reduction in allowances                                     (26.4)           (12.0)           (38.4)
Collection of debts written-off in previous years            (0.3)               -             (0.3)
                                                          -------          -------          -------
Amount carried to the income statement                       56.2            (12.0)            44.2
                                                          -------          -------          -------

Debts written-off                                           (95.3)               -            (95.3)
                                                          -------          -------          -------

Balance of allowance at end of year                         675.6             57.6            733.2
                                                          =======          =======          =======

Amount of allowance not deducted from credit
 to public                                                    1.0                -              1.0
                                                          -------          -------          -------

     (1)  Not including allowance for interest on non-income bearing loans.

     (2)  Including a general allowance in accordance with Bank of Israel
          directives in the total amount of NIS 38.9 million (as at December 31,
          2006 and December 31, 2005 - NIS 38.9 million).


                                     F - 31`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     D.   CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
          SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
          BORROWER

                                                  DECEMBER 31, 2007
                                     ---------------------------------------------
                                    NUMBER OF                              CREDIT
                                   BORROWERS (3)       CREDIT (1)          RISK (2)
                                     -------            -------            -------
AMOUNT OF CREDIT PER BORROWER                       REPORTED AMOUNTS
---------------------------------    ---------------------------------------------
NIS THOUSANDS                                          NIS MILLIONS
---------------------------------    ---------------------------------------------

Up to 10                                  33                0.2                  -
From 10        to 20                      19                0.3                  -
From 20        to 40                      15                0.4                  -
From 40        to 80                      17                0.9                0.1
From 80        to 150                     26                2.5                0.2
From 150       to 300                     49                9.9                1.0
From 300       to 600                     57               22.4                1.7
From 600       to 1,200                   74               61.4                2.7
From 1,200     to 2,000                   43               59.7                7.6
From 2,000     to 4,000                   37               97.0               13.1
From 4,000     to 8,000                   13               66.8                5.3
From 8,000     to 20,000                  10               84.5               32.8
From 20,000    to 40,000                   2               38.2               28.0
From 40,000    to 200,000                  3              158.9               71.1
From 3,200,000 and up                      1            4,963.2 (4)              -
                                     -------            -------            -------

                                         399            5,566.3              163.6
                                     =======            =======            =======


     (1)  The credit is net of the specific allowances for doubtful debts.

     (2)  Credit risk relating to off-balance sheet financial instruments as
          computed for the purpose of individual borrower debt limitations.

     (3)  The number of borrowers is based on the total credit and credit risk.
          Borrowers that constitute one legal entity were grouped together.

     (4)  Credit secured by a guarantee of the State.


                                     F - 32`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     D.   CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
          SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
          BORROWER (CONT'D)

                                                 DECEMBER 31, 2006
                                    ------------------------------------------
                                   NUMBER OF                           CREDIT
                                  BORROWERS (3)       CREDIT (1)       RISK (2)
                                    -------            -------         -------
AMOUNT OF CREDIT PER BORROWER                     REPORTED AMOUNTS
--------------------------------    ------------------------------------------
NIS THOUSANDS                                       NIS MILLIONS
--------------------------------    ------------------------------------------

Up to 10                                 98             0.6                  -
From 10        to 20                     42             0.6                  -
From 20        to 40                     34             1.0                  -
From 40        to 80                     30             1.4                0.2
From 80        to 150                    33             3.5                0.2
From 150       to 300                    56            11.2                1.5
From 300       to 600                    65            25.2                0.8
From 600       to 1,200                  81            68.3                2.3
From 1,200     to 2,000                  53            76.0                6.5
From 2,000     to 4,000                  53           141.8               10.9
From 4,000     to 8,000                  22           110.9                9.5
From 8,000     to 20,000                 17           175.2               38.0
From 20,000    to 40,000                  5           112.6               29.6
From 40,000    to 200,000                 3           171.5               84.7
From 3,200,000 and up                     1         5,671.0 (4)              -
                                    -------         -------            -------

                                        593         6,570.8              184.2
                                    =======         =======            =======

     (1)  The credit is net of the specific allowances for doubtful debts.

     (2)  Credit risk relating to off-balance sheet financial instruments as
          computed for the purpose of individual borrower debt limitations.

     (3)  The number of borrowers is based on the total credit and credit risk.
          Borrowers that constitute one legal entity were grouped together.

     (4)  Credit secured by a guarantee of the State.

     E.   CUSTOMER'S DEBT RECLASSIFIED TO THE "SECURITIES" ITEM

     In his letter of July 15, 2003, regarding a debt of a customer in respect
     of which a receiver was appointed to realize shares pledged in favor of the
     Bank, the Supervisor of Banks stated that it is no longer proper to treat
     the outstanding balance of the debt, due to be repaid through the
     realization of the said shares by the receiver, as a credit item.
     Accordingly, the balance of the debt was reclassified on June 30, 2003, and
     stated as shares included in the item "Available-for-sale securities",
     presented at their market value at that date.

     Beginning with June 30, 2003, these shares are included in the "Securities"
     item and from that date the changes in the market value of these shares are
     recorded in a capital reserve.

     In view of the inability of the customer to honor his debt, the Bank in the
     past classified this debt as non-income bearing and recorded the allowances
     required from such classification. The supplementary allowance for doubtful
     debts recorded in respect of the classification of the debt as non-income
     bearing was cancelled in 2005.


                                     F - 33`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 5 - CREDIT TO GOVERNMENTS

                                                         DECEMBER 31      DECEMBER 31
                                                            2007             2006
                                                           -------         -------
                                                          REPORTED        REPORTED
                                                           AMOUNTS         AMOUNTS
                                                           -------         -------
                                                        NIS MILLIONS    NIS MILLIONS
                                                           -------         -------

Deposits in foreign currency out of loans received               -             6.8
Amounts receivable in connection with exchange
rate insurance of capital notes                               20.2            24.9
Credit to foreign governments                                    -             2.0
Other credit                                                   4.5             7.8
                                                           -------         -------

Total credit to governments                                   24.7            41.5
                                                           =======         =======

NOTE 6 - FIXED ASSETS

     A.   This item includes equipment, computers, furniture and motor vehicles
          as follows:

                                                  CHANGES DURING THE YEAR
                                   AT             ------------------------           AT
                                JANUARY 1                                        DECEMBER 31
                                  2007           ADDITIONS        DISPOSALS         2007
                                 -------          -------          -------         -------
                                                      REPORTED AMOUNTS
                                 ---------------------------------------------------------
                              NIS MILLIONS     NIS MILLIONS      NIS MILLIONS   NIS MILLIONS
                                 -------          -------          -------         -------

Cost                                57.6              0.1                -            57.7
Accumulated depreciation           (56.5)            (0.4)               -           (56.9)
                                 -------          -------          -------         -------

Net book value                       1.1             (0.3)               -             0.8
                                 =======          =======          =======         =======

     B.   The average rate of depreciation is 25% (2006 - 21%).


                                     F - 34`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 7 - OTHER ASSETS

                                                                     DECEMBER 31     DECEMBER 31
                                                                        2007            2006
                                                                      -------         -------
                                                                     REPORTED         REPORTED
                                                                      AMOUNTS          AMOUNTS
                                                                      -------         -------
                                                                   NIS MILLIONS    NIS MILLIONS
                                                                      -------         -------

Excess of income tax advances over current
provisions                                                                  -             0.1
Prepaid expenses                                                          1.1             1.6
Payroll VAT receivable                                                    2.8             5.9
Debit balances in respect of derivative financial instruments             0.5             2.1
Sundry receivables and debit balances                                     2.8             2.4
                                                                      -------         -------

Total other assets                                                        7.2            12.1
                                                                      =======         =======

NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY

                                                                    DECEMBER 31     DECEMBER 31
                                                                        2007            2006
                                                                      -------         -------
                                                                     REPORTED         REPORTED
                                                                      AMOUNTS          AMOUNTS
                                                                      -------         -------
                                                                   NIS MILLIONS    NIS MILLIONS
                                                                      -------         -------

Deposit in respect of the "C", "CC" and "CC1" non-redeemable
participating preference shares linked to the U.S. dollar (B)           324.2           315.4

Deposit in respect of the "D" redeemable non-participating
preference shares linked to the U.S. dollar (C)                         119.5           116.3

Deposit in respect of the "DD" redeemable non-participating
preference shares linked to the U.S. dollar (C)                         405.1           394.1
                                                                      -------         -------

Total perpetual deposits with the Treasury                              848.8           825.8
                                                                      =======         =======


                                     F - 35`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)

     A.   On May 6, 1996, an agreement was signed between the Bank and the
          Treasury of the State of Israel regarding changes in the method of
          computing the linkage on perpetual deposits, which the Bank had
          deposited with the Israeli Treasury with respect to the Bank's
          preference shares (C, CC, CC1, D, and DD).

          Until the signing of the agreement the aforementioned deposits were
          linked to the exchange rate of the dollar. In addition, the deposits
          bear dollar-linked interest at a rate, which, after the payment of VAT
          on profit imposed on the Bank's income, leaves the Bank with an amount
          comprising net interest at a rate of 7.5% per annum, the same as the
          dividend the Bank used to pay on the aforementioned preference shares.
          Pursuant to an Order of the Income Tax Authorities, the interest and
          linkage differentials paid on the deposits are exempt from tax, except
          for VAT on profit on the interest. The deposits will be repaid to the
          Bank at the time of the redemption of the relevant shares or upon
          liquidation of the Bank.

          Pursuant to the deposit agreements, the aforementioned interest will
          be paid to the Bank on the payment dates of the dividends on the
          aforementioned preference shares. According to the agreement signed on
          May 6, 1996, the deposits have become, in effect, linked to the CPI,
          with retroactive effect from October 1, 1987. However, in no case
          shall their amount be less than their dollar value as computed prior
          to the date of the agreement. Namely, the linkage on the deposits as
          from October 1, 1987 is based on the higher of the CPI or the dollar.
          The interest continues to be computed based on a dollar calculation.

          These deposit agreements do not explicitly establish the rule as to
          the interest on the perpetual deposits in the period during which the
          Bank is prevented from distributing the aforementioned dividends on
          the aforementioned preference shares, and whether the interest will
          accrue and be paid when the Bank pays the accrued preferred dividends
          in arrears or upon liquidation. The Bank's Board of Directors reached
          the conclusion that the interest, which is not claimed due to the
          non-payment of the dividend, would accrue to the Bank's credit and,
          accordingly, upon liquidation, it would become part of the liquidation
          assets. On August 5, 2007, the Tel Aviv District Court rendered a
          ruling on the originating motion filed by the Bank, in which it
          rejected the position of the Bank and stipulated that as long as a
          dividend is not distributed on the Bank's preference shares, no
          interest accrues on the perpetual deposits with the Treasury. The
          amount of the accrued interest, which has not yet been drawn, totals
          NIS 185.4 million as of December 31, 2007 (NIS 167.0 million as at
          December 31, 2006), and is not recorded in the financial statements of
          the Bank. This amount is equal to the amount of the accrued dividend
          in arrears, which is also not recorded in the financial statements.
          See Note 16E for further details regarding the discontinued
          distribution of dividend and the requests made to the Ministry of
          Finance and the Government Companies Authority with respect to the
          above matter as well as regarding the legal proceedings being held on
          this matter.


                                     F - 36`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)

          Concurrent with the signing of the above-mentioned agreement, the
          Bank's Articles of Association were amended in May 1996. According to
          the amendment, an ordinary "B1" share (currently held by the State of
          Israel) was separated from all of the ordinary "B" shares. The
          difference deriving from the change in the method of calculating the
          revaluation of the deposit (should such difference exist) shall be
          paid, upon liquidation of the Bank to the holder of the "B1" share.
          However, the right attached to the ordinary "B1" share ranks after the
          settlement in full of all amounts due in the present and future to
          creditors of the Bank, and after repayment of the paid-up share
          capital to the holders of the Bank's preferred ordinary shares,
          ordinary "A" shares and ordinary "B" shares and after repayment of the
          paid-up share capital, including linkage differentials, to the holders
          of the Bank's linked preferred shares of the "C", "CC", "CC1", "D" and
          "DD" classes and payment of the cumulative preferred dividends in
          arrears to these preferred shareholders and to ordinary shareholders.
          Further to the agreement with the Treasury, there was an increase in
          the amount of the deposits with the Treasury and a parallel increase
          in the Bank's shareholders' equity. As of the date of the signing of
          the agreement, the aforementioned increase in deposits and capital
          amounts to NIS 279.6 million. As of December 31, 2007, this difference
          amounts to NIS 402.3 million (December 31, 2006 - NIS 335.2 million).

     B.   As noted, up to May 6, 1996, the above-mentioned deposits were linked
          to the dollar. The difference which arose up to May 6, 1996, between
          the adjustment of the deposit on the basis of the dollar linkage, in
          respect of the participating, preference "C", "CC" and "CC1" shares,
          which are also dollar-linked, and the adjustment thereof to the CPI,
          was credited in the statement of changes in shareholders' equity to
          "accumulated difference on translation of dollar linked deposits."
          Further to the initial implementation of Accounting Standard No. 22,
          as at January 1, 2006, the Bank cancelled the balance of the
          accumulated difference from the dollar-linked deposit, due to the
          reclassification of the participating preference shares to a liability
          and their being measured as at that date at their dollar-linked value.

     C.   Up to May 6, 1996, the above-mentioned deposits were linked to the
          dollar. The difference which arose up to May 6, 1996, between the
          adjustment of the deposit on the basis of the dollar linkage in
          respect of the non-participating preference "D" and "DD" shares, which
          do not constitute shareholder's equity and which are also linked to
          the dollar, and the adjustment of the above-mentioned deposit to the
          CPI, was recorded in the statement of income, as was recorded the
          difference arising from the liabilities in respect of these shares. As
          a result of signing the above-mentioned agreement, differences arose
          from the date of signing between the adjustment of the deposits with
          the Treasury (linked to the higher of the CPI or the dollar), and the
          adjustment of the non-participating dollar-linked preference D and DD
          shares and the participating dollar-linked preference C, CC, and CC1
          shares. Such differences are recorded in the statement of
          shareholder's equity under "accumulated difference on translation of
          CPI linked deposits." As at December 31, 2007, the balance of this
          item amounted to NIS 402.3 million (December 31, 2006 - NIS 335.2
          million).


                                     F - 37`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 9 - DEPOSITS OF THE PUBLIC

                                     DECEMBER 31     DECEMBER 31
                                         2007            2006
                                       -------         -------
                                      REPORTED        REPORTED
                                       AMOUNTS         AMOUNTS
                                       -------         -------
                                    NIS MILLIONS    NIS MILLIONS
                                       -------         -------

On-demand deposits                        11.4            14.2
Fixed-term and other deposits             37.0            44.3
Savings deposits                           6.2             8.4
                                       -------         -------

Total deposits from the public            54.6            66.9
                                       =======         =======

NOTE 10 - DEPOSITS OF BANKS

                                                          DECEMBER 31     DECEMBER 31
                                                             2007            2006
                                                           -------         -------
                                                          REPORTED        REPORTED
                                                           AMOUNTS         AMOUNTS
                                                           -------         -------
                                                         NIS MILLIONS   NIS MILLIONS
                                                           -------         -------

Fixed-term deposits                                              -             6.8
Special line of credit from the Bank of Israel (1)           481.2           761.5
                                                           -------         -------

Total deposits of banks                                      481.2           768.3
                                                           =======         =======

     (1)  See Note 17 regarding a pledge provided as security for credit
          received from the Bank of Israel.

NOTE 11 - PERPETUAL DEPOSIT

     This deposit of the Israeli Treasury is unlinked and is convertible at any
     time, at the request of the Israeli Treasury, into ordinary "B" shares of
     the Bank, at their par value.

     The deposit is perpetual, but the Israeli Treasury has the right to demand
     its redemption in the event that the State's voting power in the Bank falls
     below 20%. The redemption would thereupon be effected in twenty-five equal
     annual installments, beginning ten years after the date of the demand for
     redemption. The Bank has agreed to issue capital notes to the State of
     Israel in place of the deposit, on identical terms and conditions.


                                     F - 38`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 12 - CAPITAL NOTES

     This series of capital notes of a par value of $ 49,976,000 bears interest
     at the rate of 7.5% per annum and was due on December 31, 1998. The terms
     of the above capital notes provide that the redemption date of notes for
     which the holders did not give notice of their intention to redeem, will be
     deferred by an additional 18 months each time. Over the last nine years,
     notes of a par value of $ 44,730,755 were redeemed. Accordingly, the
     balance of notes still outstanding as at December 31, 2007 amounts to $
     5,245,245 which constitute NIS 20.2 million (December 31, 2006 - $
     5,684,245 which constitute NIS 24.9 million). The next redemption date for
     the capital notes is June 30, 2009. The Bank is entitled to redeem the
     unredeemed capital notes at a premium of 5%. See Note 5 regarding amounts
     receivable with respect to exchange rate insurance on the capital notes.

NOTE 13 - OTHER LIABILITIES

                                                                            DECEMBER 31    DECEMBER 31
                                                                               2007            2006
                                                                             -------         -------
                                                                            REPORTED         REPORTED
                                                                             AMOUNTS         AMOUNTS
                                                                             -------         -------
                                                                          NIS MILLIONS     NIS MILLIONS
                                                                             -------         -------

Excess of provision for severance pay and pensions over
amounts funded (see Note 18)                                                    21.3            26.2

Provision for vacation pay, long-service
bonus and unutilized sick leave (see Note 18)                                    4.3             5.4

Prepaid income                                                                   0.5             1.5

Credit balances in respect of derivative financial instruments                   0.6               -

Allowance for doubtful debts in respect of an off-balance sheet item             1.3             1.9

Sundry creditors and credit balances                                            22.7            23.2
                                                                             -------         -------

Total other liabilities                                                         50.7            58.2
                                                                             =======         =======


                                     F - 39`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 14 - NON-PARTICIPATING SHARES

     A.   COMPOSITION:

                                                         DECEMBER 31     DECEMBER 31
                                                            2007             2006
                                                           -------         -------
                                                          REPORTED        REPORTED
                                                           AMOUNTS         AMOUNTS
                                                           -------         -------
                                                        NIS MILLIONS     NIS MILLIONS
                                                           -------         -------

"B" ordinary shares                                              -               -
"D" preference shares linked to the US dollar (1)             62.9            69.1
"DD" preference shares linked to the US dollar (1)           213.1           234.1
                                                           -------         -------

Total non-participating shares                               276.0           303.2
                                                           =======         =======

     (1)  See Note 8 regarding a deposit with the Israeli Treasury in respect of
          non-participating preference shares.

     B.   ADDITIONAL DATA REGARDING THE NON-PARTICIPATING SHARES AND THE
          PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)

                                                               AUTHORIZED             ISSUED AND PAID
                                                               ---------         ---------------------------
                                                                 2007              2007              2006
NUMBER                                                         ---------         ---------         ---------
OF SHARES      CLASS OF SHARES                                    NIS               NIS               NIS
-------------  ------------------------------------------      ---------         ---------         ---------

135,399         "B" ordinary shares of NIS 0.1 each             13,539.9          13,489.9          13,489.9

164,000         7.5% cumulative "D" preference
                shares of NIS 0.03 each, linked to the
                US dollar at the rate of
                $1 = NIS 0.0003, redeemable
                at a premium of 5 5/8 %
                (redemption dates will be
                determined by the Bank subject
                to approval by the Israeli Treasury)               4,920           4,904.3           4,904.3

60,000          7.5% cumulative "DD" preference
                shares of NIS 2.1 each, linked to the
                US dollar at the rate of
                $1 = NIS 0.0021 redeemable (without
                premium) (redemption dates will be
                determined by the Bank, subject to
                approval by the Israeli Treasury)                126,000         116,358.9         116,358.9
                                                               ---------         ---------         ---------

                Total shares                                   144,459.9         134,753.1         134,753.1
                                                               =========         =========         =========


                                     F - 40`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 14 - NON-PARTICIPATING SHARES (CONT'D)

     C.   For rights in dividend distributions - see Note 16D.

     D.   For cessation of dividend distributions - see Note 16E.

     E.   For rights upon liquidation - see Note 16F.

     F.   All the non-participating shares are not traded on the Tel-Aviv Stock
          Exchange.


                                     F - 41`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 15 - PARTICIPATING PREFERENCE SHARES *

     A.   COMPOSITION:

                                                          DECEMBER 31     DECEMBER 31
                                                             2007             2006
                                                            -------         -------
                                                           REPORTED         REPORTED
                                                            AMOUNTS          AMOUNTS
                                                            -------         -------
                                                         NIS MILLIONS     NIS MILLIONS
                                                            -------         -------

"C" preference shares linked to the US dollar (1)              65.4            71.8
"CC" preference shares linked to the US dollar (1)             38.4            42.3
"CC1" preference shares linked to the US dollar (1)            66.8            73.3
                                                            -------         -------

Total participating shares                                    170.6           187.4
                                                            =======         =======

     (1)  See Note 8 regarding a deposit with the Israeli Treasury in respect of
          non-participating preference shares.

