`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, 2008

                                       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)

                 12 Yad Harutzim Street, Tel Aviv, Israel 67778
                    (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 (redeemed December 31, 2008)

                                                                           NUMBER OF SHARES
                                                                      OUTSTANDING AS OF DECEMBER
                         TITLE OF CLASS                                        31, 2008
-----------------------------------------------------------------               ------

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 DECEMBER
                         TITLE OF CLASS                                        31, 2008
-----------------------------------------------------------------               ------

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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(ss.232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such file)

                                       N/A

     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]

     Inducate by check mark which basis of accounting the registrant has used to
prepare the financial statements included in this filing:

U.S. GAAP [_]      International Financial Reporting Standards as      Other [X]
                   issued by the International Accounting
                   Standards Board  [_]

     If "Other" has been checked in response to the previous question, 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.

                                       N/A`

`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                                                             19
Item 5 -           Operating and Financial Review and Prospects                                           45
Item 6 -           Directors, Senior Management and Employees                                             65
Item 7 -           Major Shareholders and Related Party Transactions                                      82
Item 8 -           Financial Information                                                                  86
Item 9 -           The Offer and Listing                                                                  91
Item 10 -          Additional Information                                                                 92
Item 11 -          Quantitative and Qualitative Disclosures About Market Risk                            113
Item 12 -          Description of Securities Other than Equity Securities                                119
                                     PART II
Item 13 -          Defaults, Dividend Arrearages and Delinquencies                                       120
Item 14 -          Material Modifications to the Rights of Security Holders and Use of Proceeds          127
Item 15 -          Controls and Procedures                                                               127
Item 16A -         Audit Committee Financial Expert                                                      128
Item 16B -         Code of Ethics                                                                        129
Item 16C -         Principal Accountant Fees and Services                                                129
Item 16D -         Exemptions from the Listing Standards for Audit Committees                            130
Item 16E -         Purchases of Equity Securities by the Issuer and Affiliated Purchasers                130
                                    PART III
Item 17 -          Financial Statements                                                                  131
Item 18 -          Financial Statements                                                                  131
Item 19 -          Exhibits                                                                              131


                                       i`

`EXPLANATORY NOTES

     All references in this annual report on Form 20-F for the period ended
December 31, 2008 (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 and the implementation of the compromise and arrangement plan
between the Bank and its shareholders (which was approved by the Bank's
shareholders on October 30, 2008 and November 6, 2008 and by the Tel Aviv
District Court on November 24, 2008) regarding, among other things, 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 outcome of the
sale process of the Bank's shares according to the above plan, which was begun
on April 6, 2009; the government's resolutions regarding our future operations;
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 particular, at
present it is not possible to ascertain if and when the sale of our shares
pursuant to the above compromise and arrangement plan will be carried out and
what will be the consequences to the Bank should the sale of our shares not be
carried out. The financial statements have been prepared under the going concern
assumption since there is no substantial doubt as to our ability to continue
operating as a going concern and since our liquidation is not imminent. 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.


                                       ii`

`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.

                            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, 2008 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 that
were presented in the past 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, 2008.


                                       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, 2008           3.588          4.022          3.230          3.802
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

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

MONTH ENDED
September 30, 2009          3.781          3.807          3.729          3.758
August 31, 2009             3.832          3.931          3.743          3.811
July 31, 2009               3.892          3.987          3.781          3.790
June 30, 2009               3.944          4.005          3.887          3.919
May 31, 2009                4.092          4.196          3.958          3.958
April 30, 2009              4.196          4.256          4.125          4.163
March 31, 2009              4.159          4.245          4.024          4.188
February 29, 2009           4.103          4.191          4.012          4.162
January 31, 2009            3.913          4.065          3.783          4.065
December 31, 2008           3.870          3.980          3.677          3.802

----------

(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 October 22, 2009, the exchange rate was NIS 3.698 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
                                            -------------------------------------------------------------------------------
                                              2008             2007              2006               2005             2004
                                            -------           -------           -------           -------           -------
OPERATING DATA:                                                            REPORTED AMOUNTS
                                            -------------------------------------------------------------------------------
ISRAELI GAAP                              NIS MILLIONS     NIS MILLIONS      NIS MILLIONS      NIS MILLIONS      NIS MILLIONS
                                            -------           -------           -------           -------           -------