     B.   ADDITIONAL DATA REGARDING THE PARTICIPATING PREFERENCE SHARES AND THE
          PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)

                                                             AUTHORIZED            ISSUED AND PAID
                                                              -------         -----------------------
                                                                2007            2007           2006
NUMBER                                                        -------         -------         -------
OF SHARES      CLASS OF SHARES                                  NIS            NIS             NIS
-------------  ------------------------------------------     -------         -------         -------

17,000,000     6% cumulative "C" participating
               preference shares of NIS 0.00018 each,
               linked to the US dollar at the rate of
               $1 = NIS 0.00018                                 3,060           3,060           3,060

1,000,000      6% cumulative "CC" participating
               preference shares of NIS 0.003 each,
               linked to the US dollar at the rate of
               $1 = NIS 0.003                                   3,000           3,000           3,000

1,740,000      6% cumulative "CC1" participating
               preference shares of NIS 0.003 each,
               linked to the US dollar at the rate of
               $1 = NIS 0.003                                   5,220           5,204           5,204
                                                              -------         -------         -------

               Total shares                                    11,280          11,264          11,264
                                                              =======         =======         =======

     The participating shares are traded on the Tel-Aviv Stock Exchange.

     C.   For rights in dividend distributions - see Note 16D.

     D.   For cessation of dividend distributions - see Note 16E.

     E.   For rights upon liquidation - see Note 16F.

     *    For information regarding the accounting classification of the
          participating preference shares as a result of the initial
          implementation of Accounting Standard No. 22, see Note 1D.


                                     F - 42`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY

     A.   The following are details regarding the nominal value of the share
          capital and the principal rights attached thereto, as of December 31:

                                                                                              AUTHORIZED            ISSUED AND PAID
                                                                                               -------         -----------------------
                                                                                                 2007            2007           2006
NUMBER                                                                                         -------         -------         -------
OF SHARES      TYPE OF SHARES                                                                    NIS             NIS             NIS
-------------  ------------------------------------------                                      -------         -------         -------

16,000         "A" ordinary shares of NIS 0.1 each                                               1,600           1,510           1,510

1              "B1" ordinary share of NIS 0.1                                                      0.1             0.1             0.1

1,000,000      8% cumulative participating preferred ordinary shares of NIS 0.001 each           1,000           1,000           1,000

50,100         Unclassified shares of NIS 0.1 each                                               5,010               -               -
                                                                                               -------         -------         -------

               Total shares                                                                    7,610.1         2,510.1         2,510.1
                                                                                               =======         =======         =======

     The ordinary preference shares are traded on the Tel Aviv Stock Exchange.
     None of the other shares are traded.


                                     F - 43`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     B.   VOTING RIGHTS

     Only "A" class ordinary shares and ordinary preferred shares grant their
     holders the right to receive notification regarding general shareholders'
     meetings of the Bank, and to participate and vote in the general meetings
     of the Bank. Every "A" class ordinary share has 1000 votes and every
     ordinary preferred share has one vote.

     C.   RIGHT TO APPOINT DIRECTORS

     According to the Bank's Articles of Association, the Board of Directors is
     comprised of no less than 7 and no more than 15 directors. The directors of
     the Bank (except for the Chairman of the Board) are appointed solely by
     holders of "A" class ordinary shares. Every 1015 "A" class ordinary shares
     grant the right to appoint one director. The other shares in the Bank do
     not grant rights to appoint directors of the Bank. The appointment of
     external directors is done in accordance with an agreement that was signed
     in July 2001 between Bank Leumi le-Israel B.M., Leumi Industrial
     Development Bank Ltd., Poalim Trust Services Ltd., Bank Hapoalim B.M.,
     Israel Discount Bank Ltd. and the nominee company of Israel Discount Bank
     Ltd., and the decision of the Government from March 2001. In accordance
     with the aforementioned agreement and Government decision, one external
     director is appointed by the general meeting on account of the rights to
     appoint directors of the three banking groups that are party to the
     aforementioned agreement (as proposed by one of them and supported by the
     others) and an additional external director is appointed by the general
     meeting on account of the State's rights to appoint directors.

     The Chairman of the Board, who is the extra director (the fifteenth
     director), is appointed by all the other members of the Board who were
     appointed, as above, by the holders of "A" class ordinary shares.

     D.   RIGHTS TO RECEIVE A PREFERENCE DIVIDEND

     According to the Bank's Articles of Association, in the event that there
     are sufficient profits, the Bank shall first distribute a preferred
     dividend of 6% per annum (plus necessary adjustments due to linkage to the
     dollar) on the paid-in capital of "C" class preference shares, the paid in
     capital of "CC" class preference shares and the paid-in capital of "CC1"
     class preference shares, and of 7 1/2% per annum (plus necessary
     adjustmenTS due to linkage to the dollar) on the paid-in capital of "D"
     class preference shares, and the paid-in capital of "DD" class preference
     shares, all dividends being pari-passu and pro-rata to the paid-in capital
     of the aforementioned shares, and then will distribute an 8% cumulative
     preferred dividend on the paid in capital of ordinary preferred shares.
     However, if until then preferred dividends in arrears on the shares
     accumulated, they will be distributed prior to the other dividends.


                                     F - 44`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION

     The issued share capital of the Bank includes preference shares of classes
     C, CC, CC1, D, and DD to which the Bank used to pay quarterly 25% of the
     annual preferred dividend (the "quarterly dividend"). The Bank deposited
     the proceeds of issue of these preferred shares with the Israeli Treasury
     in perpetual deposits, which will be returned to the Bank only upon
     liquidation or for the purpose of redeeming the preference D and DD shares
     (hereinafter - the "perpetual deposits"). According to the deposit
     agreements, the interest on the perpetual deposits, at a rate of 7.5% (plus
     differentials of linkage to the dollar), is paid to the Bank on the payment
     dates of the dividends to the aforementioned preferred shares. The deposit
     agreements do not expressly stipulate how the interest on the perpetual
     deposits should be handled during periods in which the Bank is prevented
     from distributing dividends on these preferred shares, and whether the
     interest will accrue and be paid when the Bank pays the accrued preferred
     dividends in arrears or upon liquidation.

     According to the Companies Law - 1999 (hereinafter - "the Companies Law"),
     a company is entitled to distribute dividends only from its profits (as
     defined therein), on condition that there is no reasonable fear that such
     distribution would prevent the company from meeting its existing
     liabilities and its expected liabilities when they come due (hereinafter -
     the "repayment ability test"). Nevertheless, the Court is permitted to
     approve the distribution of a dividend not from the company's profits, if
     it is convinced that the company meets the "repayment ability test".
     According to the Directives of Proper Banking Procedures, the Supervisor of
     Banks prohibited distribution of dividends by a banking institution if,
     among other things, one or more of the last three calendar years ended in a
     loss, or the aggregate results of the three quarters ending on the last day
     of the interim period for which the last financial statements were issued
     reflected a loss.

     The Bank ended the years 2001 through 2003 with a loss, the year 2004 with
     earnings, the years 2005 - 2006 with a loss and the year 2007 with
     earnings. Commencing with the financial statements for the first quarter of
     2002, the Bank had no profits from which it could distribute a dividend
     under the Companies Law.

     In accordance with the Bank's Articles it can distribute a dividend only
     out of earnings of the Bank. As from the second quarter of 2002 the Bank
     did not remain even with nominal earnings.

     The last quarterly dividend paid by the Bank in respect of the
     aforementioned preferred shares was the second quarterly dividend of 2002,
     and in order to distribute that dividend, the Bank obtained Court approval
     and the approval of the Supervisor of Banks.

     Immediately prior to the publication of the financial statements of the
     Bank for the third quarter of 2002, the Board of Directors of the Bank
     decided, at that stage, not to distribute a dividend for the third quarter
     of 2002. The decision was taken upon the advice of legal counsel and taking
     into consideration, among other things, the following issues:

     o    The results of operations of the third quarter of 2002 and the crisis
          which affected the Bank during that quarter.

     o    Non-existence of distributable profits under the Companies Law.

     o    The prohibition on distribution of dividends according to the Bank's
          Articles of Association when there are no profits, even in nominal
          terms.

     o    The prohibition on distribution of dividends according to Proper
          Banking Procedure, as long as the Supervisor of Banks has not replied
          to the Bank's request and has not permitted such distribution.


                                     F - 45`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)

     o    The possibility that the interest on the Bank's perpetual deposits
          with the Israeli Treasury will continue to accrue to the credit of the
          Bank even if not actually paid, as long as no dividend is distributed.

     On December 1, 2002, the Bank received the reply of the Supervisor of Banks
     to its request for the position of the Supervisor on the matter of
     distributing a dividend in respect of the third quarter of 2002. The
     Supervisor's answer stipulated, among other things, that in the existing
     circumstances (as detailed in the letter), the Supervisor of the Banks
     believes that "it is inappropriate to distribute a dividend at this time".
     Nevertheless, the Supervisor of Banks noted that it was still not
     completely clear as to the legal aspects of various questions connected
     with the distribution of the dividend and the accrual of the interest on
     the perpetual deposits, and as to what the position of the State of Israel
     is on this issue. The Supervisor of Banks added that a copy of the letter
     had been sent to the Government Companies Authority and the Accountant
     General, and that following receipt of clarifications from them and from
     the Bank to the questions raised, the Supervisor will notify the Bank as to
     his position.

     In view of the lack of clarity as to the matter of the accrual of interest
     on the perpetual deposits during the period in which the Bank is prevented
     from distributing a dividend (the lack of clarity to which the Supervisor
     of Banks referred to in his letter) and in view of the possible
     ramifications of this matter on the distribution of the dividends in
     respect of the preferred shares, the Board of Directors deliberated the
     matter, taking into consideration a comprehensive legal opinion presented
     to the Board. The Board reached the conclusion that the interest not paid
     to the Bank due to the non-distribution of the dividend should accrue to
     the Bank's credit and, accordingly, in the event of the Bank's liquidation,
     the interest will be paid to the receiver. In a letter dated January 22,
     2003, the Bank requested from the Ministry of Finance and the Government
     Companies Authority to issue their positions on this matter as soon as
     possible. The reply of the Finance Ministry to the Bank's letter was
     unclear and further requests and reminders of the Bank did not result in
     its clarification. During that time, the Board of Directors has deliberated
     the matter of the dividend on the said preference shares several more
     times, and after taking into account all of the considerations and
     circumstances described above has decided to abide by its previous decision
     and to refrain from distributing any further dividend for the time being.

     From the date the Bank stopped paying the dividend on the aforementioned
     preferred shares, the State has stopped paying to the Bank the interest on
     its perpetual deposits.

     On September 28, 2004 various financial entities that hold class C and/or
     CC and/or CC1 shares of the Bank filed with the Tel Aviv District Court an
     originating motion in which the Court is petitioned to instruct the Bank to
     pay to its shareholders a dividend at the rates and dates it was paid until
     the second quarter of 2002.

     Since in the opinion of the Bank, the matter of the dividend distribution,
     which is the issue of the aforementioned originating motion, is connected
     to the question of whether under the circumstances of a non-distribution of
     dividend, the interest on the perpetual deposits of the Bank with the
     Israeli Treasury is accrued in its favor, and since the answers received so
     far from the Ministry of Finance were not clear enough and were
     insufficient, the Bank filed an originating motion with the Court on March
     9, 2005 against the Minister of Finance and the aforementioned financial
     entities, in which it requested a ruling declaring (among other things)
     that the interest on the perpetual deposits is indeed accrued in favor of
     the Bank.


                                     F - 46`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)

     In the reply of the Minister of Finance to the originating motions prior to
     a preliminary hearing that was held on January 12, 2006, the Minister of
     Finance announced that his position is that the interest on the perpetual
     deposits does not accrue in favor of the Bank when it does not distribute a
     dividend, and that even so, in light of the Bank's circumstances, there is
     no justification for the distribution of a dividend by the Bank.

     At the time, the board of directors of the Bank expressed its in principle
     position that if the court rules that the interest on the perpetual
     deposits does not accrue, the board of directors will reconsider its
     position regarding the renewal of the dividend distribution, subject to the
     legal and regulatory restrictions placed on the Bank in connection with
     this issue, including the need to obtain authorizations and to amend the
     by-laws of the Bank. On August 5, 2007, the Tel Aviv District Court issued
     its ruling whereby it rejected the originating motion filed by the Bank
     against the Finance Minister and the aforementioned financial institutions
     and stipulated that as long as no dividend is distributed to the preference
     shares of the Bank, the interest does not accrue on the perpetual deposits
     of the Bank with the Treasury.

     At its meeting of October 9, 2007, the Board of Directors of the Bank
     discussed the consequences of the court ruling. The Board decided that
     since the claim of the Bank (its originating motion) related not only to
     the issue of the accrual of interest on the perpetual deposits in the
     absence of a dividend distribution, rather also to its accrual and payment
     when a dividend in arrears is paid (including during liquidation), and
     since on the basis of the determination of the court that the claim of the
     Bank was rejected, a claim could be made that the court ruling also
     rejected the right of the Bank to accrued interest against the payment of
     the dividend in arrears on the preference shares (a result which in the
     opinion of the Board of Directors is basically incorrect and it is
     reasonable to assume that the court did not mean it), then the Bank should
     file an appeal on the rejection of the suit in connection with the payment
     of the accrued interest on the perpetual deposits against payment of the
     dividend in arrears. Such an appeal was filed by the Bank with the Supreme
     Court on February 6, 2008.

     At its meeting on October 9, 2007, the Board also discussed the
     ramifications of the aforementioned ruling on its continued policy in
     connection with the distribution of a dividend on the preference shares
     (preference shares of classes C, CC, CC1, D and DD). In view of the
     determination of the court ruling in connection with the non-accrual of
     interest on the Bank's perpetual deposits with the Treasury as long as no
     dividend is distributed (a determination which the Bank does not dispute),
     and after the board considered the interests of both the shareholders of
     the Bank and the creditors of the Bank (who in view of the court ruling no
     longer profit from the non-distribution of the dividend), the Board reached
     a decision that it would be prudent for the Bank to take steps towards a
     renewal of the distribution of the dividend. In connection with this, the
     Board also decided (at the aforementioned meeting) to take a number of
     steps, as follows: 1) to recommend to the general meeting of the Bank to
     amend the by-laws of the Bank in connection with two matters that relate to
     the renewal of the dividend, one being the authorization to distribute a
     dividend not only from profits (which at present are non-existent) but also
     from the interest to be paid to the Bank on its perpetual deposits with the
     Treasury and the other, the authorization of the distribution of a regular
     preference dividend on the Bank's preference shares even without the
     distribution - either prior or concurrent - of the preference dividend in
     arrears on these shares (since, in view of the wording of the court ruling,
     claims may be raised whereby the Bank is not entitled to the accrued
     interest on the perpetual deposits against the distribution of the dividend
     in arrears, a result that will prevent the Bank from distributing the
     dividend in arrears in the absence of sufficient income); 2) to convene a
     general meeting of the Bank to amend the Bank's by-laws as above and
     empower the Chairman of the Board to determine the date of the meeting;


                                     F - 47`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)

     3) to petition the Supervisor of Banks for his approval of a distribution
     of a dividend to the preferred shareholders, subject to an amendment to the
     by-laws, as above, and to obtain the approval of the court to the proposed
     distribution (according to the Companies Law - 1999, the distribution of a
     dividend not from distributable income requires court approval, and at that
     time the Bank did not have distributable income). A detailed description of
     the decisions of the Board of Directors at its meeting of October 9, 2007
     can be found in the Immediate Reports issued by the Bank on October 10,
     2007. In accordance with those decisions of the Board of Directors of the
     Bank, on January 7, 2008, the general meeting of the Bank was convened and
     on its agenda were the abovementioned proposals for the amendment to the
     by-laws of the Bank such that the by-laws would not continue being an
     impediment to the renewal of a dividend distribution.

     The proposed changes were put to a vote and were rejected by a majority of
     the voters. On February 5, 2008, the financing entities which filed the
     originating motion against the Bank filed a request with the court to add
     the State as an additional respondent to the originating motion, due to,
     among other reasons, the vote of the State at the general meeting of the
     Bank against the proposed amendments to the by-laws of the Bank.

     The cumulative amount of the dividend, at a rate of 7.5% per annum, in
     respect of the aforementioned preference shares (including a 1.5%
     participating dividend in respect of class C, CC, and CC1 shares) which has
     not been paid since the Bank ceased paying dividends is, as of December 31,
     2007, an amount of NIS 185.4 million. This amount was not recorded in the
     financial statements and is equal to the amount of the interest on the
     perpetual deposits which was also not recorded in the financial statements.

     The cumulative amount of NIS 185.4 million is broken down as follows: NIS
     113.8 million in respect of non-participating shares (D and DD), and an
     amount of NIS 71.6 million in respect of participating shares (C, CC, and
     CC1). Of this amount, an amount of NIS 33.4 million is in respect of 2007,
     as follows: NIS 20.7 million in respect of non participating shares (D and
     DD), and an amount of NIS 12.7 million in respect of C, CC, and CC1 shares
     which are participating shares.

     For information pertaining to the originating motions on the aforementioned
     cessation of distribution of dividends, see Note 20D below.

     F.   RIGHTS UPON LIQUIDATION

     Upon liquidation of the Bank, all available assets will be distributed to
     shareholders. Following are the first seven stages of distribution in
     accordance with the priorities appearing in the Bank's Articles of
     Association:

     o    First - to pay cumulative preferred dividends in arrears, including
          dollar linkage differentials, to all classes of preference shares (C,
          CC, CC1, D, DD) all being pari passu and pro-rata to the paid in
          capital of the aforementioned shares. As at December 31, 2007, the
          accrued amount of the preferred dividend in arrears is NIS 170.1
          million (as at December 31, 2006 - NIS 152.9 million).

     o    Second - to pay cumulative preferred dividends in arrears to preferred
          ordinary shares. As at December 31, 2007 the dividends in arrears in
          respect of the preferred ordinary shares amount to NIS 440 (as at
          December 31, 2006 - NIS 360).


                                     F - 48`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     F.   RIGHTS UPON LIQUIDATION (CONT'D)

     o    Third - to refund paid in capital (plus dollar linkage differentials)
          of "C" class preference shares, to refund paid in capital (plus dollar
          linkage differentials) of "CC" class preference shares, to refund paid
          in capital (plus dollar linkage differentials) of "CC1" class
          preference shares, to refund paid in capital (plus dollar linkage
          differentials) of "D" class preference shares, to refund paid in
          capital (plus dollar linkage differentials) of "DD" class preference
          shares - all being pari-passu and pro-rata to the paid in capital of
          the aforementioned shares. As at December 31, 2007, the aforementioned
          amounts to NIS 446.6 million (as at December 31, 2006 - NIS 490.6
          million).

     o    Fourth - to refund paid in capital of preferred ordinary shares. As at
          December 31, 2007, the aforementioned amounts to NIS 1,000 (as at
          December 31, 2006 - NIS 1,000).

     o    Fifth - to refund paid in capital of class "A" ordinary shares, to
          refund paid in capital of class "B" ordinary shares, and to refund
          paid in capital of class "B1" ordinary shares - all being pari passu
          and pro-rata to the paid in capital of the aforementioned shares. As
          at December 31, 2007, the aforementioned amounts to NIS 14 thousand
          (as at December 31, 2006 - NIS 14 thousand).

     o    Sixth - the remainder (if at all) of the differences to be paid to the
          Bank by the State of Israel upon liquidation as a result of the rate
          of increase in the CPI as compared with the increase in the
          representative exchange rate of the dollar, in respect of the deposits
          made by the Bank with the State, shall be paid to the holder or
          holders of the class "B1" ordinary share. As at December 31, 2007, the
          aforementioned difference amounts to NIS 402.3 million (as at December
          31, 2006 - NIS 335.2 million).

     o    Seventh - the remainder of ordinary assets will be distributed between
          the holders of the class "A" ordinary shares, the holders of the
          preferred ordinary shares, and the holders of the C, CC and CC1
          preference shares, according to the paid in capital of these shares
          and at the ratio of ten per each agora of paid in class "A" ordinary
          shares, ten per each agora of paid in preferred ordinary shares, ten
          per each agora of paid in class "C" preference shares, six per each
          agora of paid in class "CC" preference shares and six per each agora
          of paid in class "CC1" preference shares - all being pari-passu and
          pro-rata to the paid in capital of the aforementioned shares.


                                     F - 49`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
           BANKS

          Following is the calculation of capital adequacy in accordance with
          Directives Nos. 311 and 341 of the Supervisor of Banks, regarding
          "Minimal Capital Ratio" and "Capital Allocation with respect to
          Exposure to Market Risks":

     A.   CAPITAL FOR PURPOSES OF CALCULATING CAPITAL RATIO

                              DECEMBER 31     DECEMBER 31
                                  2007            2006
                                -------         -------
                                REPORTED        REPORTED
                                AMOUNTS         AMOUNTS
                                -------         -------
                              NIS MILLIONS    NIS MILLIONS
                                -------         -------

First tier capital                100.4            11.4
Second tier capital (1)           100.4            11.4
                                -------         -------

Total capital                     200.8            22.8
                                =======         =======

     (1)  The general allowance for doubtful debts, in the amount of NIS 38.9
          million was deducted from the credit since it is not a part of the
          second tier capital.


                                     F - 50`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
           BANKS (CONT'D)

     B.   WEIGHTED-BALANCES OF CREDIT RISK

                                                         DECEMBER 31, 2007              DECEMBER 31, 2006
                                                      -----------------------         ----------------------
                                                                  WEIGHTED CREDIT                  WEIGHTED CREDIT
                                                    BALANCES(2)    RISK BALANCES    Balances(2)     RISK BALANCES
                                                      -------         -------         -------         -------
                                                                          REPORTED AMOUNTS
                                                      -------------------------------------------------------
                                                    NIS MILLIONS   NIS MILLIONS    NIS MILLIONS     NIS MILLIONS
                                                      -------         -------         -------         -------

ASSETS
Cash and deposits with banks                             33.8             5.6            66.4            11.7
Securities                                               46.3            36.8            50.4            50.4
Credit to the public (1)                              5,521.1           547.8         6,519.1           831.2
Credit to governments and
perpetual deposits with the
Israeli Treasury                                        873.5               -           867.3               -
Buildings and equipment                                   0.8             0.8             1.1             1.1
Other assets                                              7.2             2.0            12.1             2.4
                                                      -------         -------         -------         -------

Total assets                                          6,482.7           593.0         7,516.4           896.8
                                                      =======         =======         =======         =======

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

Transactions representing credit risk                   180.4           163.4           224.0           182.8
Derivative financial instruments                         47.5             0.9            99.3             1.9
                                                      -------         -------         -------         -------

Total off-balance sheet financial instruments           227.9           164.3           323.3           184.7
                                                      -------         -------         -------         -------

Total credit risk assets                              6,710.6           757.3         7,839.7         1,081.5
Market risk                                                 -           548.0               -           615.5
                                                      -------         -------         -------         -------

Total risk assets                                     6,710.6         1,305.3         7,839.7         1,697.0
                                                      =======         =======         =======         =======

     (1)  The general allowance for doubtful debts, in the amount of NIS 38.9
          million was deducted from the credit since it is not a part of the
          second tier capital.

     (2)  Assets - balance sheet amounts, off-balance sheet financial
          instruments - nominal balances weighted by credit conversion factors.


                                     F - 51`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
           BANKS (CONT'D)

     C.   RATIO OF CAPITAL TO TOTAL RISK ASSETS

                                                                        DECEMBER 31     DECEMBER 31
                                                                            2007           2006
                                                                          -------         -------
                                                                             %               %
                                                                          -------         -------

Ratio of first tier capital to total risk assets                              7.7            0.67
Ratio of second tier capital to total risk assets                             7.7            0.67
                                                                          -------         -------

Ratio of total first and second tier capital to total risk assets            15.4            1.34
                                                                          =======         =======

     The ratio of capital to risk assets, as of December 31, 2006, was lower
     than the 9% as prescribed by Proper Banking Procedures.

NOTE 17 - LIENS AND RESTRICTIVE CONDITIONS

     A.   In connection with receiving of the special line of credit from the
          Bank of Israel, the Bank signed on November 14, 2002 a debenture in
          favor of the Bank of Israel (that was amended on December 29, 2005),
          whereby the Bank registered a first degree floating pledge on all of
          its assets, excluding the following assets:

          -    Loans and credits under State guarantee at a total balance sheet
               value (according to financial statements as at December 31, 2007)
               of NIS 5.0 billion.

          -    The Bank's deposit with the Ministry of Finance (the Accountant
               General) in respect of the DD preference shares of the Bank.

          -    Deposits made by the Bank from time to time with other banking
               institutions in Israel and/or abroad, and/or with brokers in
               Israel and/or abroad, which were deposited in connection with
               guaranteeing the Bank's liabilities to such banking institutions
               and/or brokers, which were created subsequent to November 14,
               2002.

          Under this debenture, the Bank undertook, among other things, not to
          register additional pledges on the assets pledged as part of the
          debenture and not to dispose of such assets, in any form, without
          receiving the prior written consent of the Bank of Israel.
          Notwithstanding the above, the debenture stipulates that the floating
          pledge registered therein does not prevent the Bank, or restrict the
          Bank in the ordinary course of its business, including the fulfillment
          of its obligations, receiving repayments of credit or granting credit.

          The balance of the credit line (including accrued interest) as at
          December 31, 2007, was an amount of NIS 481.2 million (December 31,
          2006 - NIS 761.5 million).

     B.   As of December 31, 2007, deposits with banks in the amount of NIS 10.0
          million have been pledged by the Bank in favor of those banks
          (December 31, 2006 - NIS 22.0 million). The Bank of Israel gave its
          consent to the pledge, which serves as collateral for transactions in
          derivative financial instruments with those banks.


                                     F - 52`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS

     A.   SEVERANCE PAY

     1.   The Bank's liability for the payment of severance pay to its
          employees, which is calculated as customary on the basis of one
          monthly salary per each year of employment, is fully covered by
          payments and deposits with recognized pension and provident funds, the
          purchase of insurance policies and by the unfunded provision in the
          books.

     2.   Commencing on July 15, 2002, Mr. U. Galili has served as the General
          Manager of the Bank. During 2005, the Bank extended the employment
          agreement of Mr. Galili until July 31, 2008 (the end of the Run-Off
          plan).

          Commencing on August 14, 2002, Dr. Ra'anan Cohen has served as the
          Chairman of the Board of Directors of the Bank. During 2005, the
          employment agreement of Dr. Ra'anan Cohen was extended until July 31,
          2008 (the end of the Run-Off plan).

          On September 1, 2002, Mr. A. Savir joined the Bank's Management. Mr.
          Savir serves as Deputy General Manager and as Credit Supervisor of the
          Bank. During 2005, the employment agreement of Mr. Savir was extended
          until July 31, 2008 (the end of the Run-Off plan).

          On May 30, 2007, the Audit Committee and the Board of Directors of the
          Bank authorized the granting of additional severance pay to the GM and
          the Deputy GM of the Bank upon resignation from their positions (in
          excess of the amounts provided for them in managers insurance policies
          and/or pension funds), at a rate of one month's salary for each year
          of service and the relative share of a month's salary in respect of
          part of the year. This resolution is subject to the approval of the
          Supervisor of Wages and Labor Agreements in the Israeli Finance
          Ministry, who announced that he had no objection to the wording of the
          decision and that his approval of the proposal will be taken under
          advisement if, and only if, the termination of their employment occurs
          at the end of the Bank's Run-off Plan (which is scheduled to end on
          July 31, 2008) or if ownership of the Bank is transferred to an
          external investor prior to the end of the Run-Off Plan. The additional
          severance pay to the Chairman of the Board of Directors was ratified
          by the general shareholders meeting of the Bank. The periods of
          service of the Chairman of the Board, Dr. R. Cohen, the GM, Mr. A
          Galili, and the Deputy GM, Mr. A Savir, started at different times
          during the second half of 2002 and, therefore, assuming that their
          periods of service conclude at the end of the Run-off Plan on July 31,
          2008, there will be additional severance pay of six-months' salary for
          each of the above. The cost of the additional severance pay in respect
          of the three of them together, for the entire period, amounts to NIS
          0.9 million. The financial statements contained a provision related to
          the period ended September 30, 2007 (approx. NIS 0.8 million).

     3.   On December 26, 2002 a collective agreement was signed between the
          Bank, the New Histadrut (the general federation of labor) and the
          representatives of the Bank's employees, which applies to the Bank's
          employees who are subject to the collective agreements of the Bank.
          The agreement was for a period of 3 years and can be extended by one
          additional year. The agreement arranged, inter alia, the following
          matters:


                                     F - 53`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS (CONT'D)

     A.   SEVERANCE PAY (CONT'D)

          >>   Management's right to dismiss employees in the framework of
               cutbacks in the Bank's activities, as well as the process of
               dismissal.

          >>   Cutbacks that will be made in the salary of the employees and in
               their related benefits.

          >>   Benefits and special payments that will be due to the employees
               who are dismissed, including additional severance pay in addition
               to those provided in the law, and with respect to employees
               having worked a certain number of years and with a certain number
               of years remaining until retirement, conversion of the right to
               enhanced severance pay, with the right to receive an early
               pension.

          On March 14, 2005 the parties signed a new collective agreement which
          extended the period of the aforementioned collective agreement (from
          December 26, 2002) until the earlier of the end of the Bank's Run-Off
          plan (including any change and extension made and approved by the
          Government) or December 31, 2007 (the "first extension agreement").

          The first extension agreement also provided and clarified the
          following points:

          A.   Employees who according to the original agreement are entitled to
               an early pension following their dismissal, will be entitled to
               receive it until they reach the age they are entitled to receive
               an ordinary pension from the pension fund to which they belong,
               following the pension reform that came into effect in Israel
               after the signing of the original agreement.

          B.   Some of the concessions the employees agreed to make in the
               original agreement that were limited in time, will continue to
               apply also in the period of the first extension agreement.

          On July 12, 2006, a new collective agreement was signed between the
          parties (the "second extension agreement") which extended for the
          second time the aforementioned collective agreement (dated December
          26, 2002), as amended by the first extension agreement, until July 31,
          2008 (the end of the Run-off Plan). The second extension agreement
          also stipulated that should the Run-off Plan be extended past July 31,
          2008, the aforementioned collective agreement would be extended until
          the termination of the Run-off Plan, but not beyond December 31, 2008.
          At present, with the second extension agreement coming to an end,
          negotiations are being held regarding the possible extension of the
          agreement for an additional period and/or a change in the collective
          agreement from December 26, 2002.

          Certain provisions of the aforementioned agreements, which for the
          most part grant the employees special benefits and payments following
          their dismissal, were also applied to employees with personal
          contracts who began working with the Bank before January 1, 2003, in
          exchange for their agreeing to certain reductions in their terms of
          employment, as was done with respect to the employees under the
          collective agreements.

          As at December 31, 2007, the balance of the provision relating to the
          employees included in the aforementioned collective agreement amounted
          to NIS 18.2 million (excluding salary tax), compared with NIS 20.8
          million in December 2006.


                                     F - 54`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS (CONT'D)

     A.   SEVERANCE PAY (CONT'D)

     4.   In the past, the Bank signed personal employment contracts with three
          senior executives of the Bank. The Bank and these executives have the
          right to terminate the employee-employer relationship by providing an
          advance notice of three months.

          In accordance with these contracts, in the event of the resignation of
          the executives, the Bank has undertaken to pay them additional
          severance payments and an "adaptation bonus" in addition to the
          regular severance pay. In the event that their employment is
          terminated by the Bank, these executives are entitled to severance pay
          at higher rates or to early pensions. In August 2006, the employment
          contracts of these three employees were amended with regard to the
          severance terms in the event of termination by the Bank. The amended
          terms, which in general are inferior to those included in the original
          employee contracts, were determined on the basis of the principles of
          the collective agreement dated December 26, 2002 and in accordance
          with the approval of the Supervisor of Wages in the Israeli Finance
          Ministry.

          The Bank has an appropriate provision included in the reserve for
          severance pay in respect of these liabilities, which as at December
          31, 2007 amounted to NIS 6.4 million (December 31, 2006 - NIS 6.5
          million).

     5.   In the framework of the Economic Policy Law for 2005 (Legislation
          Amendments) - 2004, which was approved by the Knesset on March 29,
          2005, the definition of "salary" for purposes of paying salary tax by
          financial institutions, including the Bank, was expanded so as to
          include also a retirement grant or a death grant and any other amount
          paid by an employer to an advanced study fund or provident fund that
          is not a central severance pay fund, even if according to Section 3 of
          the Income Tax Ordinance it is not considered earned income on the
          date it was paid to the advanced study fund or the provident fund. The
          amendment is in effect from January 1, 2005. In accordance with an
          examination of the Bank, the aforementioned law mainly affects the
          special collective agreement that was signed on December 26, 2002 with
          respect to the dismissal of employees. Following the said change in
          the definition of salary tax the Bank recorded a provision in 2005 in
          the amount of NIS 3.7 million in respect of salary tax on expenses
          relating to early retirement.

     6.   Following is the data relating to provisions and funding for severance
          pay included in the balance sheet:

                                                         DECEMBER 31   DECEMBER 31
                                                             2007        2006
                                                           -------      -------
                                                          REPORTED      REPORTED
                                                           AMOUNTS      AMOUNTS
                                                           -------      -------
                                                        NIS MILLIONS  NIS MILLIONS
                                                           -------      -------

Provision for severance pay                                   43.4         48.0
Amounts funded with pension and provident funds
(including earnings thereon)                                  22.1         21.8
                                                           -------      -------
Unfunded provision included in "Other liabilities"            21.3         26.2
                                                           =======      =======

          The Bank may not withdraw amounts funded other than for the purpose of
          discharging severance pay liabilities.

     7.   As to subsequent events, see Note 33 C.


                                     F - 55`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS (CONT'D)

     B.   UNUTILIZED SICK LEAVE

     Employees who retire or are terminated are entitled, under certain
     conditions, to compensation in respect of unutilized sick leave. In the
     opinion of Management of the Bank an adequate provision has been included
     in the financial statements in this respect. The balance of the provision
     as at balance sheet date totals NIS 2.5 million (December 31, 2006 - NIS
     3.1 million) and is included in the "Other liabilities" item.

     C.   LONG SERVICE BONUS

     In accordance with the current collective employment agreement at the Bank,
     employees who are subject to this agreement are entitled to a special long
     service bonus upon completing periods of twenty-five years and thirty years
     of service with the Bank. A full provision has been made in the financial
     statements for this liability, based on the probability of the employee
     still being employed by the Bank on one of the two aforementioned dates.
     The balance of the provision as at balance sheet date is NIS 0.1 million
     (December 31, 2006 - NIS 0.1 million). This balance is included in "Other
     liabilities" item.

     D.   UNUTILIZED VACATION

     The balance of the provision for unutilized vacation is NIS 1.7 million as
     at balance sheet date (December 31, 2006 - NIS 2.2 million). The balance is
     included in "Other liabilities" item.


                                     F - 56`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS

REPORTED AMOUNTS

                                                                      DECEMBER 31, 2007
                                  -----------------------------------------------------------------------------------
                                                                 FOREIGN CURRENCY OR LINKED
                                     ISRAELI CURRENCY                     THERETO
                                  ----------------------          ------------------------
                                                LINKED TO            US             OTHER      NON-MONETARY
                                 UNLINKED        THE CPI           DOLLAR         CURRENCIES      ITEMS        TOTAL
                                  -------        -------          -------          -------       -------      -------
                               NIS MILLIONS   NIS MILLIONS     NIS MILLIONS     NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                  -------        -------          -------          -------       -------      -------

ASSETS
Cash and deposits
 with banks                          20.3            3.8              9.6              0.1             -         33.8
Securities                              -            0.5                -                -          45.8         46.3
Credit to the public                104.0          340.2          5,060.2             16.7             -      5,521.1
Credit to governments                   -            4.5             20.2                -             -         24.7
Fixed assets                            -              -                -                -           0.8          0.8
Other assets                          6.1              -                -                -           1.1          7.2
Perpetual deposits with
 the Israeli Treasury                   -          848.8                -                -             -        848.8
                                  -------        -------          -------          -------       -------      -------

Total assets                        130.4        1,197.8          5,090.0             16.8          47.7      6,482.7
                                  -------        -------          -------          -------       -------      -------

LIABILITIES
Deposits of the public               29.4           24.7              0.5                -             -         54.6
Deposits of banks                   481.2              -                -                -             -        481.2
Deposits of
 the Government                         -          256.6          5,062.6                -             -      5,319.2
Perpetual deposit                     0.1              -                -                -             -          0.1
Capital notes                           -              -             20.2                -             -         20.2
Other liabilities                    16.8           31.9              1.5                -           0.5         50.7
Non-participating shares                -              -            276.0                -             -        276.0
Participating shares                    -              -            170.6                -             -        170.6
                                  -------        -------          -------          -------       -------      -------

Total liabilities                   527.5          313.2          5,531.4                -           0.5      6,372.6
                                  -------        -------          -------          -------       -------      -------

Difference                         (397.1)         884.6           (441.4)            16.8          47.2        110.1

Forward transactions, net            46.5          (30.0)               -            (16.5)            -            -
                                  -------        -------          -------          -------       -------      -------

Total                              (350.6)         854.6           (441.4)             0.3          47.2        110.1
                                  =======        =======          =======          =======       =======      =======


                                     F - 57`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT'D)

REPORTED AMOUNTS

                                                                      DECEMBER 31, 2006
                                  -----------------------------------------------------------------------------------
                                                                 FOREIGN CURRENCY OR LINKED
                                     ISRAELI CURRENCY                     THERETO
                                  ----------------------          ------------------------
                                                LINKED TO            US             OTHER      NON-MONETARY
                                 UNLINKED        THE CPI           DOLLAR         CURRENCIES      ITEMS        TOTAL
                                  -------        -------          -------          -------       -------      -------
                               NIS MILLIONS   NIS MILLIONS     NIS MILLIONS     NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                  -------        -------          -------          -------       -------      -------

ASSETS
Cash and deposits
 with banks                          33.1           10.2             22.9              0.2             -         66.4
Securities                              -            0.7                -                -          49.7         50.4
Credit to the public                213.9          464.8          5,819.5             20.9             -      6,519.1
Credit to governments                   -            7.8             26.9              6.8             -         41.5
Fixed assets                            -              -                -                -           1.1          1.1
Other assets                         10.5              -                -                -           1.6         12.1
Perpetual deposits with
 the Israeli Treasury                   -          825.8                -                -             -        825.8
                                  -------        -------          -------          -------       -------      -------

Total assets                        257.5        1,309.3          5,869.3             27.9          52.4      7,516.4
                                  -------        -------          -------          -------       -------      -------

LIABILITIES
Deposits of the public               30.6           32.7              3.5              0.1             -         66.9
Deposits of banks                   761.5              -                -              6.8             -        768.3
Deposits of
 the Government                         -          306.1          5,781.3                -             -      6,087.4
Perpetual deposit                     0.1              -                -                -             -          0.1
Capital notes                           -              -             24.9                -             -         24.9
Other liabilities                    17.5           37.6              1.6                -           1.5         58.2
Non participating shares                -              -            303.2                -             -        303.2
Participating shares                    -              -            187.4                -             -        187.4
                                  -------        -------          -------          -------       -------      -------

Total liabilities                   809.7          376.4          6,301.9              6.9           1.5      7,496.4
                                  -------        -------          -------          -------       -------      -------

Difference                         (552.2)         932.9           (432.6)            21.0          50.9         20.0

Forward transactions, net            96.2          (44.0)           (29.5)           (22.7)            -            -
                                  -------        -------          -------          -------       -------      -------

Total                              (456.0)         888.9           (462.1)            (1.7)         50.9         20.0
                                  =======        =======          =======          =======       =======      =======


                                     F - 58`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
          MATURITY DATE (1)

REPORTED AMOUNTS

                                                                                                        DECEMBER 31, 2007
                                      ------------------------------------------------------------------------------------------------------------------------------------------------
                                     ON DEMAND  FROM ONE   FROM THREE  FROM ONE   FROM TWO  FROM THREE  FROM FOUR  FROM FIVE   FROM TEN    OVER                 WITHOUT         TOTAL
                                     AND UP TO  TO THREE    MONTHS TO   TO TWO    TO THREE   TO FOUR     TO FIVE    TO TEN     TO TWENTY  TWENTY    TOTAL CASH  MATURITY    BALANCE SHEET
                                     ONE MONTH   MONTHS      ONE YEAR    YEARS      YEARS     YEARS       YEARS      YEARS       YEARS     YEARS      FLOWS     DATE(2)       AMOUNT (3)
                                      -------    -------     -------    -------    -------   -------     -------    -------     -------   -------    -------    -------        -------
                                        NIS        NIS         NIS        NIS        NIS       NIS         NIS        NIS         NIS       NIS        NIS        NIS            NIS
                                      MILLIONS   MILLIONS    MILLIONS   MILLIONS   MILLIONS  MILLIONS    MILLIONS   MILLIONS    MILLIONS  MILLIONS   MILLIONS   MILLIONS       MILLIONS
                                      -------    -------     -------    -------    -------   -------     -------    -------     -------   -------    -------    -------        -------

UNLINKED ISRAELI CURRENCY
Assets                                   22.3        1.6        24.9       19.9        4.9       2.1         0.1          -           -         -       75.8       68.4          130.4
Liabilities                              15.0       11.7         3.0          -          -         -           -          -           -         -       29.7      510.0 (4)      527.5
                                      -------    -------     -------    -------    -------   -------     -------    -------     -------   -------    -------    -------        -------
Difference                                7.3      (10.1)       21.9       19.9        4.9       2.1         0.1          -           -         -       46.1     (441.6)        (397.1)
Derivative instruments
 excluding options                       16.5       20.1         9.9          -          -         -           -          -           -         -       46.5          -           46.5
ISRAELI CURRENCY LINKED TO THE CPI
Assets                                    5.5       11.9        50.4       60.4       56.6      49.3        47.2      127.6        68.3         -      477.2      848.8        1,197.8
Liabilities                               1.2       12.6        47.2       50.7       49.6      48.4        45.0       48.1         2.4         -      305.2       31.3          313.2
                                      -------    -------     -------    -------    -------   -------     -------    -------     -------   -------    -------    -------        -------
Difference                                4.3       (0.7)        3.2        9.7        7.0       0.9         2.2       79.5        65.9         -      172.0      817.5          884.6
Derivative instruments
 excluding options                          -      (20.1)       (9.9)         -          -         -           -          -           -         -      (30.0)         -          (30.0)
FOREIGN CURRENCY AND
 LINKED THERETO
Assets                                   22.8      139.7       419.5      574.3      549.1     544.8       540.8    2,675.8     2,808.8         -    8,275.6        5.1        5,106.8
Liabilities                               0.2      139.0       416.6      570.8      546.1     542.2       538.4    2,671.3     2,811.1         -    8,235.7      448.1        5,531.4
                                      -------    -------     -------    -------    -------   -------     -------    -------     -------   -------    -------    -------        -------
Difference                               22.6        0.7         2.9        3.5        3.0       2.6         2.4        4.5        (2.3)        -       39.9     (443.0)        (424.6)
Derivative instruments
 excluding options                      (16.5)         -           -          -          -         -           -          -           -         -      (16.5)         -          (16.5)
NON-MONETARY ITEMS
Assets                                      -          -           -          -          -         -           -          -           -         -          -       47.7           47.7
Liabilities                                 -          -           -          -          -         -           -          -           -         -          -        0.5            0.5
                                      -------    -------     -------    -------    -------   -------     -------    -------     -------   -------    -------    -------        -------
Difference                                  -          -           -          -          -         -           -          -           -         -          -       47.2           47.2

TOTAL AS AT DECEMBER 31, 2007
ASSETS                                   50.6      153.2       494.8      654.6      610.6     596.2       588.1    2,803.4     2,877.1         -    8,828.6      970.0        6,482.7
LIABILITIES                              16.4      163.3       466.8      621.5      595.7     590.6       583.4    2,719.4     2,813.5         -    8,570.6      989.9        6,372.6
                                      -------    -------     -------    -------    -------   -------     -------    -------     -------   -------    -------    -------        -------
DIFFERENCE                               34.2      (10.1)       28.0       33.1       14.9       5.6         4.7       84.0        63.6         -      258.0      (19.9)         110.1
                                      =======    =======     =======    =======    =======   =======     =======    =======     =======   =======    =======    =======        =======

(1)  In this table the future cash flows in respect of assets and liabilities
     are presented according to linkage base, in accordance with the remaining
     period to the contractual maturity date of each cash flow.