Profit from financing
 operations before allowance
 for doubtful debts                            84.0              29.3              18.2              61.6              66.2
Allowance for doubtful debts                  (16.9)            (13.8)             21.7              44.2              70.2
                                            -------           -------           -------           -------           -------
Profit (loss) from financing
 operations after allowance
 for doubtful debts                           100.9              43.1              (3.5)             17.4              (4.0)
                                            -------           -------           -------           -------           -------
OPERATING AND OTHER INCOME -
Operating commissions                           0.6               1.1               1.3               2.2               4.1
Gains  from
 investments in shares                          1.0               8.7              16.4              11.3              41.5
Other income                                    1.4               1.7               3.8               4.7               4.6
                                            -------           -------           -------           -------           -------
Total operating and other income                3.0              11.5              21.5              18.2              50.2
                                            -------           -------           -------           -------           -------
OPERATING AND OTHER EXPENSES -
Salaries and related expenses                  19.9              18.5              17.6              18.2              19.7
Expenses (income) in respect of
 employee retirement                            9.0                 -               0.5               5.5              (0.8)
Maintenance and depreciation
 of buildings and equipment                     2.9               2.9               2.7               3.8               5.7
Other expenses                                  9.6               9.4              14.3              16.5              20.4
                                            -------           -------           -------           -------           -------
Total operating and other expenses             41.4              30.8              35.1              44.0              45.0
                                            -------           -------           -------           -------           -------
Operating profit (loss)
 before taxes on income                        62.5              23.8             (17.1)             (8.4)              1.2
Provision for taxes on operating
   income                                       9.5               1.6                 -                 -                 -
                                            -------           -------           -------           -------           -------
Operating profit (loss) after
 taxes on income                               53.0              22.2             (17.1)             (8.4)              1.2
OTHER ITEMS
Capital gain net                                  -                 -                 -                 -               0.2
                                            -------           -------           -------           -------           -------
Total other items                                 -                 -                 -                 -               0.2
                                            -------           -------           -------           -------           -------
NET EARNINGS (LOSS) FOR THE YEAR               53.0              22.2             (17.1)             (8.4)              1.4
                                            =======           =======           =======           =======           =======
NET EARNINGS (LOSS) PER SHARE IN
NIS, ORDINARY A SHARES                      3,509.9           1,470.2          (1,132.4)           (556.3)             92.7
                                            =======           =======           =======           =======           =======


                                       2`

`2008           2007           2006           2005           2004
                                                            -----          -----          -----          -----          -----
                                                               (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                               19.6          (22.4)         (64.9)          17.1          (20.0)

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

Profit (Loss) per Ordinary A Shares                        (226.5)         293.2       (2,936.4)     (3,983.55)     (3,019.28)

BALANCE SHEET DATA:
ISRAELI GAAP

Deposits received                                           5,049          5,855          6,923          8,110          8,488
Registered Subordinated Capital Notes                           -             20             25             27             25
Total Liabilities, not including Preference shares          5,113          5,926          7,006          8,193          8,570
Non-participating Preference shares                           336            276            303            330            309
Participating Preference shares*                              204            171            187              -              -
Shareholders' equity*                                         104            110             20            197            199
Loans extended                                              5,107          5,521          6,519          7,681          7,993
Deposits with the Israeli Treasury                             30            853            840            853            843
Credit to governments                                           -              -              2              7             11
Amounts receivable from the Israel Treasury in
      respect of linkage increments and exchange
      differences on the Bank's liabilities                     -             20             25             27             25
Total Assets                                                5,757          6,483          7,516          8,721          9,078

* See Note 1D to the financial statements in

Item 17 of this Annual Report on Form 20-F


                                       3`

`2008           2007           2006           2005           2004
                              -----          -----          -----          -----          -----
                                   (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                  6,311          6,661          7,778          9,056          9,443
Total Liabilities             5,671          6,457          7,551          8,762          9,168
Shareholders' equity            640            204            227            294            275

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.

     Although the Run-Off Plan (as defined below; see "Item 4. Information on
the Company-Business Overview") that we adopted expired on July 31, 2008, we
continue to focus our activity on the gradual realization of our loan portfolio
and refrain from extending new credits or undertaking other activities.