(2)  Including assets past due in the amount of NIS 67.7 million. The data is
     net of specific allowances for doubtful debts.

(3)  As included in Note 19 "Assets and liabilities classified according to
     linkage base", including off-balance sheet amounts for derivatives.

(4)  The balance includes the balance of the credit line that was provided by
     the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).


                                     F - 59`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
          MATURITY DATE (1) (CONT'D)

REPORTED AMOUNTS

                                                                                                       DECEMBER 31, 2006
                                       ------------------------------------------------------------------------------------------------------------------------------------------------------
                                      ON DEMAND   FROM ONE   FROM THREE   FROM ONE   FROM TWO  FROM THREE  FROM FOUR   FROM FIVE  FROM TEN     OVER                 WITHOUT           TOTAL
                                      AND UP TO   TO THREE    MONTHS TO    TO TWO    TO THREE   TO FOUR     TO FIVE     TO TEN    TO TWENTY   TWENTY   TOTAL CASH  MATURITY       BALANCE SHEET
                                      ONE MONTH    MONTHS     ONE YEAR     YEARS      YEARS      YEARS       YEARS       YEARS      YEARS     YEARS      FLOWS      DATE(2)         AMOUNT (3)
                                       --------   --------    --------    --------   --------   --------    --------    --------   --------  --------   --------    --------         --------
                                         NIS        NIS         NIS         NIS        NIS        NIS         NIS         NIS        NIS       NIS        NIS         NIS              NIS
                                       MILLIONS   MILLIONS    MILLIONS    MILLIONS   MILLIONS   MILLIONS    MILLIONS    MILLIONS   MILLIONS  MILLIONS   MILLIONS    MILLIONS         MILLIONS
                                       --------   --------    --------    --------   --------   --------    --------    --------   --------  --------   --------    --------         --------

UNLINKED ISRAELI CURRENCY
Assets                                     37.1        3.6        36.6        34.3       30.3        4.0         2.1         3.3          -         -      151.3       128.0            257.5
Liabilities                                25.2       21.1       128.5       114.0          -          -           -           -          -         -      288.8       569.5 (4)        809.7
                                       --------   --------    --------    --------   --------   --------    --------    --------   --------  --------   --------    --------         --------
Difference                                 11.9      (17.5)      (91.9)      (79.7)      30.3        4.0         2.1         3.3          -         -     (137.5)     (441.5)          (552.2)
Derivative instruments
 excluding options                         52.2       19.9        24.1           -          -          -           -           -          -         -       96.2           -             96.2
ISRAELI CURRENCY LINKED TO THE CPI
Assets                                     10.2       21.4        74.7        82.5       73.9       67.5        58.7       163.4       87.9       0.8      641.0       825.8          1,309.3
Liabilities                                20.5       11.9        47.5        51.9       49.3       48.2        47.0        89.7        3.2         -      369.2        37.6            376.4
                                       --------   --------    --------    --------   --------   --------    --------    --------   --------  --------   --------    --------         --------
Difference                                (10.3)       9.5        27.2        30.6       24.6       19.3        11.7        73.7       84.7       0.8      271.8       788.2            932.9
Derivative instruments
 excluding options                            -      (19.9)      (24.1)          -          -          -           -           -          -         -      (44.0)          -            (44.0)
FOREIGN CURRENCY AND
 LINKED THERETO
Assets                                     26.2      160.4       496.8       617.5      611.7      606.4       600.6     2,949.2    3,672.5         -    9,741.3        36.8          5,897.2
Liabilities                                 2.8      158.1       488.8       608.3      604.1      599.9       595.6     2,940.5    3,673.6         -    9,671.7       492.2          6,308.8
                                       --------   --------    --------    --------   --------   --------    --------    --------   --------  --------   --------    --------         --------
Difference                                 23.4        2.3         8.0         9.2        7.6        6.5         5.0         8.7       (1.1)        -       69.6      (455.4)          (411.6)
Derivative instruments
 excluding options                        (52.2)         -           -           -          -          -           -           -          -         -      (52.2)          -            (52.2)
NON-MONETARY ITEMS
Assets                                        -          -           -           -          -          -           -           -          -         -          -        52.4             52.4
Liabilities                                   -          -           -           -          -          -           -           -          -         -          -         1.5              1.5
                                       --------   --------    --------    --------   --------   --------    --------    --------   --------  --------   --------    --------         --------
Difference                                    -          -           -           -          -          -           -           -          -         -          -        50.9             50.9

TOTAL AS AT DECEMBER 31, 2006
ASSETS                                     73.5      185.4       608.1       734.3      715.9      677.9       661.4     3,115.9    3,760.4       0.8   10,533.6     1,043.0          7,516.4
LIABILITIES                                48.5      191.1       664.8       774.2      653.4      648.1       642.6     3,030.2    3,676.8         -   10,329.7     1,100.8          7,496.4
                                       --------   --------    --------    --------   --------   --------    --------    --------   --------  --------   --------    --------         --------
DIFFERENCE                                 25.0       (5.7)      (56.7)      (39.9)      62.5       29.8        18.8        85.7       83.6       0.8      203.9       (57.8)            20.0
                                       ========   ========    ========    ========   ========   ========    ========    ========   ========  ========   ========    ========         ========

(1)  In this table the future cash flows in respect of assets and liabilities
     are presented according to linkage base, in accordance with the remaining
     period to the contractual maturity date of each cash flow.

(2)  Including assets past due in the amount of NIS 154.3 million. The data is
     net of specific allowances for doubtful debts.

(3)  As included in Note 19 "Assets and liabilities classified according to
     linkage base", including off-balance sheet amounts for derivatives.

(4)  The balance includes the balance of the credit line that was provided by
     the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).


                                     F - 60`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS

     A.   OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

                                            DECEMBER 31   DECEMBER 31
                                               2007          2006
                                               -----         -----
                                             REPORTED       REPORTED
                                              AMOUNTS       AMOUNTS
                                               -----         -----
                                           NIS MILLIONS   NIS MILLIONS
                                               -----         -----

Transactions the balance of which
 represents a credit risk -

Guarantees securing credit                     157.9         170.9
Guarantees to home purchasers                   17.9          46.2
Other guarantees and liabilities                 4.6           6.3
Unutilized revolving credit facilities             -           0.6

     B.   OTHER CONTINGENT LIABILITIES AND COMMITMENTS

     1.   See Note 18A with respect to the contingent liabilities regarding
          personal employment agreements with senior executives.

     2.   Long-term rental agreement -

          During 2003, the Bank signed a rental agreement in respect of its
          office premises for the period ending in August 2009. The annual
          rental payment, which is linked to the CPI, amounts to NIS 1.1
          million.

     3.   As at January 1, 2004 the Bank has outsourced its computer services,
          according to which it signed an agreement to receive computer services
          for a period of five years. As part of the agreement, the company with
          which the Bank signed the agreement undertook to provide the Bank with
          ongoing management and operational services of its information
          systems, operation and maintenance of hardware, computers, peripheral
          equipment, communications and infrastructure software, operation and
          maintenance of applications, making changes and adjustments to the
          information systems, data security, etc. In 2008, the cost of the
          service will amount to NIS 2.2 million per annum. This agreement will
          expire on December 31, 2008 and the parties have no commitment to
          extend it further.

     4.   During 2006, the Bank signed an agreement to receive storage and
          archive services for a period of four years, ending at the end of
          April 2010. The annual cost is estimated at NIS 78 thousand.

     5.   A few years ago, the Bank entered into agreements whereby it will
          participate in private investment funds. The total amount approved for
          investment by the Bank amounts to U.S.$ 20 million. The said
          investment funds invest in Israeli companies or companies related to
          Israel and in hi-tech companies. The investment in them is presented
          under the "Securities" item. The major part of the investments made by
          these funds is in the credit component. The balance of these
          liabilities as at balance sheet date amounts to U.S.$ 0.7 million.


                                     F - 61`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     C.   INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS

     1)   The Company issued to its officers and directors a letter of
          indemnification that was approved by the shareholders' general meeting
          of the Bank on August 8, 2002. According to the letter of
          indemnification that was issued, the Bank undertook to indemnify its
          officers and directors in respect of any monetary liability imposed on
          them in favor of another person in accordance with a court ruling
          (including a ruling made as part of a compromise and an arbitration
          decision that received court approval) and in respect of reasonable
          legal expenses (including attorney fees), that are imposed on them
          following actions (defined as including acts of omission or
          commission) that were taken and/or will be taken by them due to their
          being officers or directors of the Bank or as part of a position or
          duty that they fulfilled and/or will fulfill at the request of the
          Bank or on its behalf in a company or other corporate entity or any
          business venture in which the Bank has invested or will invest,
          providing that these actions are connected with one or more of the
          types of events detailed in the letter of indemnification including,
          inter alia, the following events:

          o    The issuance of securities.

          o    Using voting rights and rights to appoint directors in a company
               in which the Bank held and/or will hold shares and/or in another
               company and/or business venture in which the Bank has or will
               invest.

          o    Voting for or against any decision of the Board of Directors, a
               committee, etc., of a company, entity or venture as
               aforementioned.

          o    The realizing of collateral provided to the Bank.

          o    The approval of credit and/or the provision of credit and other
               actions as part of the Bank's permissible business in accordance
               with the Banking Law (Licensing) - 1981.

          o    The holding of assets in trust.

          o    The providing of an underwriting commitment.

          o    A transaction in assets executed by the Bank for itself.

          o    The issuance of a report or notice as required by law.

          o    The receipt of licenses and permits.

          o    Events connected to employee-employer relations.

          o    The privatization of the Bank and any course of action performed
               to further the privatization or in connection therewith.

          o    Any refraining from executing one or more of the aforementioned
               acts.

          The amount of the total cumulative indemnification that is payable
          according to the aforementioned letter of indemnification shall not
          exceed 25% of the Bank's shareholders' equity according to its
          financial statements for March 31, 2002, which was NIS 640.3 million,
          meaning no more than NIS 160.1 million, linked to the CPI published in
          respect of March 2002. The letter of indemnification is subject to the
          provisions of the Companies Law and to various conditions as specified
          in the letter of indemnification. It is noted that Amendment 3 to the
          Companies Law - 1999 (dated March 7, 2005) provides, inter alia, that
          an indemnification commitment (such as the aforementioned letter of
          indemnification) has to be limited to events the board of directors
          believes may actually occur at the time of providing the
          indemnification commitment and to an amount or criterion the board of
          directors deems as reasonable under the circumstances of the matter.
          The question of the amendment applying to existing letters of
          indemnification and the interpretation of the aforementioned
          restriction have not yet been addressed in court rulings and therefore
          the effects of the amendment on the aforementioned writ of
          indemnification are uncertain.


                                     F - 62`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

          C.   INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS
               (CONT'D)

               In May 2003, the Audit Committee and the Board of Directors of
               the Bank approved the applicability of the letter of
               indemnification to an additional director whose appointment ended
               prior to July 11, 2002.

          2)   On February 26, 2008, the Audit Committee and the Board of
               Directors of the Bank approved the issuance of a new letter of
               indemnification to Officers and Directors of the Bank
               (hereinafter - the "New Letter of Indemnification"). The new
               letter of indemnification applies to transactions (as defined to
               include acts of omission and decisions) conducted commencing on
               August 26, 2002 (which is the date on which the Prime Minister's
               Office, the Finance Ministry and the Bank of Israel decided on a
               package of steps in connection with the Bank, including the sale
               of its asset and liability portfolio) and that were performed
               and/or will be performed by Officers and Directors of the Bank by
               virtue of their being Officers or Directors of the Bank, or by
               virtue of any position or job in any company, the shares of which
               are and/or will be held by the Bank or in any corporation or
               other business project in which the Bank invested and/or will
               invest. The new letter of indemnification covers monetary
               indebtedness placed on the Officers or Directors in favor of
               another person by court ruling (including a ruling rendered as
               part of a compromise or arbitration ruling approved by the court)
               and which are connected or which derive from events set out in
               the new letter of indemnification, that are events that the Board
               of Directors of the Bank found to be foreseeable in view of the
               activity of the Bank at the date of the approval of the new
               letter of indemnification.

               These events include, among other things, the following:

               o    The sale or assignment of credit or collateral.

               o    Receipt of a special credit line from the Bank of Israel.

               o    Adoption or extension of the Bank's Run-off Plan.

               o    Liquidation or receivership of the assets of the Bank.

               o    Repayment of the perpetual deposits of the Bank with the
                    Treasury.

               o    Redemption of the redeemable preference shares of the Bank.

               o    Conducting and/or advancing negotiations and executing an
                    arrangement with the shareholders of the Bank as part of
                    article 350 of the Companies Law - 1999, in connection with
                    the transfer and/or delivery and/or redemption of their
                    shares.

               o    The privatization of the Bank.

               o    Management of credit, handling debts, restructuring of
                    debts, taking steps to collect debts.

               o    Management of various types of risks.

               o    Activities connected with the disclosure and recording
                    requirements applicable to the Bank.

               The overall amount of the indemnification in respect of the
               aforementioned monetary indebtedness to be paid as part of the
               new letter of indemnification and the overall amount of the
               indemnification in respect of the monetary indebtedness to be
               paid as part of the existing letter of indemnification which was
               approved by the general meeting of the Bank on August 8, 2002
               (hereinafter - the "existing letter of indemnification"), shall
               not exceed in the aggregate the ceiling for indemnification set
               out in the existing letter of indemnification which, as mentioned
               above, amounts to NIS 160.1 million, linked to the Cost of Living
               Index in respect of March 2002.


                                     F - 63`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     C.   INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS (CONT'D)

          In addition to the aforementioned monetary indebtedness, the new
          letter of indemnification also covers reasonable litigation costs,
          including attorney fees that officers or directors incurred or will be
          charged in certain proceedings. The new letter of indemnification
          still requires the approval of the general meeting of the Bank (which
          has not yet been given) and in any event will go into effect only upon
          submission of a request by the bank to the court to approve a
          compromise plan and/or arrangement pursuant to article 350 of the
          Companies Law - 1999, between the Bank and all or part of its
          shareholders, in connection with (among other things) the purchase
          and/or redemption of their shares.

     3)   On February 26, 2008, the Audit Committee and the Board of Directors
          of the Bank approved the issuance of a letter of exemption to Officers
          and Directors of the Bank. The letter of exemption exempts the
          Officers and Directors of the Bank from liability in respect of damage
          caused to the Bank as a result of a breach in their fiduciary
          responsibility towards the Bank in actions (defined as including acts
          of omission and decisions) carried out and/or that will be carried out
          by them by virtue of their being Officers and Directors of the Bank,
          except for actions carried out, as above, prior to August 26, 2002.

          The letter of exemption still requires the approval of the general
          meeting of the Bank (which has not yet been given) and in any event
          will go into effect only upon submission of a request by the bank to
          the court to approve a compromise plan and/or arrangement pursuant to
          article 350 of the Companies Law - 1999, between the Bank and all or
          part of its shareholders, in connection with (among other things) the
          purchase and/or redemption of their shares.

     4)   On July 17, 2005 the Bank issued a letter of indemnification to a
          former employee of the Bank regarding a possible claim that may be
          filed against him by a customer of the Bank and/or representatives of
          the customer. The Bank has taken legal measures against this customer
          in respect of a liability in the amount of U.S. $ 250,000. The claim
          filed by the aforementioned customer also includes various allegations
          against the aforementioned employee.

     5)   On February 11, 2005 the Bank issued a letter of indemnification in
          favor of an attorney of the Bank who was appointed as the execution
          office receiver for the purpose of realizing a mortgage of the Bank.
          The letter of indemnification was issued in respect of proceedings the
          Bank and aforementioned attorney are taking in order to annul the sale
          agreement that was prepared by the said attorney in the framework of
          realizing the mortgage in favor of the Bank.

     D.   LEGAL ACTIONS

     Legal actions, including a motion to certify a claim as a class action,
     were filed against the Bank in the ordinary course of business. Management
     of the Bank, on the basis of legal opinions regarding the prospects of the
     actions, believes that when necessary, adequate provisions were included in
     the financial statements to cover possible losses in respect of those
     claims.

     Following are details of legal actions against the Bank in material
     amounts:

     1)   In March 2003, Lehava Underwriters Ltd. (by virtue of its being a
          shareholder of the Bank) filed a derivative claim in the amount of NIS
          409.5 million against eleven senior officers of the Bank (current and
          past) and against the Bank itself. The plaintiff claims that the named
          senior officers breached their "duty of care" toward the Bank and were
          negligent in fulfilling their duty and, as a result, should be
          required to pay the Bank the amount of the claim, as compensation for
          the damages they inflicted on the Bank.


                                     F - 64`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

          According to the claim, the negligence of the senior officers is
          reflected in, among other things, the credit that they granted without
          suitable collateral, problems with the credit-granting policy and the
          quality and approval procedures thereof, credit risk management and
          the ongoing handling of the credit. The amount of the suit, in respect
          of damages incurred as a result of the alleged negligence, reflects
          the amount of the allowances for doubtful debts recorded by the Bank
          in 2002. The Bank notified the insurers with which it has a directors
          and senior officers liability insurance policy of the filing of the
          suit. The insurers have notified the Bank that they have certain
          reservations regarding the insurance coverage of the claim and that
          they reserve their rights on this matter. The Bank rejects these
          reservations in their entirety and intends to act in order to fully
          exercise its rights against the insurers. The defendants filed a
          motion to have the suit summarily dismissed on the grounds that the
          plaintiff should have filed a motion for approval of the claim as a
          derivative claim. The Court accepted the position of the defendants
          and it ordered the plaintiff to file a motion for the approval of the
          claim as a derivative claim. Such a motion was submitted on December
          7, 2003. The Bank delegated an attorney to represent it in the claim
          and the motion for approval. The hearing on the motion was held on May
          26, 2005. On June 18, 2006, the Court decided to reject the motion to
          approve the suit as a derivative suit and awarded the defendants court
          costs and attorney fees. On September 18, 2006, the plaintiff appealed
          the decision to reject the motion to approve the suit as a derivative
          suit to the Supreme Court. The parties submitted written summaries,
          and the completion of oral arguments was held on February 21, 2008.
          The Supreme Court has not yet rendered its ruling on the appeal. In
          the opinion of the Bank's legal counsel, since the claim is a
          derivative action in which the Bank is only a formal respondent, the
          Bank's exposure in respect thereto is only for expenses (including
          court fees, expenses of the plaintiff, fee to the attorney of the
          plaintiff and special compensation to the plaintiff).

     2)   In October 2002, Mr. Arye Fin (a shareholder of the Bank) filed with
          the Tel Aviv-Jaffa District Court a legal action against the Bank,
          against the State of Israel (as controlling shareholder in the Bank),
          and against 17 former and current officers of the Bank (two of which
          were removed later from the action), together with a motion to have
          the suit approved as a class action. The class action was filed in the
          name of all those who purchased shares of the Bank between December 1,
          2001 and August 22, 2002, and the cause of the action is the alleged
          breach of the duty to report under the Securities Law - 1968 and the
          Securities Regulations (Periodic and Immediate Reports) - 1970 enacted
          thereunder (hereinafter - the Securities Regulations). As claimed in
          the action, during the aforementioned period, a number of
          extraordinary events and/or matters occurred that indicated that the
          Bank was in serious condition, and both these events and matters, and
          the Bank's very situation mandated that the Bank file an immediate
          report under the Securities Regulations. Such a report was not filed.
          The estimated damages being claimed in the action is NIS 20 million
          and, alternatively, NIS 14 million. The Bank notified the insurers
          with which it has a bankers policy and a directors and senior officers
          liability insurance policy of the filing of the suit. The insurers
          carrying the bankers policy notified the Bank that the bankers policy
          does not cover the claim. The Bank was also notified by the insurers
          carrying the directors and senior officers liability insurance policy
          that they have certain reservations regarding the validity of the
          claim's insurance coverage and that they reserve their rights on this
          matter.