                                       4`

`OUR BANKING LICENSE EXPIRED ON AUGUST 1, 2008.

     Pursuant to a letter dated January 29, 2006 from the Governor of the Bank
of Israel, our banking license, that we received on June 4, 1989, expired on
August 1, 2008. Consequently, we are deprived of certain benefits we previously
enjoyed in our capacity as a banking entity in conducting legal proceedings
against our customers. Following the revocation of our banking license, the
number of depositors in the Bank may not exceed 29.

     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 WITHOUT THE NEED FOR ANY FURTHER CONSENT ON THE PART
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, SHALL BE DEEMED TO HAVE WAIVED THEIR CLAIMS AGAINST THE STATE OF ISRAEL IN
THIS REGARD.

     On November 24, 2008, the Tel Aviv District Court approved a compromise and
arrangement plan, pursuant to Article 350 of the Companies Law - 1999, between
us and our shareholders ("the Arrangement Plan" or "Plan"), after the approval
of the Plan by the meetings of the classes of shareholders of the Bank. Pursuant
to the Plan, our perpetual deposit (as defined below) was returned to us by the
Ministry of Finance on December 31, 2008, except the sum of NIS 29.9 million
(equivalent to approximately $7.9 million as of December 31, 2008) which remains
deposited with the Ministry of Finance. Pursuant to the Plan, the State of
Israel has also begun, by way of the Government Companies Authority ("the
Authority" or "the GCA") the process for the sale of our shares. In April 2009,
the Authority published a notice stating that all parties interested in
purchasing our shares are invited to apply to the Authority, pursuant to the
details set forth in the notice and the Sale Procedure published together with
the notice. The notice states that those interested must file their
documentation by May 21, 2009. After this date, we were notified by the
Authority that it received applications from five parties interested in
participating in the sale process. Pursuant to the sale procedure published by
the Authority, the representatives of the State of Israel have screened the
applicants and chose which ones will be invited to further participate in the
sale process (review of our records in the Data Room, submission of price bids,
etc.) On July 13, 2009, we opened the Data Room. Pursuant to the Arrangement
Plan if a purchaser is found for the shares so that the sale shall be completed
by December 31, 2009, than 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 which the
shareholders have waived in advance 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.

     See our Notices on Form 6-K, filed on May 29, 2008, July 6, 2008 and
November 25, 2008, for additional details regarding the scheme.

     If in fact the scheme is executed, our shares will be sold and/or redeemed
without the need for any further consent on the part of our shareholders.
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 have waived in
advance their claims against the State of Israel regarding the balance of the
dividend.


                                       5`

`IT CAN NOT BE RULED OUT THAT AT SOME STAGE WE MIGHT ENTER INTO LIQUIDATION
PROCEEDINGS.

     If the scheme for the sale and/or redemption of our shares is 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 completed by
December 31, 2009, it may be expected that 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. 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. Under the Directives of
Proper Banking Procedures (that continue to apply to us even after the
expiration of our Banking License), 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.

     We ended 2006 with losses and the years 2007 and 2008 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.


                                       6`

`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.

     Following the approval of the Arrangement Plan by the court on November 24,
2008, and pursuant to the details set forth in the Plan, on December 31, 2008,
the State repaid to us the perpetual deposits in the Ministry of Finance (except
the sum of approximately $7.9 million, which represents the proceeds from the D
shares and DD shares issued to the public and which will continue to be handled
as a perpetual deposit with the Ministry of Finance), in the amount of
approximately $225.5 million.

     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.


                                       7`

`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), and since the dismissal of the motion could be
interpreted as denying us also of our right to the accumulated interest against
payment of the dividend in arrears on the Preferred Shares, 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. The appeal was filed 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 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 did 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.


                                       8`

`Following the approval of the Arrangement Plan by the court on November 24,
2008, and pursuant to the details set forth in the Plan, the perpetual deposit
was returned to the Ministry of Finance on December 31, 2008, except the sum of
approximately $7.9 million, which represents the proceeds from the D shares and
DD shares issued to the public and which will continue to be handled as a
perpetual deposit with the Ministry of Finance.