                                     F - 65`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

          The Bank announced that it summarily rejects these reservations and
          intends to act in order to fully exercise its rights towards the
          insurers. The Bank handed over the care of the suit and the motion to
          have the suit recognized as a class action to an attorney acting on
          its behalf. On July 11, 2007, a compromise agreement was signed
          between the Bank and the representative plaintiff, Mr. A. Fin (without
          either party recognizing the claims of the other), whereby the Bank
          undertook to pay an amount of NIS 4.7 million to the plaintiff group
          and an additional amount of NIS 1.2 million (plus VAT as applicable)
          as a special remuneration to the plaintiff and attorney fees to the
          attorneys of the plaintiff. In addition, the Bank will have to bear
          the costs of advertising the compromise arrangement, the fee of the
          examiner to be appointed by court to render his opinion on the
          proposed compromise, and an amount of US$ 10,000 plus VAT as the fee
          of the Supervisor who will examine the debt claims of the group.
          Concurrently, the Bank entered into a compromise agreement with the
          insurer which issued the policy granting indemnification of the
          Directors and senior officers, whereby the insurers undertook to
          indemnify the Bank in an amount equal to half of the cost of the
          compromise with the representative plaintiff (up to a maximum of NIS
          6.25 million), plus NIS 1 million in respect of the legal fees of the
          Bank and the senior officers that were sued. The compromise agreement
          with the representative plaintiff was ratified by the court on
          November 4, 2007 (with no objections to its ratification being
          submitted), after having been previously ratified by the general
          shareholders meeting of the Bank and the Bank paid the amounts set out
          in the agreement.

     3)   In September 2004, various financial entities that hold class C and/or
          CC and/or CC1 shares of the Bank filed with the Tel Aviv-Jaffa
          District Court an originating motion in which the Court was requested,
          inter alia, to instruct the Bank to pay to its shareholders a dividend
          at the rates and dates it was paid until the second quarter of 2002.
          The petitioners contend, inter alia, that according to the Bank's
          articles of association, the Bank is required to pay to the holders of
          its preferred shares an annual dividend at the rate of 7.5%, because
          this dividend is not actually a dividend but rather a payment made in
          full by the State of Israel in respect of the perpetual deposits the
          Bank keeps with it, and therefore its distribution is not subject to
          the distribution conditions provided in the law, and that even if the
          distribution conditions should be applied, the Bank should still be
          ordered to distribute the requested dividend, due to the Bank's
          meeting the repayment ability test as the dividend is being fully
          financed by the State of Israel and not being deducted from the
          capital of the Bank. The Bank transferred the handling of the
          originating motion to attorneys acting on its behalf. Since in the
          opinion of the Bank, the matter of the dividend distribution, which is
          the issue of the aforementioned originating motion, is connected to
          the question of whether under the circumstances of a non-distribution
          of dividends, the interest on the perpetual deposits of the Bank with
          the Ministry of Finance is accrued in its favor, and since the answers
          received so far from the Ministry of Finance were not clear enough and
          were insufficient, the Bank filed an originating motion with the Court
          on March 9, 2005 against the Minister of Finance and the
          aforementioned financial entities, in which it requested (among other
          things) a declaratory ruling by which the interest on the perpetual
          deposits is indeed accrued in favor of the Bank. Following the request
          of the Bank and the aforementioned financial entities the Court
          ordered that the hearing on the two originating motions be
          consolidated. A preliminary hearing on the originating motions took
          place on January 12, 2006. In the reply of the Minister of Finance to
          the originating motions prior to the aforementioned preliminary
          hearing, the Minister of Finance announced that his position is that
          the interest on the perpetual deposits does not accrue in favor of the
          Bank when it does not distribute a dividend, and that even so, in
          light of the Bank's circumstances, there is no justification for the
          distribution of a dividend by the Bank.


                                     F - 66`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

          On March 23, 2006, the court decided that in the first stage, the
          question of the accrual of interest on the perpetual deposits of the
          Bank with the Treasury will be discussed and resolved, since a
          resolution of this question will advance the hearing and the
          resolution of the rest of the questions that must be answered. On
          August 5, 2007, a verdict was handed down by the Tel Aviv District
          Court whereby it rejected the opening motion filed by the Bank against
          the Finance Minister and against the aforementioned financial
          institutions and determined that as long as a dividend is not
          distributed on the preference shares of the Bank, the interest on the
          perpetual deposits of the Bank with the Treasury does not accrue. At
          its meeting on October 9, 2007, the board of directors of the Bank
          discussed the ramifications of the verdict. The board of directors
          decided that since the suit of the Bank (its opening motion) related
          not only to the issue of the accrual of the interest on the perpetual
          deposits, in the absence of a dividend distribution, rather also to
          the accrual and payment of a dividend in arrears (including upon
          liquidation), and since on the basis of the determination of the court
          that the suit of the Bank was rejected, a claim can be made that the
          verdict rejects also the right of the Bank to accrued interest against
          the payment of the dividend in arrears on the preferred shares (a
          result which the board of directors believes is incorrect and it is
          reasonable to assume that the court did not intend such a result),
          then the Bank will file an appeal on the rejection of the claim with
          regard to the payment of the accrued interest on the perpetual
          deposits against the payment of the dividend in arrears.
          Notwithstanding the above, the board of directors added in its
          decision that the appeal will not be filed if an adequate
          clarification is provided by the State as to its consent to pay
          accrued interest on the perpetual deposits against the payment of the
          dividend in arrears on the preferred shares (Preferred C, CC, CC1, D
          and DD shares). Such clarification was not forthcoming and the appeal
          of the Bank was submitted to the Supreme Court on January 6, 2008. At
          the aforementioned meeting on October 9, 2007, the board of directors
          of the Bank also decided that in view of the ruling handed down by the
          Tel Aviv District Court on the originating motion of the Bank, it
          would be prudent for the Bank to take steps towards the renewal of the
          distribution of the dividend and as such, it decided to take a number
          of steps including convening a general meeting of the Bank and
          recommending to the general meeting to amend the by-laws of the Bank
          so as to remove the existing impediment therein against the renewal of
          a dividend distribution to the preferred shareholders of the Bank. The
          general meeting of the Bank convened on January 7, 2008 and rejected
          the proposed amendments to the by-laws of the Bank. On February 5,
          2008, the financial entities that filed the originating motion against
          the Bank submitted a request to the court to add the State as an
          additional respondent to the originating motion due to, among other
          reasons, the vote of the State at the general meeting of the Bank
          against the proposed amendments to the Bank's by-laws. In the opinion
          of the Bank's legal counsel, the likelihood that the court will
          require the Bank to pay the dividend, as above, without its being
          financed by the State (as interest on the perpetual deposits of the
          Bank with the Treasury) is remote.

          As to subsequent events, see Note 33 A. and B.

     4)   In December 2007, a suit was filed against the Bank in the Tel Aviv-
          Jaffa Magistrates Court for an amount of NIS 1.3 million. The suit was
          filed by a customer of the Bank which received in the past credit from
          the Bank to finance a construction project. As alleged in the suit,
          the Bank over charged the plaintiff's account with the bank in respect
          of interest and commissions, without its consent or against agreements
          with it. According to the plaintiff, if not for these charges, its
          account with the Bank as of June 2007 would have had a credit balance
          in the amount being sued for and not a debit balance. The Bank
          transferred the handling of this suit to an attorney.


                                     F - 67`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

     5)   In May 2006, a suit was filed in the Rehovot Magistrates Court, in an
          amount of NIS 2.5 million, against the Bank, the receiver that was
          appointed at the request of the Bank in respect of a carpentry
          workshop and the purchaser of the workshop from the receiver.
          According to the statement of claim, the Bank agreed to allow the
          plaintiffs who were the owners of the workshop to find a purchaser for
          the workshop by themselves, but when the potential purchaser that the
          owners found heard that the workshop was in receivership, he entered
          into an agreement with the Bank and the receiver for the purchase of
          the workshop at an amount that was lower than the amount that he
          undertook to pay the plaintiffs. The plaintiffs also claim that the
          Bank and the receiver did not insure the premises and equipment of the
          workshop and, therefore, they are liable for the damages that occurred
          to the premises and the equipment as a result of a fire that broke out
          at the workshop. The handling of the suit was transferred to an
          attorney on behalf of the Bank.

     6)   In October 2005, a company, that performs engineering and plumbing
          work, filed a claim with the Tel Aviv-Jaffa District Court in the
          amount of NIS 1.4 million against the Bank, a receiver that was
          appointed at the request of the Bank to a residential and commercial
          project that encountered difficulties, and against the owner of the
          land that at the time had entered into a combination agreement with
          the promoter that had constructed the project with the financing of
          the Bank. The plaintiff company allegedly performed work on the
          project at the request of the promoter, which had failed and did not
          repay its debt to the plaintiff company. The claim states that the
          amount requested reflects the amount the promoter still owes the
          plaintiff company in respect of the work it executed on the project
          with the addition of interest and/or linkage differences. The
          plaintiff company contends that due to principles of closed banking
          financing and the Bank having granted to the promoter bank financing
          for construction of the project, the Bank should be considered
          responsible for repayment of the debt. Furthermore, it contends that
          at the time it had entered into the agreement with the promoter, the
          Bank should have brought to its attention the information the
          plaintiff contends was in the possession of the Bank, regarding the
          difficult condition of the promoter and the project. The handling of
          the claim was transferred to the care of an attorney acting on behalf
          of the Bank. On March 14, 2006, the suit against the receiver was
          summarily dismissed, but the suit against the Bank and the owner of
          the property (who has since passed away) remained in place.

     7)   In June 2004, two former employees of the Bank, who had filled senior
          positions in the Bank, filed a suit against the Bank with the Tel
          Aviv-Jaffa Labor Court in the total amount (for both of them) of NIS
          2.3 million. The claim is for the payment of certain benefits, which
          the plaintiffs allege were due to them with regard to their retirement
          from the Bank in 2002. The suit was filed also against the Ministry of
          Finance Commissioner of Wages and Labor Agreements in respect of the
          non-approval of these payments. Alternatively the aforementioned
          plaintiffs claim the salary raises they allege that they forfeited in
          the past in exchange for the aforementioned benefits. The Bank has
          transferred the matter to an attorney acting on its behalf. On June
          20, 2005 the aforementioned plaintiffs filed a request for a partial
          judgment in the amount of NIS 415 thousand, in respect of amounts the
          payment of which was approved by the Ministry of Finance Commissioner
          of Wages and Labor Agreements without conditioning the approval upon
          their relinquishing any additional claims. The Bank has filed an
          objection to the request. The Court has not yet ruled on the request.


                                     F - 68`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

     8)   In September 2003, a supplier of fuel products filed a claim in the
          amount of NIS 6 million with the Tel Aviv-Jaffa District Court against
          the Bank and two other banks regarding non-payment of the
          consideration for fuel products it had provided to a mutual customer
          of the three defending banks. It is alleged that the involvement of
          the defending banks in the approval of the business plan and in the
          approval of the expense and income budget of the aforementioned
          customer, had created a representation towards the plaintiff on which
          it had relied at the time of delivery of its products, because it had
          assumed that the expenses included in the approved plan and/or budgets
          would be paid by the defending banks. The Bank has transferred the
          matter to an attorney acting on its behalf.

     9)   In August 2000 a suit was filed with the Tel Aviv-Jaffa District Court
          against one of the Bank's former senior executives and against 24
          other defendants by a number of venture capital funds. For purposes of
          the court fee, the amount of the suit was set at $ 18.7 million, which
          was later increased to $ 22.5 million. According to the plaintiff's
          complaint, the suit was filed, among other reasons, in connection with
          the breach of an investment agreement, whereby the plaintiffs and
          other investors were allegedly supposed to receive 46.5% of the shares
          of a company in which the aforementioned senior executive served in
          the past as a director on behalf of a former subsidiary of the Bank.
          The claim was transferred to an attorney and a defense brief was
          submitted. In 2005, the insurers carrying the directors and senior
          officers liability insurance policy notified the Bank that in their
          opinion the claim does not have insurance coverage, but the Bank's
          legal counsel handling the claim believes that if the said executive
          has to make any monetary payment in respect of the suit, the payment
          will be covered by the insurance policy.

          On June 29, 2008, a court decision was rendered, as part of which a
          settlement agreement between the parties to the suit was approved,
          whereby all of the disputes between them were resolved, without the
          former manager of the Bank, who was one of the defendants, being
          required to make any payments.

     In the opinion of Management of the Bank, which is based on the opinion of
     its legal counsel, the Bank's exposure in respect of pending claims, whose
     prospects of success are not remote and regarding which a provision was not
     recorded, amounts to NIS 15 million.

     E    NON-REPORTING IN THE U.S. REGARDING SHARES CONSIDERED "ABANDONED"

     The Bank's D and DD preference shares were issued in the U.S., as were some
     of the C and CC preference shares and capital notes of the Bank. According
     to U.S. state law, under certain circumstances, a security that is uncalled
     for is considered to be "abandoned" and it must be reported each year to
     the state in which the last residence of the owner of the security is
     located. The same state is also entitled to take ownership of the security.
     The same applies to the payment of a dividend and/or interest in respect of
     securities not collected by the holders of the securities which, when
     certain conditions are fulfilled, are also considered to be "abandoned" and
     which must be reported and transferred. The shares and capital notes were
     issued in the U.S. many years ago and the ongoing handling of the
     securities was done by an agent in the U.S. The information which reached
     the Bank indicates that no reports were filed with the various states and
     as a result the securities and/or the payments in respect of the securities
     of the Bank which were not collected became "abandoned".. Failure to file
     the required reports and the resulting non-transfer of the securities
     and/or the payments, may expose the bank to financial sanctions. There are
     various issues involved which still require further investigation, such as
     the volume of the securities and payments involved, whether the securities
     are indeed subject to U.S. law or to Israeli law, who is entitled to them
     as a result of their being "abandoned", the likelihood of sanctions and the
     possibility of having them cancelled, and to what extent the Bank is liable
     for the failure to report and transfer. At this stage, the Bank is unable
     to assess the financial consequences, if at all.


                                     F - 69`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     F.   OFF-BALANCE SHEET COMMITMENT AT YEAR-END IN RESPECT OF ACTIVITY BASED
          ON COLLECTION OF LOANS*

                                                         DECEMBER 31   DECEMBER 31
                                                             2007          2006
                                                           -------       -------
                                                          REPORTED       REPORTED
                                                           AMOUNTS       AMOUNTS
                                                           -------       -------
                                                         NIS MILLIONS  NIS MILLIONS
                                                           -------       -------

Credit from deposits based on rate of collection**
Unlinked Israeli currency                                    335.1         335.6
CPI linked Israeli currency                                    4.7           4.7
Foreign currency                                             171.8         188.6
                                                           -------       -------

Total                                                        511.6         528.9
                                                           =======       =======

     *    Credit and deposits from deposits the repayment of which to the
          depositor is contingent upon the collection of credit (or deposits).
          The Bank presently has no interest margin or collection commission
          with respect to the handling of such credit.

     **   The aforementioned credit and deposits mainly derive from agreements
          that were made with the State regarding the granting of credit as
          follows:

          -    Loans intended for research and development.

          -    Loans in the framework of the fund for small businesses.

          -    Loans that were granted in the framework of Amendment 39 of the
               Law for the Encouragement of Capital Investments.

     As at December 31, 2007, the activity based on the extent of collection
     includes past due balances amounting to NIS 506.9 million (December 31,
     2006 - NIS 524.2 million).


NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
           PERIODS

     A.   VOLUME OF OPERATIONS

     1.   Stated amount of derivative instruments ALM (1)

                            DECEMBER 31, 2007          DECEMBER 31, 2006
                          ---------------------      ---------------------
                         CPI/SHEKEL    FOREIGN      CPI/SHEKEL     FOREIGN
                          INTEREST     CURRENCY      INTEREST      CURRENCY
                         CONTRACTS     CONTRACTS    CONTRACTS     CONTRACTS
                          -------       -------      -------       -------
                             REPORTED AMOUNTS          REPORTED AMOUNTS
                          ---------------------      ---------------------
                       NIS MILLIONS  NIS MILLIONS  NIS millions  NIS millions
                          -------       -------      -------       -------

Forward contracts            30.4          17.0         45.9          53.4
                          -------       -------      -------       -------

Total                        30.4          17.0         45.9          53.4
                          =======       =======      =======       =======

     (1)  Derivatives comprising part of the asset and liability management of
          the Bank, not designated for hedging purposes.


                                     F - 70`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
           PERIODS (CONT'D)

     A.   VOLUME OF OPERATIONS (CONT'D)

     2.   Gross fair value of derivative instruments ALM (1)

                                  DECEMBER 31, 2007          DECEMBER 31, 2006
                                ---------------------      ---------------------
                               CPI/SHEKEL    FOREIGN      CPI/SHEKEL     FOREIGN
                                INTEREST     CURRENCY      INTEREST      CURRENCY
                               CONTRACTS     CONTRACTS    CONTRACTS     CONTRACTS
                                -------       -------      -------       -------
                                   REPORTED AMOUNTS          REPORTED AMOUNTS
                                ---------------------      ---------------------
                             NIS MILLIONS  NIS MILLIONS  NIS millions  NIS millions
                                -------       -------      -------       -------

Gross positive fair value             -           0.5          1.0           1.1
Gross negative fair value          (0.6)            -            -             -
                                -------       -------      -------       -------

Total                              (0.6)          0.5          1.0           1.1
                                =======       =======      =======       =======

     B.   DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
          THE CONTRACT

                                                                      DECEMBER 31, 2007
                                                               -------------------------------
                                                                       REPORTED AMOUNTS
                                                               -------------------------------
                                                                         NIS MILLIONS
                                                               -------------------------------
                                                                BANKS   CENTRAL BANKS   TOTAL
                                                               -------     -------     -------

Gross positive fair value of derivative instruments                0.5           -         0.5
Off-balance sheet credit risk in
 respect of derivative instruments (2)                             4.7           -         4.7
                                                               -------     -------     -------

Total credit risk in respect of derivative instruments             5.2           -         5.2
                                                               =======     =======     =======

                                                                      DECEMBER 31, 2006
                                                               -------------------------------
                                                                       REPORTED AMOUNTS
                                                               -------------------------------
                                                                         NIS MILLIONS
                                                               -------------------------------
                                                                BANKS   CENTRAL BANKS   TOTAL
                                                               -------     -------     -------

Gross positive fair value of derivative instruments                2.1           -         2.1
Off-balance sheet credit risk in
 respect of derivative instruments (2)                             9.9           -         9.9
                                                               -------     -------     -------

Total credit risk in respect of derivative instruments            12.0           -        12.0
                                                               =======     =======     =======

     (1)  Derivatives comprising part of the asset and liability management of
          the Bank, not designated for hedging purposes.

     (2)  Off-balance sheet credit risk relating to derivative instruments
          (including those with a negative fair value) as computed for
          limitation on individual borrower indebtedness.


                                     F - 71`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
           PERIODS (CONT'D)

     C.   MATURITY PERIOD - STATED AMOUNTS AT YEAR-END

                                               DECEMBER 31, 2007
                                      ----------------------------------
                                                REPORTED AMOUNTS
                                      ----------------------------------
                                       UP TO    FROM 3 MONTHS
                                      3 MONTHS    TO 1 YEAR       TOTAL
                                      -------      -------       -------
                                   NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                      -------      -------       -------

CPI/Shekel interest contracts            20.3         10.1          30.4
Foreign currency contracts               17.0            -          17.0
                                      -------      -------       -------

Total                                    37.3         10.1          47.4
                                      =======      =======       =======

                                               DECEMBER 31, 2006
                                      ----------------------------------
                                                REPORTED AMOUNTS
                                      ----------------------------------
                                       UP TO    FROM 3 MONTHS
                                      3 MONTHS    TO 1 YEAR       TOTAL
                                      -------      -------       -------
                                   NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                      -------      -------       -------

CPI/Shekel interest contracts            20.5         25.4          45.9
Foreign currency contracts               53.4            -          53.4
                                      -------      -------       -------

Total                                    73.9         25.4          99.3
                                      =======      =======       =======

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     This note contains information on the methods of arriving at the fair value
     of financial instruments. Most of the Bank's financial instruments are not
     traded on active markets and thus market quotations are not available.
     Therefore, the fair value is arrived at by using accepted pricing models,
     such as the present value of future cash flows discounted at interest
     rates, which reflect the level of risk intrinsic to the financial
     instrument. Estimating the fair value by way of determining the future cash
     flows and setting the discount interest rate is subjective. Therefore,
     regarding most of the financial instruments, the fair value estimate is not
     necessarily an indication of the instrument's realizable value on balance
     sheet date. The estimate of the fair value was made at interest rates
     prevailing at balance sheet date and did not take interest rate
     fluctuations into consideration. The use of other interest rates could
     result in significantly different fair values. This is especially true in
     regard to non-interest bearing financial instruments or those bearing fixed
     interest rates. Furthermore, commissions receivable or payable as a result
     of the business activity were not taken into account and neither was the
     tax effect.


                                     F - 72`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)

     Moreover, the difference between the book value and fair value of the
     financial instruments may not be realized since, in most cases, the Bank is
     likely to hold the instruments until redemption. In view of the above, it
     should be emphasized, that the data contained in this note should not be
     considered as an indication of the value of the Bank as a going concern.
     Furthermore, considering the wide range of valuation and estimation
     techniques which may be applied in arriving at fair values, caution should
     be used in comparing the fair values arrived at by different banks.

     PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
     VALUE ESTIMATES OF FINANCIAL INSTRUMENTS

     GENERAL - As mentioned in Note 1A, the Bank needed a credit line from the
     Bank of Israel. The credit line from the Bank of Israel bears the Bank of
     Israel rate of interest. The discount rate of the cash flows of the
     deposits raised by the Bank is set, for purposes of the fair value of the
     liabilities, on the basis of the said interest rates.

     DEPOSITS WITH BANKS AND CREDIT TO THE GOVERNMENT - By use of the method of
     discounting future cash flows at interest rates used by the Bank in similar
     transactions proximate to balance sheet date.

     MARKETABLE SECURITIES - Are valued at market value. Shares for which no
     market value is readily available are stated at cost.

     CREDIT TO THE PUBLIC - The fair value of the balance of credit to the
     public was arrived at by using the method of the present value of future
     cash flows discounted at an appropriate interest rate. The balance of such
     credit was segmented into several categories. The future aggregate cash
     flows of each category (principal and interest) were calculated. Such cash
     inflows were discounted at an interest rate, which reflects the level of
     risk inherent in the credit. Generally, this interest rate is set on the
     basis of the rate at which similar transactions of the Bank were effected
     as at balance sheet date. For short-term balances of credit (for an initial
     period of up to three months), or balances at variable market interest
     rates (prime, Libor, etc.), which change at intervals of up to three
     months, their stated value is considered to be their fair value.

     The fair value of problematic debts was calculated by using discount rates
     reflecting their intrinsic high credit risk. In any event, such discount
     rates were not less than the highest interest rate used by the Bank in its
     operations proximate to balance sheet date. The future cash flows of
     problematic debts were calculated net of the specific allowances for
     doubtful debts. The general and supplementary allowances for doubtful debts
     in an aggregate amount of NIS 45.3 million (on December 31, 2006 - NIS 51.7
     million), were not deducted from the balance of credit to the public for
     cash flows purposes in assessing the fair value.

     PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY - The accepted pricing models
     cannot be applied to such deposits. Therefore, their book value is
     considered to be their fair value (see Note 8 for details of the terms of
     these deposits).

     DEPOSITS, DEBENTURES AND CAPITAL NOTES - The fair value of these
     liabilities was arrived at by the method of discounting the future cash
     flows at the interest rate paid by the Bank in obtaining similar deposits,
     or the interest rate of similar debentures and capital notes issued by the
     Bank, prevailing as at balance sheet date.


                                     F - 73`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
     VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     DEPOSITS FROM THE BANK OF ISRAEL - The balance in the balance sheet is a
     close approximation of the fair value since the deposits are at variable
     rates of interest.

     NON-PARTICIPATING PREFERENCE SHARES - The common costing models do not
     address this type of share. As a result, the fair value is presented as
     book value (for information pertaining to the rights of these shares and
     the dividend in arrears, see Notes 14 and 16).

     PARTICIPATING PREFERENCE SHARES - The common costing models do not address
     this type of share. As a result, the fair value is presented as book value
     (for information pertaining to the rights of these shares and the dividend
     in arrears, see Notes 15 and 16).

     DERIVATIVE FINANCIAL INSTRUMENTS - Instruments having an active market,
     were valued at market value. Where these instruments are traded on several
     markets, valuation was based on quotations in the most active market.
     Derivatives that are not traded on an active market, were valued based on
     models used by the Bank in its current operations which take into
     consideration the inherent risk of the financial instrument (market risk,
     credit risk etc.).

     FINANCIAL INSTRUMENTS (OTHER THAN DERIVATIVE AND MARKETABLE FINANCIAL
     INSTRUMENTS) FOR AN INITIAL PERIOD NOT EXCEEDING THREE MONTHS AND AT
     VARIABLE MARKET INTEREST RATES - The amount stated in the balance sheet
     represents an approximation of the fair value subject to changes in credit
     risks and interest margins of the Bank in transactions at variable interest
     rates.


                                     F - 74`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
     VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     Following are balances and fair value estimates of financial instruments:

                                                           DECEMBER 31, 2007
                                        ---------------------------------------------------------
                                                 BALANCE SHEET AMOUNTS
                                        -----------------------------------------
                                                          OTHER
                                        FINANCIAL       FINANCIAL
                                      INSTRUMENTS(1)  INSTRUMENTS(2)      TOTAL         FAIR VALUE
                                        ---------       ---------       ---------       ---------
                                                             REPORTED AMOUNTS
                                        ---------------------------------------------------------
                                      NIS MILLIONS    NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                        ---------       ---------       ---------       ---------

FINANCIAL ASSETS
Cash and deposits with banks                 31.5             2.3            33.8            33.9
Securities                                   45.8             0.5            46.3            46.3
Credit to the public                        148.5         5,372.6         5,521.1         5,551.9
Credit to governments                         0.1            24.6            24.7            26.2
Other financial assets                        3.3               -             3.3             3.3
Perpetual deposits with the
 Israeli Treasury                           848.8               -           848.8           848.8
                                        ---------       ---------       ---------       ---------

Total financial assets                    1,078.0         5,400.0         6,478.0         6,510.4
                                        =========       =========       =========       =========

FINANCIAL LIABILITIES
Deposits of the public                       30.0            24.6            54.6            55.5
Deposits of banks                           481.2               -           481.2           481.2
Deposits of the Government
 and a perpetual deposit                      0.1         5,319.2         5,319.3         5,326.2
Capital notes                                   -            20.2            20.2            21.8
Other financial liabilities                  24.0               -            24.0            24.0
Non participating preference
 shares                                     276.0               -           276.0           276.0
Participating preference shares             170.6               -           170.6           170.6
                                        ---------       ---------       ---------       ---------

Total financial liabilities                 981.9         5,364.0         6,345.9         6,355.3
                                        =========       =========       =========       =========

     (1)  Financial instruments, the balance sheet amount of which represents
          the estimated fair value - financial instruments stated at market
          value, or instruments with an initial maturity period not exceeding
          three months, or instruments based on market interest rates that vary
          at intervals of up to three months.

     (2)  Other financial instruments.


                                     F - 75`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
     VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)

     Following are balances and fair value estimates of financial instruments:
     (cont'd)

                                                           DECEMBER 31, 2006
                                        ---------------------------------------------------------
                                                 BALANCE SHEET AMOUNTS
                                        -----------------------------------------
                                                          OTHER
                                        FINANCIAL       FINANCIAL
                                      INSTRUMENTS(1)  INSTRUMENTS(2)      TOTAL         FAIR VALUE
                                        ---------       ---------       ---------       ---------
                                                             REPORTED AMOUNTS
                                        ---------------------------------------------------------
                                      NIS MILLIONS    NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                        ---------       ---------       ---------       ---------

FINANCIAL ASSETS
Cash and deposits with banks                 56.2            10.2            66.4            66.5
Securities                                   49.7             0.7            50.4            50.4
Credit to the public                        322.7         6,196.4         6,519.1         6,514.5
Credit to governments                           -            41.5            41.5            41.8
Other financial assets                        4.5               -             4.5             4.5
Perpetual deposits with the
 Israeli Treasury                           825.8               -           825.8           825.8
                                        ---------       ---------       ---------       ---------

Total financial assets                    1,258.9         6,248.8         7,507.7         7,503.5
                                        =========       =========       =========       =========

FINANCIAL LIABILITIES
Deposits of the public                       33.8            33.1            66.9            68.2
Deposits of banks                           761.5             6.8           768.3           768.4
Deposits of the Government
 and a perpetual deposit                      0.1         6,087.4         6,087.5         6,088.2
Capital notes                                   -            24.9            24.9            25.4
Other financial liabilities                  25.1               -            25.1            25.1
Non participating preference
 shares                                     303.2               -           303.2           303.2
Participating preference shares             187.4               -           187.4           187.4
                                        ---------       ---------       ---------       ---------

Total financial liabilities               1,311.1         6,152.2         7,463.3         7,465.9
                                        =========       =========       =========       =========

     (1)  Financial instruments, the balance sheet amount of which represents
          the estimated fair value - financial instruments stated at market
          value, or instruments with an initial maturity period not exceeding
          three months, or instruments based on market interest rates that vary
          at intervals of up to three months.

     (2)  Other financial instruments.


                                     F - 76`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 22 - INTERESTED AND RELATED PARTIES

     "Related Parties" and "Interested Parties" of the Bank, as defined in
     Opinion No. 29 of the Institute of Certified Public Accountants in Israel
     and the Securities Regulations (Preparation of Annual Financial Statements)
     - 1993, are: The State of Israel; Bank Hapoalim B.M.; Israel Discount Bank
     Ltd.; Bank Leumi le-Israel B.M.; the General Manager, Directors of the Bank
     and companies related to them, affiliates of the Bank and their related
     companies.

     The Bank conducts transactions with all or some of the aforementioned
     parties, in the ordinary course of business on terms applicable to its
     transactions in general. As it is not practical to separately record the
     transactions with such entities, it is not possible to reflect the
     information required by the said Opinion except for the following details:

     A.   BALANCES

                                            DECEMBER 31, 2007                                      DECEMBER 31, 2006
                             -------------------------------------------------       -------------------------------------------------
                              AFFILIATES AND THEIR                                   AFFILIATES AND THEIR
                               RELATED COMPANIES     DIRECTORS AND GENERAL MANAGER     RELATED COMPANIES     DIRECTORS AND GENERAL MANAGER
                             ---------------------       ---------------------       ---------------------       ---------------------
                                           HIGHEST                     HIGHEST                     HIGHEST                     HIGHEST
                           BALANCE AT      BALANCE     BALANCE AT      BALANCE     BALANCE AT      BALANCE     BALANCE AT      BALANCE
                          BALANCE SHEET   DURING THE  BALANCE SHEET  DURING THE   BALANCE SHEET   DURING THE  BALANCE SHEET   DURING THE
                               DATE        YEAR(1)        DATE         YEAR(1)        DATE         YEAR(1)        DATE         YEAR(1)
                             -------       -------       -------       -------       -------       -------       -------       -------
                                                                         REPORTED AMOUNTS
                             ---------------------------------------------------------------------------------------------------------
                           NIS MILLIONS  NIS MILLIONS  NIS MILLIONS  NIS MILLIONS  NIS MILLIONS  NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                             -------       -------       -------       -------       -------       -------       -------       -------

ASSETS
Credit to the public             0.1           0.2             -             -           0.2           0.3             -             -

LIABILITIES

Other liabilities                  -             -           0.9           0.9             -             -           0.2           0.2

          (1)  On the basis of the balances at the end of each month.

          (*)  For information on the credit to the Israel Electric Company
               Ltd., granted from the deposit of the State and with the
               guarantee of the State - see E below.


                                     F - 77`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)

     B.   SUMMARY OF RESULTS OF OPERATIONS WITH INTERESTED AND RELATED PARTIES*

                                            2007         2006
                                         ---------     ---------
                                       DIRECTORS AND  DIRECTORS AND
                                          GENERAL       GENERAL
                                          MANAGER       MANAGER
                                         ---------     ---------
                                             REPORTED AMOUNTS
                                         -----------------------
                                       NIS MILLIONS  NIS MILLIONS
                                         ---------     ---------

Profit from financing
 operations before allowance
 for doubtful debts (1)                          -             -
Allowance for doubtful debts                     -             -
Operating and other expenses (2)               2.3           2.3

     (1)  See details in D hereunder.

     (2)  See details in C hereunder.

     (*)  For information on the credit to the Israel Electric Company Ltd.,
          granted from the deposit of the State and with the guarantee of the
          State - see E below.

     C.   BENEFITS TO INTERESTED PARTIES

                                                2007                           2006
                                       ----------------------         ----------------------
                                    DIRECTORS AND GENERAL MANAGER  DIRECTORS AND GENERAL MANAGER
                                       ----------------------         ----------------------
                                          REPORTED AMOUNTS               REPORTED AMOUNTS
                                       ----------------------         ----------------------
                                                     NUMBER OF                     NUMBER OF
                                     NIS MILLIONS   RECIPIENTS      NIS MILLIONS   RECIPIENTS
                                       ---------    ---------         ---------    ---------

Interested parties employed by
 the Bank (1)                                2.3            2               1.7            2
Fees to directors not employed
 by the Bank                                 0.6            9               0.6           10

     (1)  Not including VAT on salaries.

     See Note 18A regarding employment agreements with the Chairman of the Board
     of the Bank and its General Manager.


                                     F - 78`

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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)

     D.   RESULTS OF FINANCING OPERATIONS (BEFORE ALLOWANCE FOR DOUBTFUL DEBTS)
          WITH INTERESTED AND RELATED PARTIES*

                                                       2007          2006          2005
                                                      -------       -------       -------
                                                                REPORTED AMOUNTS
                                                      -----------------------------------
                                                    NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                      -------       -------       -------

Income deriving from credit to the public                   -             -             -
Expenses deriving from deposits of the public               -             -             -
                                                      -------       -------       -------
Net results from financing operations
 before allowance for doubtful debts                        -             -             -
                                                      =======       =======       =======

     Definitions in this note:

     -    Interested parties - as defined in Paragraph 1 of the definition of an
          "interested party in a company" in Section 1 of the Securities Law.

     -    Related party - as defined in Opinion 29 of the Institute of Certified
          Public Accountants in Israel.

     -    Directors and General Manager - including their spouses and minors
          (Opinion 29 of the Institute of Certified Public Accountants in
          Israel).

     (*)  For information on the income and expenses in connection with the
          credit to the Israel Electric Company Ltd., granted from the deposit
          of the State and with the guarantee of the State - see E below.

     E.   CREDIT TO THE ISRAEL ELECTRIC COMPANY LTD. AND DEPOSITS OF THE
          GOVERNMENT

     The Bank provided long-term credit to the Israel Electric Corporation Ltd.
     which was granted out of a deposit of the State. The State provided a
     guarantee as security for the repayment of such credit to the Bank. As at
     December 31, 2007, the balance of the credit was NIS 4,963 million (as at
     December 31, 2006 - NIS 5,671 million). An expense of NIS 127 million was
     recorded in respect of the aforementioned credit in 2007 (in 2006 - an
     expense of NIS 89 million). This refers to dollar-denominated credit and
     due to the decrease in the exchange rate of the dollar, negative exchange
     rate differentials were recorded. In 2005, income of NIS 864 million was
     recorded, constituting more than 10% of the profit from financing
     operations before the allowance for doubtful debts in the said year.

     As aforementioned, the source for this credit was a deposit of the State of
     Israel. In addition to the said deposit, the balance of the Government
     deposits includes also deposits made in order to provide loans in the
     framework of the Kibbutzim arrangement and other deposits made in order to
     provide other long-term loans. As at December 31, 2007, the overall balance
     of the Government deposits amounted to NIS 5,319 million compared with NIS
     6,087 million as at December 31, 2006. Financing income in an amount of NIS
     115 million was recorded in 2007 in respect of the Government deposits,
     compared with income of NIS 84 million in 2006 and an expense of NIS 902
     million in 2005.


                                     F - 79`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 23 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS

                                                               2007           2006          2005
                                                            ---------      ---------     ---------
                                                                       REPORTED AMOUNTS
                                                            --------------------------------------
                                                           NIS MILLIONS   NIS MILLIONS  NIS MILLIONS
                                                            ---------      ---------     ---------

A.    INCOME (EXPENSES) DERIVING FROM ASSETS:
Credit to the public                                            (80.7)         (39.7)        979.3
Credit to governments                                               -           (0.9)          1.0
Deposits with Bank of Israel                                        -              -           0.1
Deposits with banks                                               0.8            0.7           8.2
Debentures                                                          -              -           0.3
                                                            ---------      ---------     ---------
                                                                (79.9)         (39.9)        988.9
                                                            ---------      ---------     ---------

B.    (EXPENSES) INCOME DERIVING FROM LIABILITIES
Deposits of the public                                           (3.1)          (4.4)        (15.4)
Deposits of the Government                                      115.1           84.2        (901.7)
Deposits of Bank of Israel                                      (23.6)         (45.2)        (43.0)
Deposits of banks                                                 0.1            0.9           0.7
                                                            ---------      ---------     ---------
                                                                 88.5           35.5        (959.4)
                                                            ---------      ---------     ---------

C.    INCOME DERIVING FROM DERIVATIVE FINANCIAL
      INSTRUMENTS
Net income from derivative instruments ALM *                      0.3           11.6           1.8
                                                            ---------      ---------     ---------
                                                                  0.3           11.6           1.8
                                                            ---------      ---------     ---------

D.    OTHER INCOME AND EXPENSES
Commissions from financing operations                            11.0           12.1          13.4
Other financing income**                                         19.0           11.6          28.1
Other financing expenses                                         (9.6)         (12.7)        (11.2)
                                                            ---------      ---------     ---------
                                                                 20.4           11.0          30.3
                                                            ---------      ---------     ---------
Total profit from financing operations before
 allowance for doubtful debts                                    29.3           18.2          61.6
                                                            =========      =========     =========

Including - exchange rate differences, net                       (6.1)          (9.8)         15.6
                                                            =========      =========     =========

E.   RESULTS FROM INVESTMENTS IN DEBENTURES
Financing income on accrual basis on available-for-
 sale debentures (included in income from assets)                   -              -           0.3
                                                            ---------      ---------     ---------

Total profit from investments in debentures                         -              -           0.3
                                                            =========      =========     =========

*    Derivatives comprising part of the asset and liability management system of the Bank, not
     designated for hedging purposes.

**  Including income from interest collected in
    respect of problematic debts                                 17.4            9.4          21.6
                                                            =========      =========     =========


                                     F - 80`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 24 - OPERATING COMMISSIONS

                                                              2007        2006          2005
                                                            -------      -------       -------
                                                                     REPORTED AMOUNTS
                                                            ----------------------------------
                                                         NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                            -------      -------       -------

Ledger fees (in Israeli and foreign currency)                   0.5          0.4           1.1
Payment order system services                                     -          0.1           0.1
Foreign trade transactions                                      0.1          0.2           0.2
Credit handling and drafting of contracts                         -            -           0.1
Computerized information services and
 confirmations                                                    -            -           0.1
Other                                                           0.5          0.6           0.6
                                                            -------      -------       -------

Total operating commissions                                     1.1          1.3           2.2
                                                            =======      =======       =======

NOTE 25 - GAINS ON INVESTMENTS IN SHARES

                                                              2007        2006          2005
                                                            -------      -------       -------
                                                                     REPORTED AMOUNTS
                                                            ----------------------------------
                                                         NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                            -------      -------       -------

Gains on sale of available-for-sale shares                      3.3         10.3          11.3
Dividend from available-for-sale and trading shares             5.4          6.1             -
                                                            -------      -------       -------

Total gains on investments in shares                            8.7         16.4          11.3
                                                            =======      =======       =======

NOTE 26 - OTHER INCOME

                                                              2007        2006          2005
                                                            -------      -------       -------
                                                                     REPORTED AMOUNTS
                                                            ----------------------------------
                                                         NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                            -------      -------       -------

Gains on severance funding                                      0.2          0.8           0.6
Other                                                           1.5          3.0           4.1
                                                            -------      -------       -------

Total other income                                              1.7          3.8           4.7
                                                            =======      =======       =======


                                     F - 81`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 27 - SALARIES AND RELATED EXPENSES

                                                              2007        2006          2005
                                                            -------      -------       -------
                                                                     REPORTED AMOUNTS
                                                            ----------------------------------
                                                         NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                            -------      -------       -------

Salaries                                                       13.3         13.8          14.5
Severance pay, provident fund, pensions,
 continuing education fund, vacation pay,
 sick leave pay and long service bonuses (*)                    2.1          3.0           2.8
National insurance                                              3.1          0.7           0.8
Other related expenses                                            -          0.1           0.1
                                                            -------      -------       -------

Total salaries and related expenses                            18.5         17.6          18.2
                                                            =======      =======       =======

     (*)  In 2006 and 2005, payroll tax was not included in payroll expenses due
          to the existence of losses for purposes of profit tax.