     Following the approval of the Plan and pursuant to the details set forth
therein, the originating motion filed by the abovementioned financial
institutions and the appeal filed by us on January 6, 2008 to the Supreme Court
were dismissed. Under the terms of the Plan, the dismissal of the appeal will be
binding on us and on the State only for the relations between us with regard to
the part of the Perpetual Deposit for the various C type shares.

     Pursuant to the Arrangement Plan, if the sale of the bank is completed by
December 31, 2009, then:

     1)   The D and DD shares held by the public shall be redeemed and the
          holders shall be paid all of the preferred dividend which accumulated
          for them, and;

     2)   The holders of C shares, CC shares and CC1 shares and the State of
          Israel, as holder of D shares and DD shares, will waive their rights
          and claims to receive a dividend and they will receive only their
          share in the sale proceeds.

     Pursuant to the Arrangement Plan, 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"), then:

     1.   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.

     2.   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.

     3.   The State will forego its demands and claims against us and/or our
          liquidator and/or the liquidation fund with regard to payment of 50%
          of the dividend in arrears due 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.


                                       9`

`4.   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.

     5.   Subject to the payment of 50% of the abovementioned dividend, the
          shareholders of C Shares, CC Shares, and CC1 Shares will have waivedin
          advance 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.

     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.

     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 our business. 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.


                                       10`

`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.

     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.


                                       11`

`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, 2008,
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.

     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."


                                       12`

`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.

     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, 2008, the balance of credit to the public amounts to NIS
5,107 million. This credit includes credit in the amount of NIS 4,699 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 408 million. The fact that we have refrained
from providing new credit for more than six years has reduced our ability to
diversify our credit risks in accordance with credit risk diversification
accepted parameters to a minimum as described below:


                                       13`

`DIVERSIFICATION OVER ECONOMIC SECTORS - Our industrial credit constitutes
39% 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 0.8% of the credit compared with
8.6% of the credit to various commerce sectors of ordinary banks. Our credit to
private households amounts to an insignificant rate of 0.8% compared with 29.6%
of the credit to private households of the five largest Israel banking groups.
The comparative data of the banking system is for December 31, 2008.

     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, 2008, 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 578 million. The overall credit risk in respect of our sixteen
largest borrowers amounts to NIS 398 million and constitutes 69% of the credit
balance.

     Pursuant to data for the year-end 2007, the weight of the twenty nine
largest borrowers in the five largest banking groups in Israel constitutes 4.7%
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 227 million,
constituting 50.4% of the balance sheet credit (before deduction of the general
and supplementary allowances for doubtful debts), compared with 4.2% in the five
largest banking groups (as at December 2007). The balance of the debt classified
as non-income bearing amounts to approximately NIS 22 million, about 4.9% of the
balance sheet credit, compared with approximately 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 six 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, 2008,
amounted to NIS 38 million, of which NIS 29 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 28 million) is in shares of one company which is included in the Tel Aviv
25 Index.


                                       14`

`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. 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.

     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").

     Nonetheless, the State of Israel has been purchasing over the past years
our D Shares and our DD shares from holders in the United States, at a rate of
90% of the nominal value of our D shares and 100% of the nominal value of our DD
shares.

     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.


                                       15`

`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 and our CC1 Shares
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.

     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 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 first "determining date" to be included in the list was
June 15, 2007. The list is 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. On December 31,
2008, the TASE advised us that our C Shares would be removed from this list, but
on July 5, 2009, they advised us that the C shares would be included again in
the list.


                                       16`

`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;

     (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.


                                       17`

`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 in the future. 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 operations in the future 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.

     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.

     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.


                                       18`

`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. Due to the reduction in our activities following the
liquidity crisis that we experienced in the third quarter of 2002, the Governor
of the Bank of Israel notified us that our banking license would be revoked.
Accordingly, on August 1, 2008 our banking license expired and we ceased to be a
banking entity.

     Our legal and commercial name is Industrial Development Bank of Israel Ltd.
Our registered office was located until August 21, 2009 at 82 Menachem Begin
Road, Tel-Aviv, Israel 67138, and from August 23, 2009 at 12 Harutzim Street,
Tel-Aviv, Israel 61200 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 that were redeemed on December 31, 2008 is
The Bank of New York Mellon, located at 101 Barclay Street, 4 East, New York,
N.Y. 10286.