NOTE 28 - OTHER EXPENSES

                                                              2007        2006          2005
                                                            -------      -------       -------
                                                                     REPORTED AMOUNTS
                                                            ----------------------------------
                                                         NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                            -------      -------       -------

Marketing and advertising                                       0.1          0.1           0.1
Communications (postage, telephone,
 courier fees, etc.)                                            0.3          0.4           0.4
Computer (not including salaries and
 depreciation)                                                  2.8          3.3           4.3
Office expenses                                                 0.2          0.2           0.3
Insurance                                                       1.5          3.2           4.7
Professional services                                           3.3          3.4           4.8
Directors' fees (not including a director employed
 as a senior executive)                                         0.6          0.6           0.7
Staff training, further education, etc.                         0.1          0.1             -
Other                                                           0.5          3.0           1.2
                                                            -------      -------       -------

Total other expenses                                            9.4         14.3          16.5
                                                            =======      =======       =======


                                     F - 82`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 29 - TAXES ON ORDINARY OPERATING INCOME

     A.   COMPOSITION:

                                                              2007        2006          2005
                                                            -------      -------       -------
                                                                     REPORTED AMOUNTS
                                                            ----------------------------------
                                                         NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                            -------      -------       -------

Taxes for the current year                                      1.5            -             -
Taxes in respect of prior years                                 0.1            -             -
                                                            -------      -------       -------

Provision for taxes on income                                   1.6            -             -
                                                            =======      =======       =======

     B.   RECONCILIATION BETWEEN THE THEORETICAL TAX AND THE TAX EXPENSE

     The following table presents a reconciliation between the theoretical tax
     applying to the operating profit of the Bank, based on the statutory tax
     rate applicable to banks in Israel, and the tax expense on operating
     profit, as reflected in the statement of income:

                                                              2007        2006          2005
                                                            -------      -------       -------
                                                                     REPORTED AMOUNTS
                                                            ----------------------------------
                                                         NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                            -------      -------       -------

Statutory tax rate                                            38.53%       40.65%        43.59%
                                                            =======      =======       =======

Tax (tax savings) at the valid statutory rate                   9.2         (7.0)         (3.7)

Tax (tax savings) in respect of:
Addition (deduction) in respect of inflation                    2.1         (0.2)          2.2
General and supplementary allowances for
  doubtful debts                                               (2.5)        (2.4)         (5.2)
Other non-deductible expenses  (fines, excess expenses)         0.1          0.1           0.1
Exempt income and income with limited rates                       -          1.1             -
Differences and tax benefits in respect of which
 deferred taxes had not been recorded                          (4.2)         7.3           3.6
Profit tax on payroll tax (net)                                 0.2            -             -
Taxes in respect of prior years                                 0.1            -             -
Additional payables (receivables) in respect of
  other problematic debts                                      (3.4)           -             -
Loss for purposes of profit VAT which
  cannot be set off                                               -          1.1           3.0
                                                            -------      -------       -------

Tax expense reflected in the statement of income                1.6            -             -
                                                            =======      =======       =======

     C.   The Bank has been issued final tax assessments for all years through
          2003.

     D.   Carryforward tax losses in respect of which deferred tax assets were
          not recorded total NIS 719 million (in 2006 - NIS 707 million).


                                     F - 83`

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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 29 - TAXES ON INCOME (CONT'D)

     E.   In 2006, the Bank recorded payroll tax on salaries receivable in the
          amounts of NIS 2.8 million, as a result of losses for purposes of
          profit tax.

     F.   On July 25, 2005 the Israeli parliament passed the Law for the
          Amendment of the Income Tax Ordinance (No. 147 and Temporary Order) -
          2005 (hereinafter - Amendment 147). The Amendment provides for a
          gradual reduction in the company tax rate in the following manner: in
          2007 the tax rate will be 29%, in 2008 the tax rate will be 27%, in
          2009 the tax rate will be 26% and from 2010 onward the tax rate will
          be 25%. Furthermore, as from 2010, upon reduction of the company tax
          rate to 25%, real capital gains will be subject to tax of 25%.

          The tax on banking institutions includes profit tax in accordance with
          the VAT Law

          On June 29, 2006, a VAT Order was issued reducing the profit tax rate
          from 17% to 15.5%, commencing on July 1, 2006. Accordingly, the
          statutory tax rate that will apply to the Bank will be 36.8% in 2008,
          35.9% in 2009 and 35.1% in 2010.

NOTE 30 - DESIGNATED DEPOSITS AND CREDIT AND DEPOSITS GRANTED THEREFROM

                                                      DECEMBER 31     DECEMBER 31
                                                         2007             2006
                                                       ---------       ---------
                                                        REPORTED        REPORTED
                                                        AMOUNTS         AMOUNTS
                                                       ---------       ---------
                                                     NIS MILLIONS     NIS MILLIONS
                                                       ---------       ---------

CREDIT AND DEPOSITS OUT OF DESIGNATED DEPOSITS
Credit to the public                                     5,095.4         5,840.1
                                                       ---------       ---------

Total                                                    5,095.4         5,840.1
                                                       =========       =========

DESIGNATED DEPOSITS
Deposits of the Government                               5,219.8         5,977.1
                                                       ---------       ---------

Total                                                    5,219.8         5,977.1
                                                       =========       =========

     Credit out of designated deposits includes NIS 4,963.2 million, which is
     secured by a State guarantee. The annual interest margin in respect of this
     credit amounts to NIS 0.3 million (on December 31, 2006 the balance of the
     credit secured by a State guarantee was NIS 5,671.0 million).


                                     F - 84`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 31 - INFORMATION ON NOMINAL DATA BASIS

                                  DECEMBER 31     DECEMBER 31
                                     2007            2006
                                   ---------       ---------
                                 NIS MILLIONS     NIS MILLIONS
                                   ---------       ---------

Total assets                         6,482.6         7,516.3
Total liabilities                    6,372.6         7,496.4
                                   ---------       ---------

Total shareholders' equity             110.0            19.9
                                   =========       =========

                                      2007            2006            2005
                                   ---------       ---------       ---------
                                 NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                   ---------       ---------       ---------

Nominal net income (loss)               22.2           (17.1)           (8.4)


                                     F - 85`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS

     A.   The Bank prepares its financial statements in accordance with Israeli
          GAAP. As applicable to these financial statements, Israeli GAAP and
          U.S. of America GAAP vary in certain significant respects, as
          described below:

          1.   EFFECT OF INFLATION:

          In accordance with Israeli GAAP, until December 31, 2003, when the
          adjustment of financial statements for the effects of inflation in
          Israel was discontinued, the Bank comprehensively included the effect
          of the changes in the general purchasing power of Israeli currency in
          its financial statements, as described in Note 1C above. In view of
          the inflation in Israel, this was considered a more meaningful
          presentation than financial reporting based on nominal amounts.

          As explained in note 1C above, the amounts adjusted for the effects of
          inflation in Israel, presented in the financial statements as of
          December 31, 2003 (hereafter - "the transition date"), were used as
          the opening balances for the nominal financial reporting in the
          following periods. As a result, amounts reported in periods subsequent
          to the transition date are based on their adjusted December 2003
          shekel balance.

          In accordance with the guidelines of the SEC for reporting
          requirements by foreign issuers, the adjustments to reflect the
          changes in the general purchasing power of Israeli currency, including
          adjustments that are included in the carrying amounts of non-monetary
          and capital items, have not been reversed in the reconciliation of
          Israeli GAAP to U.S. GAAP.

          2.   SPECIFIC PROVISION FOR LOAN LOSSES

          In accordance with Israeli GAAP:

          The provision for loan losses is determined on a specific basis,
          taking the following factors into consideration:

          a.   The financial position of the borrower, including an assessment
               of the likelihood of repayment of the loan within an acceptable
               period and the extent of the Bank's other commitments to the same
               borrower.

          b.   The realizable value of any collateral for the loan; and

          c.   The cost associated with obtaining repayment and realization of
               any such collateral.

          In accordance with U.S. GAAP:

          Financial Accounting Standards (FAS) 114, as amended by FAS 118,
          prescribes the accounting treatment by creditors with respect to
          impairment of loans. These standards cover all creditors and all
          loans, except:

          a.   Large groups of small-balance homogeneous loans that are
               collectively evaluated for impairment.

          b.   Loans that are measured at fair value or at the lower of cost or
               fair value.


                                     F - 86`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          2.   SPECIFIC PROVISION FOR LOAN LOSSES (CONT'D)

          c. Leases, as defined in FAS 13.

          d.   Debt securities, as defined in FAS 115.

          These standards cover every loan, which is part of an arrangement
          restructuring liabilities, involving modifications of terms of the
          loans, including those involving a receipt of assets in partial
          satisfaction of a receivable.

          In accordance with FAS 114, a loan is impaired when it is probable,
          based on current information and events, that the creditor will be
          unable to collect all amounts (contractual interest and principle
          payments) due according to the contractual terms of the loan
          agreement.

          Loans impaired are measured based on the present value of the expected
          future cash flows, discounted at the loan's effective interest rate
          or, alternatively, based on the observable market price of the loan or
          the fair value of the collateral, if the loan is collateral dependent.

          3.   GENERAL PROVISION FOR LOAN LOSSES

          In accordance with Israeli GAAP:

          The directives of the Supervisor of Banks require that, commencing
          with 1992, banks include, in addition to the specific allowance for
          doubtful debts, a supplementary allowance for doubtful debts, which
          replaces the general allowance, which had been required up to that
          time.

          The supplementary allowance for doubtful debts is based upon excessive
          credit balances, measured according to specified quality
          characteristics of the credit portfolio, as provided in the directives
          of the Supervisor of Banks.

          In accordance with the aforementioned requirements, a portion of the
          general allowance, as at December 31, 1991, equal to 1% of the total
          debt to which it was related at that date, is to be maintained in
          inflation adjusted values. According to a directive of the Supervisor
          of Banks the adjustment to inflation of the general allowance was
          discontinued as at January 1, 2005.

          In accordance with U.S. GAAP:

          Each bank determines its own methodology for general reserve based on
          past experience of credit losses and on the quality of its credit
          portfolio.

          In light of the structure of the Bank's credit portfolio and its
          concentrations, the Bank is considering the application of FAS 114 to
          all its borrowers without recording a general provision.


                                     F - 87`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          4.   NON-PARTICIPATING PREFERENCE SHARES

          Preference D and DD shares that were issued by the Bank, pay 7.5%
          cumulative dividend, linked to the U.S. dollar exchange rate and
          redeemable by the Bank. The redemption dates of these preference
          shares will be determined by the Bank, subject to the approval of the
          State of Israel's Treasury.

          In accordance with Israeli GAAP:

          These preference shares are presented as a liability and not as part
          of the shareholders' equity since the Bank has a contractual
          obligation to pay dividend on these preference shares and since the
          Bank does not have an unconditional right to avoid paying the
          aforementioned dividend. Since these preference shares are classified
          as liabilities, they are presented in their original amount with the
          addition of the exchange differences in respect thereof.

          In accordance with U.S. GAAP:

          Since the Bank controls the decision on the redemption and since as of
          the date of these financial statements the redemption of these shares
          is not probable, they are presented as part of the shareholders'
          equity.

          5.   PARTICIPATING PREFERENCE SHARES

          Preference C, CC and CC1 shares that were issued by the Bank, pay 6%
          cumulative dividend, linked to the U.S. dollar exchange rate. These
          preference shares are not redeemable.

          In accordance with Israeli GAAP:

          These preference shares are presented as a liability and not as part
          of shareholders' equity since the Bank has a contractual obligation to
          pay dividend on these preference shares, and since the Bank does not
          have an unconditional right to avoid paying the aforementioned
          dividend. Since those preference shares are classified as liabilities,
          they are presented in their original amount with the addition of the
          exchange differences in respect thereof.

          In accordance with U.S. GAAP:

          Since these preference shares are not redeemable, they are presented
          as part of the shareholders' equity.


                                     F - 88`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          6.   LIABILITY FOR TERMINATION BENEFITS IN REGARD WITH COLLECTIVE
               TERMINATION AGREEMENT AND PERSONAL AGREEMENTS

          In accordance with Israeli GAAP:

          The Bank recognized a liability for involuntary termination benefits
          in accordance with the collective termination agreement and certain
          personal agreements, for those employees that under the Bank's
          management best estimation it is probable that they will be
          involuntary terminated. The liability was calculated under the
          assumption that those employees would be terminated as at the Balance
          Sheet date.

          In regard to the personal agreements with the Chairman of the Board,
          CEO and Deputy CEO, the Bank recorded a provision in the amount that
          in management's estimate would be obligated to compensate them for the
          period after their expected termination and until the end of the
          period during which the Bank is obligated to employ them in accordance
          with their personal agreements.

          In accordance with U.S. GAAP:

          Since the employees are required to render services until they are
          terminated in order to receive termination benefits, the liability and
          loss are recognized ratably over the expected future service period.

          As discussed in Note 1A, the "Run-Off" plan which was originally
          supposed to end as of June 30, 2006, was extended until July 31, 2008.
          This resulted in a change of an accounting estimate and the remaining
          liability and loss are now recognized over the new expected future
          service period which is expected to end on July 31, 2008.

          7.   CUSTOMER'S IMPAIRED DEBT (NOTE 4E)

          In accordance with Israeli GAAP:

          According to the Israeli Supervisor of Banks' instructions this
          customer's debt is reclassified to securities item and presented
          according to market value of the shares pledged in favor of the Bank.

          In accordance with US GAAP:

          This customer's debt continues to be presented as part of the credit
          to the public and the allowance for impairment was recognized in
          accordance with the provision of FAS 114 (based on the fair value of
          the collateral).

          8.   INCOME (LOSS) PER SHARE

          In accordance with Israeli GAAP:

          No adjustments were made to the reported net income (loss) with
          respect to the dividends on the preference shares, for the computation
          of the per share amounts. The dividend accrued but not yet paid was
          not taken into account in the calculation of the earnings (loss) on
          the ordinary A shares since no income has been recorded in respect of
          the interest on the perpetual deposits, the payment of which, in the
          opinion of the Bank's management, is contingent upon payment of the
          dividend in respect of the aforementioned preference shares.



                                     F - 89`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          Furthermore, it is not required to add to the calculation of the loss
          on the ordinary A shares, the dollar exchange rate linkage differences
          on the principal of the preference shares.

          In accordance with U.S. GAAP:

          Since the preference shares are classified as equity and are stated in
          their nominal amount, both the accrued but not yet paid dividend on
          the preference shares and the dollar exchange rate linkage differences
          on the principal of the preference shares were taken into account in
          the calculation of the income (loss) on the ordinary A shares.

          9.   PERPETUAL DEPOSITS WITH THE STATE OF ISRAEL

          In accordance with Israeli GAAP:

          Due to the agreement between the Bank and the Israeli Treasury
          regarding the changes in the method of computing the linkage on the
          perpetual deposits with the State of Israel (see Note 8), the change
          in the amounts of the perpetual deposits (resulting from this
          agreement) is carried to the Bank's shareholders' equity.

          In accordance with U.S. GAAP:

          As this agreement represents a commitment of the Bank's shareholder to
          provide funds to the Bank in consideration for the issuance of B1
          shares, neither an increase in the Bank's shareholder's equity nor an
          increase in the deposit are recorded to the Bank's shareholders'
          equity due to the said agreement.

          10.  COMMITMENT IN RESPECT OF ACTIVITY BASED ON COLLECTION OF LOANS

          In accordance with Israeli GAAP:

          Deposits, the payment of which is dependent on collection of loans,
          and the loans that were granted from the proceeds of such deposits,
          are set off and presented on net basis, as the Bank has no credit
          risk.

          In accordance with U.S. GAAP:

          The transactions mentioned above do not meet the set off conditions
          under U.S. GAAP, hence, the deposits and loans are presented on gross
          basis.

          11.  SUMMARY OF SIGNIFICANT PRESENTATION DIFFERENCES OF BALANCE SHEET
               ITEMS BETWEEN ISRAELI GAAP AND U.S. GAAP:

          a.   Non-marketable shares included in securities available for sale
               under Israeli GAAP were classified to other assets under U.S.
               GAAP.


                                     F - 90`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          b.   Accrued interest receivable included in credit items was
               classified to other assets under U.S. GAAP.

          c.   The provision for severance pay is presented under Israeli GAAP
               net of amounts deposited in provident funds in the other
               liabilities balance sheet item.

               Under U.S. GAAP, such funded amounts do not qualify as plan
               assets and thus, are presented in other assets, and the related
               liability is presented in other liabilities.

          d.   Accrued interest payable included in deposit items was
               reclassified to other liabilities under U.S. GAAP.

          12.  STATEMENT OF OTHER COMPREHENSIVE INCOME

          In accordance with Israeli GAAP:

          No disclosure is given regarding comprehensive income.

          In accordance with US GAAP:

          SFAS 130 "Reporting comprehensive income" requires that all items that
          are required to be recognized under the accounting standards as
          components of comprehensive income be reported in a financial
          statement and displayed in the same prominence as other financial
          statements. It requires that an enterprise (a) classify items of other
          comprehensive income by their nature in a financial statement and (b)
          display the accumulated balance of other comprehensive income
          separately from retained earnings and additional paid in capital in
          the equity section of the balance sheet


                                     F - 91`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     B.   The effect of the material differences between Israeli and U.S. GAAP
          on the financial statements

          1.   STATEMENTS OF OPERATIONS:

                                                YEAR ENDED DECEMBER 31
                                          ----------------------------------
                                          2007           2006          2005
                                          -----          -----         -----
                               NOTE    NIS MILLIONS   NIS MILLIONS  NIS MILLIONS
                               -----      -----          -----         -----

(A)
Net income (loss) as
 reported, according to
 Israeli GAAP                              22.2          (17.1)         (8.4)
                                          -----          -----         -----

Specific provision for loan
 Losses                        32.A.2       8.7            3.9           5.0
General provision for loan
 Losses                        32.A.3      (6.5)          (5.9)        (12.0)
Liability for termination
 benefits                      32.A.6      (2.8)          (2.0)         (1.8)
Linkage differences on
 perpetual deposits with
 the Israeli Treasury          32.A.9     (44.0)         (43.8)         34.3
                                          -----          -----         -----
                                          (44.6)         (47.8)         25.5
                                          -----          -----         -----

Net income (loss)
 according to U.S. GAAP                   (22.4)         (64.9)         17.1
                                          =====          =====         =====

                                                   YEAR ENDED DECEMBER 31
                                               ------------------------------
                                                 2007       2006        2005
                                               -------    --------     ------
                                                 NIS         NIS         NIS
                                               -------    --------     ------

(B)  Income (loss) per share (Note 32.A.8)

BASIC INCOME (LOSS) PER "A" ORDINARY
 SHARE:

As reported according to Israeli GAAP          1,470.2    (1,132.4)    (556.3)
As reported according to U.S. GAAP               293.2    (2,936.4)  (3,983.5)
Number of shares                                15,100      15,100     15,100


                                     F - 92`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

          2.   BALANCE SHEET:

                                                     DECEMBER 31, 2007                               DECEMBER 31, 2006
                                         ----------------------------------------        ----------------------------------------
                                       AS REPORTED      ADJUSTMENTS      U.S. GAAP     AS REPORTED      ADJUSTMENTS      U.S. GAAP
                                         -------          -------         -------        -------          -------         -------
                                      NIS MILLIONS     NIS MILLIONS    NIS MILLIONS   NIS MILLIONS     NIS MILLIONS    NIS MILLIONS
                                         -------          -------         -------        -------          -------         -------

Cash and deposits with banks                33.8                -            33.8           66.4                -            66.4
Securities (1)(2)                           46.3            (44.8)            1.5           50.4            (48.4)            2.0
Credit to the public (2)(3)(4)(5)        5,521.1             (1.4)        5,519.7        6,519.1            (18.0)        6,501.1
Credit to governments (3)(12)               24.7            511.1           535.8           41.5            528.3           569.8
Fixed assets                                 0.8                -             0.8            1.1                -             1.1
Other assets (1)(3)(6)                       7.2            115.7           122.9           12.1            134.7           146.8
Perpetual deposits with the
 Israeli Treasury (11)                     848.8           (402.3)          446.5          825.8           (335.2)          490.6
                                         -------          -------         -------        -------          -------         -------
Total assets                             6,482.7            178.3         6,661.0        7,516.4            261.4         7,777.8
                                         =======          =======         =======        =======          =======         =======
Deposits of the public (7)                  54.6             (0.5)           54.1           66.9             (1.0)           65.9
Deposits of banks (7)                      481.2             (5.2)          476.0          768.3            (10.5)          757.8
Deposits of the
 government (7)(12)                      5,319.2            434.1         5,753.3        6,087.4            440.2         6,527.6
Perpetual deposits                           0.1                -             0.1            0.1                -             0.1
Capital notes                               20.2                -            20.2           24.9                -            24.9
Other liabilities (6)(7)(8)                 50.7             99.4           152.8           58.2            116.0           174.2
Non-participating
 shares (10)                               276.0           (276.0)              -          303.2           (303.2)              -
Participating preference
shares (9)                                 170.6           (170.6)              -          187.4           (187.4)              -
Shareholders' equity
(see 3 below) (2)(4)(5)(8)(9)(10)(11)      110.1             94.4           204.5           20.0            207.3           227.3
                                         -------          -------         -------        -------          -------         -------
Total liabilities and
 shareholders' equity                    6,482.7            178.3         6,661.0        7,516.4            261.4         7,777.8
                                         =======          =======         =======        =======          =======         =======

(1)  Classification of non-marketable shares from securities item to other
     assets item (see note 32.A.11.a).

(2)  A customer's debt in respect of which shares were pledged in favor of the
     Bank (see note 32.A.7).

(3)  Classification of accrued interest receivables from credit items to other
     assets item (see note 32.A.11.b).