     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, since the expiration of our our
banking license 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.


                                       19`

`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, 2008, the balance of the public's deposits with us was NIS 27
million as it was also as of June 30, 2009.

     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.

     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 a Run-Off Plan for our
business, which ended on July 31, 2008. The ultimate goal of the Run-Off Plan
was the controlled realization of our credit assets during the period of the
plan. Although the Run-Off Plan ended on July 31, 2008, we continue to focus our
activities on the realization of our remaining credit assets and refrain from
other activities. For a more detailed description of the Run-Off Plan, see
"Adoption of the Run-Off Plan and Amendment of the Special Line of Credit"
below.


                                       20`

`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 grant of the Special Line of Credit was also subject to various
conditions, including, 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%.

     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 THE APPROVAL OF THE ARRANGEMENT PLAN BETWEEN
THE BANK AND ITS SHAREHOLDERS

     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.


                                       21`

`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.

     On July 26, 2005 the Bank's Board of Directors approved the extension of
the Run-Off Plan until July 31, 2008. 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).

     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 until July 31, 2008.

     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 at the rate of interest equal to the Bank of Israel interest
rate.

     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.

     Although the Run-Off Plan ended on July 31, 2008, we presently continue to
operate in the same manner as during the Plan and we are focusing on the
collection of our credit portfolio.


                                       22`

`Prior to the expiration of the Run-Off Plan, the Government Companies
Authority ("the Authority" or "the GCA") together with the Ministry of Finance
reviewed a blueprint for the sale of our shares as part of an arrangement
between us and our shareholders pursuant to Section 350 of the Companies Act,
which upon approval would entail the immediate repayment to us of most of our
Perpetual Deposits with the Ministry of Finance.

     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 interest rate of the Special Line of Credit during that
extension period was fixed at the rate of interest of the Bank of Israel plus
1.5%.

     On November 24, 2008, the Tel Aviv District Court approved a compromise and
arrangement plan, pursuant to Section 350 of the Companies Law - 1999, between
us and our shareholders ("the Arrangement Plan" or "Plan"). On December 31, 2008
the Ministry of Finance returned to us, pursuant to the terms of the Plan, most
of our Perpetual Deposits with the Ministry and at the same time the balance of
the Special line of Credit was fully repaid out of these Perpetual Deposits.

     On April 29, 2008, the Ministerial Committee for Privatization Issues
passed a resolution regarding the privatization of the Bank, including the sale
of the holdings of the State of Israel and most of the holdings of the public in
the Bank and the redemption of the remaining holdings of the public, within the
framework of an arrangement between us and our shareholders pursuant to Section
350 of the Companies Law. The privatization resolution establishes that until
the completion of the sale, we will continue to collect our credit portfolio.

     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 Arrangement Plan for the approval of the
Court.

     Prior to adopting the above resolution, the Board of Directors received 1)
expert opinions regarding the reasonability of the criteria for determining the
minimum price for the sale of our shares as part of such Arrangement Plan, and
regarding the fairness of the formula for division of the Sale proceeds as part
of the Arrangement Plan vis-a-vis the public shareholders; and 2) a report
prepared by. Professor A. Barnea 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; and 3) a legal opinion
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 under
the Arrangement Plan if the Sale will not be effected.


                                       23`

`The decision of the Board to submit the Arrangement Plan 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
Arrangement Plan, would be more beneficial to the public shareholders of the
Bank than winding-up the Bank.

     On July 6, 2008, the Bank filed with the District Court of Tel Aviv a
motion for the approval of the Plan between the Bank and its shareholders under
Section 350 of the Companies Law. On October 30 and November 6, 2008, the
Arrangement Plan was approved by the class meetings of the Bank's shareholders.
On November 24, 2008, the Arrangement Plan was approved by the District Court of
Tel Aviv.

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

     The Arrangement Plan 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 Arrangement Plan by the
          shareholders and the Court, (i) the State of Israel will pay the Bank
          the Perpetual Deposits 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 not held by the State will
          remain deposited as a dollar-linked deposit); (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 nominal 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.


                                       24`

`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.

          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
          Arrangement Plan.