(4)  Specific provision for loan losses (see note 32.A.2).

(5)  General provision for loan losses (see note 32.A.3).

(6)  Classification of amounts deposited in provident funds in respect of
     severance pay liabilities from other liabilities item, to other assets item
     (see note 32.A.11.c).

(7)  Classification of accrued interest payables from deposit items to other
     liabilities items (see Note 32.A.11.d).

(8)  Liability for termination benefits (see note 32.A.6).

(9)  Classification of participating preference shares to shareholders' equity
     item (see note 32.A.5).

(10) Classification of non-participating preference shares to shareholders'
     equity item (see note 32.A.4).

(11) The agreement between the Bank and the Israeli Treasury regarding the
     changes in the method of computing the linkage on the perpetual deposits
     (see Note 32.A.9).

(12) Commitment in respect of activity based on collection of loans (see note
     32.A.10)


                                     F - 93`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

          3.   STATEMENT OF OTHER COMPREHENSIVE INCOME

                                                                 YEAR ENDED DECEMBER 31
                                                           ----------------------------------
                                                           2007           2006           2005
                                                           ----           ----           ----
                                                       NIS MILLIONS   NIS MILLIONS   NIS MILLIONS
                                                           ----           ----           ----

Net income (loss) according to U.S. GAAP                  (22.4)         (64.9)         17.1

Unrealized gains (losses) on available-for-sale
securities                                                 (0.4)          (2.0)           1.8
                                                           ----           ----           ----

Net comprehensive income (loss) according to U.S.
GAAP                                                      (22.8)         (66.9)         18.9
                                                           ====           ====           ====

          4.   SHAREHOLDERS' EQUITY:

                                                                     DECEMBER 31     DECEMBER 31
                                                                         2007            2006
                                                                        -----           -----
                                                         NOTE       NIS MILLIONS    NIS MILLIONS
                                                        ------          -----           -----

Shareholders' equity as reported according to
 Israeli GAAP                                                           110.1            20.0

A customer debt in respect of which shares
 were pledged in favor of the Bank                      32.A.7           (9.4)           (8.1)

Specific provision for loan losses                      32.A.2           11.5             2.8

General provision for loan losses                       32.A.3           45.2            51.7

Liability for termination benefits                      32.A.6            2.8             5.6

Perpetual deposits with the State of Israel             32.A.9         (402.3)         (335.3)

Classification of non-participating preference
 shares to  shareholders' equity item                   32.A.4          276.0           303.2

Classification of participating preference
shares to shareholders' equity item                     32.A.5          170.6           187.4
                                                                        -----           -----

Shareholders' equity according to U.S. GAAP                             204.5           227.3
                                                                        =====           =====

     C.   STATEMENTS OF CASH FLOWS

          As it relates to the Bank's financial statements, there are no
          material differences in the presentation of the Statement of Cash
          Flows between Israeli GAAP and U.S. GAAP.


                                     F - 94`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
         THE FINANCIAL STATEMENTS (CONT'D)

     D.   NEWLY ISSUED ACCOUNTING PRONOUNCEMENT

          1.   In September 2006, the Financial Accounting Standards Board
               ("FASB") issued Statement of Financial Accounting Standards No.
               157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines
               fair value, establishes a framework, provides guidance regarding
               the methods to be used for measuring fair value and expands the
               required disclosure regarding fair value measurements.

               SFAS 157 is effective for financial statements issued for fiscal
               years beginning after November 15, 2007. The Bank is currently
               assessing the impact that SFAS 157 may have on its results of
               operations and financial position.

          2.   In February 2007, the FASB issued Statement of Financial
               Accounting Standards No. 159, "The Fair Value Option for
               Financial Assets and Financial Liabilities - including an
               amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 is
               expected to expand the use of fair value accounting but does not
               affect existing standards that require certain assets or
               liabilities to be carried at fair value. SFAS 159 is effective
               for financial statements issued for fiscal years beginning after
               November 15, 2007. The Bank is currently assessing the impact
               that SFAS 157 may have on its results of operations and financial
               position.

          3.   In March 2008, the FASB issued Statement of Financial Accounting
               Standards No. 161 "Disclosures about Derivative Instruments and
               Hedging Activities", or SFAS 161. SFAS 161 is intended to improve
               financial reporting regarding derivative instruments and hedging
               activities by requiring enhanced disclosure to enable investors
               to better understand the effects of such derivative instruments
               and hedging activities on a company's financial position,
               financial performance and cash flows. It is effective for
               financial statements issued for fiscal years and interim periods
               beginning after November 15, 2008, with early application
               encouraged (January 1, 2009, for our company). SFAS 161 also
               improves transparency regarding the location and amounts of
               derivative instruments in a company's financial statements; how
               derivative instruments and related hedged items are accounted for
               under SFAS No. 133 "Accounting for Derivative Instruments and
               Hedging Activities" and how derivative instruments and related
               hedged items affect a company's financial position, financial
               performance and cash flows. The Bank is currently assessing the
               impact that SFAS 157 may have on its results of operations and
               financial position.


                                     F - 95`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 33 - SUBSEQUENT EVENTS

     A.   GOVERNMENT DECISION REGARDING THE PRIVATIZATION OF THE BANK

          On April 29, 2008, the Ministerial Committee on Privatization passed a
          resolution pertaining to the privatization of the Bank. The full
          wording of the resolution was publicized by the Bank in its Immediate
          Report on April 30, 2008. The privatization resolution stipulates,
          among other things, the following:

          o    The shares of the State in the Bank shall be sold, as one block,
               by way of a private placement, to an investor or group of
               investors from Israel and/or abroad (the "Purchaser"), as part of
               the blueprint for the sale, including the transfer of all of the
               shares of the Bank, including those held by the public, to the
               Purchaser (the "Sale").

          o    Until the completion of the sale, the Bank shall continue
               collecting its credit portfolio.

          o    Based on the memorandum of principles signed among the
               shareholders of the Bank on March 18, 2008, the Bank shall submit
               a request for approval of an arrangement, pursuant to Article 350
               of the Companies Law - 1999 (the "Companies Law", the
               "Arrangement Pursuant to Article 350"). Pursuant to the
               arrangement, among other things, the Purchaser shall purchase all
               of the preferred C shares, the preferred CC shares and the
               preferred CC1 shares (the "C Share Group") and the ordinary
               preferred shares of the Bank, traded on the Tel Aviv Stock
               Exchange (the "TASE"), and such shares shall be delisted from the
               TASE. In addition, the Purchaser shall purchase, as part of the
               arrangement pursuant to Article 350, all of the ordinary A shares
               and all of the types of the government shares.

          o    According to the Arrangement Pursuant to Article 350, the Bank
               shall redeem, in accordance with the provisions of the prospectus
               governing their issuance, the D and DD shares of the Bank which
               are not held by the State.

          o    As a condition for the approval and implementation of the
               arrangement among the shareholders, all the different types of
               qualified shareholders of the Bank shall waive their claims
               against the Bank, officers of the Bank, and interested parties in
               the Bank, as these terms are defined in the Companies Law. In
               addition, the Bank and the C Share Group shall waive all claims
               against the State in connection with the redemption of the
               perpetual deposit and its refunding to the Bank.

          o    The Bank shall redeem, upon implementation of the arrangement
               pursuant to Article 350, or until December 31, 2008, or until a
               later date to be approved by the Bank of Israel for the extension
               of the credit line, the entire special credit line placed at its
               disposal by the Bank of Israel in 2002.

          o    The Accountant General of the Ministry of Finance is authorized
               to carry out, among other things, the following steps:


                                     F - 96`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 33 - SUBSEQUENT EVENTS (CONT'D)

               a.   To refund to the Bank, by the later of July 31, 2008 or
                    until the approval by the court of the arrangement pursuant
                    to Article 350, the perpetual deposit that was by the Bank
                    with the Accountant General, plus linkage differentials in
                    accordance with the agreements between the State and the
                    Bank pertaining to the perpetual deposit. The Accountant
                    General, in coordination with the Government Companies
                    Authority (the "Authority") and the Bank is authorized to
                    decide that the relative part of the perpetual deposit in
                    respect of the consideration of the issuance of D and DD
                    shares held by the Public shall be returned to the Bank on
                    the date of the refunding of the aforementioned perpetual
                    deposit or at a later date, the latest being proximate to
                    the sale or if the Bank is liquidated. As a condition of the
                    refunding of the perpetual deposit, it shall be guaranteed
                    to the satisfaction of the Accountant General that the funds
                    of the deposit shall be used by the Bank, as a first
                    priority, to repay the balance of the special credit line
                    placed at the disposal of the Bank by the Bank of Israel.

               b.   To pay to the Bank, for purposes of redeeming preference D
                    shares and preference DD shares not held by the State:

                    1.   Interest in respect of the perpetual deposit in an
                         amount equal to the accumulated dividend that was not
                         paid to the preferred D shareholders and the preferred
                         DD shareholders, except the State, from July 1, 2002
                         through the date of the redemption of the shares.

                    2.   A premium at a rate of 5.625% of the par value of the D
                         shares not held by the State.

               c.   To take steps to have the Bank endorse the unpaid balance of
                    the loan granted to the Israel Electric Company Ltd. in
                    favor of the Accountant General or another banking
                    corporation to be stipulated by the Accountant General.

          o    The Accountant General, together with the Authority, were
               authorized to reach an agreement with the various types of
               shareholders of the Bank in connection with the distribution of
               the consideration of the sale, including taking into
               consideration the economic report of the selected expert
               (Professor Amir Barnea) and to formalize such agreement in the
               arrangement to be submitted to the Bank pursuant to Article 350.

          o    The employees of the Bank will be paid a privatization
               remuneration in according with the rules of the Authority. The
               remuneration will be granted immediately following the sale and
               will be subject to the execution thereof.

          The privatization decision was taken further to and on the basis of
          the blueprint for the sale of the issued share capital of the bank
          that has been assessed for quite some time by the Finance Ministry and
          the Government Companies Authority. Within this framework, the
          Government Companies Authority publicized on June 17, 2007 a request
          for information ("RFI") in which it announced, among other things,
          that the State of Israel, through the Government Companies Authority,
          was requesting information from parties interested in purchasing the
          Bank. The Bank was informed by the Government Companies Authority that
          requests had been received from twelve companies and individuals.

          On March 18, 2008, a memorandum of principles was signed between the
          State and the C, CC and CC1 shareholders and part of the ordinary
          preferred shareholders of the Bank, whereby the parties to the
          memorandum agreed, among other things, to cooperate in carrying out
          the blueprint for the sale of the shares of the Bank. The complete
          version of the memorandum of principles and the document of agreements
          that was attached thereto were also publicized as part of the
          Immediate Report made by the Bank on April 30, 2008. Please note that
          the banks whose names appear on the memorandum of principles as part
          of the parties to the document did not sign the document.


                                     F - 97`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 33 - SUBSEQUENT EVENTS (CONT'D)

     B.   THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL

          In a letter dated April 15, 2008, the Governor of the Bank of Israel
          notified the Bank that the Special line of credit granted to the Bank
          by the Bank of Israel until July 31, 2008, will be extended so as it
          will be in effect until the earlier of December 31, 2008 or receipt of
          the approval by the court of the Arrangement Plan between all of the
          shareholders of the Bank, the State and the Bank pursuant to Article
          350 of the Companies Law - 1999.

          In the above letter, The Governor of the Bank of Israel also announced
          that the interest on the utilized credit after July 31, 2008 will be
          equal to the "Bank of Israel rate", plus 1.5%.

     C.   REQUEST FOR APPROVAL OF THE COMPROMISE AGREEMENT AND THE ARRANGEMENT
          PURSUANT TO ARTICLE 350 OF THE COMPANIES LAW - 1999 BETWEEN THE BANK
          AND ITS SHAREHOLDERS

          Further to the resolution regarding the privatization of the Bank that
          was passed by the Ministerial Committee on Privatization and in
          accordance with such resolution, the board of directors of the Bank
          decided at its meeting of May 26, 2008 to petition the court to
          approve the compromise plan and arrangement pursuant to Article 350 of
          the Companies Law between the Bank and its shareholders (hereinafter -
          the "Arrangement Plan").

          Prior to passing the resolution, the board of directors was presented
          with the opinion of an expert regarding the reasonableness of the
          criterion for determining the minimum price at which the sale of the
          Bank will be carried out in accordance with the Arrangement Plan, and
          the fairness of the criterion as far as the public shareholders are
          concerned, regarding the formula that was set down in the plan for the
          distribution of the proceeds of the sale, and regarding the document
          dated March 9, 2008, prepared by Professor A. Barnea, who assessed the
          alternative of liquidating the Bank versus the alternative of selling
          the shares of the Bank, on the basis of the financial statements of
          the Bank as of September 30, 2007 and which contains the formula for
          the distribution of the proceeds of the sale. The document of
          Professor A. Barnea constitutes part of the Arrangement Plan and its
          full version was publicized by the Bank in an immediate filing dated
          March 12, 2008. In addition, the board of directors was furnished with
          a legal opinion regarding the reasonableness of the arrangement to pay
          a partial dividend to the C, CC, and CC1 shareholders that will apply
          in the event that the sale of the shares of the Bank is not realized.

          The resolution of the board of directors regarding the submission of
          the Arrangement Plan was passed after the board of directors reached a
          decision in view of, among other things, the conclusions and findings
          in the aforementioned two opinions and in the aforementioned document
          of Professor A. Barnea, that the alternative of selling the shares of
          the Bank, which stands at the center of the Arrangement Plan, may be
          more beneficial to the public shareholders than the alternative of
          liquidating the Bank.

          The Arrangement Plan was included in the immediate filing made by the
          Bank on May 27, 2008 and pursuant to the above resolution of the board
          of directors, a petition to approve it was submitted to court on July
          6, 2008. A brief description follows:

          The Arrangement Plan includes three parts (two of which are
          alternatives) which the shareholders and the court will be asked to
          approve.


                                     F - 98`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 33 - SUBSEQUENT EVENTS (CONT'D)

          1.   The first part will be implemented immediately upon the approval
               of the Arrangement Plan (by the meetings of the type of
               shareholders and the court). Pursuant to the first part, the
               State will redeem the perpetual deposits made by the Bank with
               the Treasury, except that part of them that reflect the proceeds
               of the issuance of the DD shares held by the public (which will
               continue to be maintained as a dollar-linked deposit). The Bank
               will use the redemption of the perpetual deposits to repay the
               balance of the line of credit placed at its disposal by the Bank
               of Israel. The opening motion that was filed by various financial
               institutions against the Bank to have the distribution of the
               dividend renewed will be rejected, and the appeal filed by the
               Bank against the court decision rejecting its opening motion on
               the matter of the accrual of the interest on its perpetual
               deposits with the Treasury will also be rejected.

          2.   Pursuant to the second part (the sales arrangement), all of the
               shares of the Bank, except for the D and DD shares not held by
               the State, will be sold by the parties holding them (the State
               and the public) as part of the sales process to be implemented by
               the Government Companies Authority.

               The D and DD shares not held by the State will be redeemed
               according to the terms of their issue: the D shares at their full
               dollar par value, plus a premium of 5.625%, plus the entire
               preferred dividend in arrears in respect of such shares, and the
               DD shares at their full dollar par value plus the entire
               preferred dividend in arrears in respect of such shares. The
               redemption of the amount of the principal will come from the
               resources of the Bank while the payment of the premium and the
               preferred dividend in arrears will be financed by funds provided
               to the Bank by the State of Israel.

               If the total proceeds to be received in respect of the sold
               shares are lower than the greater of the "liquidation value of
               the Bank" as to be determined by the average of the two
               valuations conducted at the request of the State prior to the
               implementation of the sale, less the principal amount of the
               redemption of the D and DD shares, or an amount of NIS 400
               million (the "minimum price"), the consummation of the sale shall
               be subject to the approval of the meeting of the C-type
               shareholders (C, CC and CC1) (75% of the value represented by the
               vote is required for approval). The State is authorized, at its
               discretion, not to carry out the sale even if the average total
               proceeds are higher than the minimum price.

               The proceeds of the sale shall be divided among the holders of
               the sold shares on the basis of the distribution formulas
               prepared by Professor A. Barnea as part of the document he
               prepared, which is attached to the Arrangement Plan.

               The State shall refund to the Bank part of the perpetual deposits
               it still has, in accordance to the description of part 1 above.

               The shareholders of the Bank will waive any claim, demand, or
               suit against the Bank, officers of the Bank, shareholders of the
               Bank, employees of the Bank, or the State.

               The Bank will endorse its rights to the loan it placed at the
               disposal of the Israel Electric Company Ltd. and to the State
               deposit which served as a source of such loan. The rights will be
               endorsed to the party to which the Bank is instructed by the
               Accountant General.

               The conditions for the performance of the second part (the sales
               arrangement) are the finding of a purchaser and the completion of
               the sale by December 31, 2009.


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`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
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NOTE 33 - SUBSEQUENT EVENTS (CONT'D)

          3.   The third part (the dividend arrangement) is an alternative to
               the second part and it shall be carried out in the event that the
               sales arrangement is not completed by December 31, 2009 or, if
               prior to that date, a liquidation order is issued against the
               Bank or if the general meeting of the Bank decides to voluntarily
               liquidate the Bank. As part of this course of action, the Bank
               will pay the holders of C, CC, and CC1 shares, on the earliest of
               December 31, 2009, or the date on which a liquidation order is
               issued against the Bank, or on the date on which the general
               meeting of the Bank decides to voluntarily liquidate the Bank,
               half of the preferred dividend in arrears (at an annual rate of
               6%) accrued on their shares during the period from July 1, 2002
               through July 31, 2008, plus linkage differentials and interest by
               law, from July 31, 2008 until the date of the actual payment to
               the shareholders. The State will pay the Bank in respect of the
               part of the perpetual deposits that reflect the consideration of
               the issuance of C, CC and CC1 shares, half of the interest at an
               annual rate of 6% accrued on this part during the aforementioned
               period, plus linkage differentials and interest by law, from July
               31, 2008 until the date of the actual payment to the Bank.

               Pursuant to the third part, the State will waive any claim,
               demand or suit against the Bank, the receiver of the Bank, and
               the liquidation account of the Bank in connection with 50% of the
               preferred dividend in arrears accrued on the D and DD shares held
               by the State in respect of the period from July 1, 2002 through
               July 31, 2008, and the holders of C, CC and CC1 shares will waive
               any claim, demand, or suit in connection with the perpetual
               deposit, its return to the Bank, the payment of interest thereon,
               and the non-distribution of the dividend during the period until
               the payment to them of half of the preferred dividend in arrears,
               as mentioned above (without such waiver of the holders of the C,
               CC and CC1 shares detracting from their rights under the articles
               of the Bank to accumulate a preferred dividend in respect of
               their shares, including in relation to the aforementioned
               period).

               It is hereby clarified and emphasized that the above is solely a
               condensed description of the major features of the Arrangement
               Plan. It does not replace the full version of the Arrangement
               Plan as approved by the board of directors and as submitted to
               the court for approval on July 6, 2008.

               Since the redemption of the D and DD shares and the payment of
               half of the preferred dividend in respect of the C, CC, and CC1
               shares, as described above, may constitute a reduction in
               capital, then concurrent with the submission of a request to the
               court to approve the Arrangement Plan, the Bank will also submit
               to the court a request to reduce its capital, which request was
               approved by the board of directors at its meeting on May 26,
               2008. Therefore, execution of the arrangement shall be also
               subject to the approval of the court in connection with the
               request to reduce the capital of the Bank.

     D.   EARLY RETIREMENT

          On December 26, 2002, a collective agreement was signed by the Bank,
          the New General Labor Federation and the Bank's Workers Committee. The
          agreement prescribed, among other things, special payments to be made
          to employees upon early retirement. For details of the agreement and
          additional extension agreements related thereto, see Note 18A3 above.

          On May 26, 2008, in connection with the privatization plan for the
          Bank, the board of directors of the Bank approved additional special
          payments to be made to employees upon early retirement. The additional
          amounts total NIS 10 million. A new agreement will be drafted in the
          near future and will be presented to the Supervisor of Wages and Labor
          Agreements at the Treasury for approval.


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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
--------------------------------------------------------------------------------

NOTE 33 - SUBSEQUENT EVENTS (CONT'D)

          In addition, in connection with the privatization plan for the Bank,
          the audit committee and board of directors of the Bank gave their
          approval on May 26, 2008 to payment of three months pay in lieu of
          advance notice and three months acclimation payments to the chairman
          of the board, the General Manager of the Bank and the Deputy General
          Manager of the Bank, should the aforementioned parties leave the
          employment of the Bank for any reason whatsoever. The three months pay
          will be paid in lieu of giving three months actual notice as per their
          current employment agreements. For details of the terms of employment
          of the chairman of the board, the General Manager and the Deputy
          General Manager, see Note 18A2 above.

          Resolutions of the audit committee and board of directors of the Bank
          are subject to the approval of the Supervisor of Wages and Labor
          Agreements at the Treasury. The expense deriving from such approval
          amounts to NIS 1 million.

     E.   EXPIRATION OF THE BANK'S BANKING LICENSE

          Pursuant to a letter from the Governor of the Bank of Israel dated
          January 29, 2006, on August 1, 2008, the Bank's banking license
          expired.


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