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

          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
          preferential dividend at the annual rate of 6%, that accrued on those
          shares 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 portion of the Perpetual Deposits 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.


                                       25`

`The holders of the C Shares, CC Shares, and CC1 Shares will waive all
          and any claims in connection with the Perpetual Deposits, 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.

     The above description is a summary of the main principles of the
Arrangement Plan, and is qualified by the full text of the Arrangement Plan
which 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 Arrangement
Plan, a motion to reduce our capital, as approved by the Bank's Board of
Directors on May 26, 2008. This motion was approved by the Court on November 20,
2008.

     Following the approval of the Arrangement Plan and in accordance thereto,
on December 31, 2008 the Ministry of Finance repaid to us most of the Perpetual
Deposits, and at the same time we repaid to the Bank of Israel the total balance
of the Special Line of Credit.

     On April 6, 2009, as part of the sale process of our shares included in the
Arrangement Plan, the GCA published a newspaper notice on behalf of the
government of Israel according to which those interested in purchasing all of
our issued capital are entitled to approach the Authority and submit
applications by May 21, 2009. After this date, we were notified by the Authority
that it received applications from five parties interested in participating in
the sale process. The GCA representatives screened the applicants to determine
which of them to invite to participate in the next stages of the sale process
(review of the Bank's records in the Data Room, submission of price bids etc.).
On July 13, 2009, we opened the Data Room for the purpose of the preparation of
due-diligence examinations by the parties whose continued participation in the
sale process has been approved by the GCA. As of the date of the filing of this
Report, the submission of price bids has not yet begun.

     If the sale of our shares is not completed pursuant to the Arrangement Plan
by December 31, 2009, it may be expected that our continued activity will be
determined by a special majority of the shareholders at a general meeting. We
might continue to operate under a regimen similar to our prior Run-Off Plan or
we might enter into voluntary liquidation proceedings.


                                       26`

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

     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 of September 1, 2003 and until July 31, 2008, the Special Line of Credit had
an interest rate on outstanding amounts 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 requested to be reimbursed, with interest thereon, as of December 31, 2008
was approximately NIS 90 million. After lengthy discussions between us and the
Bank of Israel, it was agreed that upon the full repayment of the Special Line
of Credit on December 31, 2008, we will be reimbursed for the full satisfaction
of our demands the amonut of NIS 48.6 million. The above agreed amount was in
fact reimbursed to us on December 31, 2008.

OUR CURRENT OPERATIONS

     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 1,276 million on December
31, 2005, to NIS 848 million on December 31, 2006, to NIS 558 million on
December 31, 2007 and to NIS 408 million on December 31, 2008. 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.

     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 from renewing deposits that reach maturity, with certain
exceptions.

     Under Israeli Banking (Licensing) Law, we are precluded, as of the
expiration of our banking license on August 1, 2008, from maintaining deposits
from more than 29 depositors. We have recently announced that we have ceased to
perform for the State of Israel economic feasibility surveys for investment
plans.

     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 42 by December 31, 2008.
The number of employees as of September 1, 2009 was 25.


                                       27`

`As part of our cutting expenses, we relocated to new offices in September
2003, which were much smaller and for which we paid much less rent per square
foot. In August 2009, we moved again to new offices, which are much smaller than
our prior offices. 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. Our activities after the expiration
of the Run-Off plan on July 31, 2008 were unchanged. We refrain from extending
new loans to customers and our operationsconcentrate on the 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, 2008, 2007 and 2006.


                                       28`

`AVERAGE BALANCE SHEETS AND INTEREST RATES
IN TERMS OF NIS OF DECEMBER 2008

REPORTED AMOUNTS                                                        2008                                          2007                                            2006
                                                        ------------------------------------           ------------------------------------           ------------------------------------
                                                                     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)
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
                                                            NIS MILLIONS                 %                 NIS MILLIONS                 %                 NIS MILLIONS                 %
                                                        --------------------           -----           --------------------           -----           --------------------           -----

ISRAELI CURRENCY - NON-LINKED
ASSETS
Credit to the Public                                     92.1            8.8            9.55           168.1           10.8            6.42           337.5           23.3            6.90
Deposits with Bank of Israel                              1.3              -               -             3.3              -               -             5.4              -               -
Deposits with banks                                      16.8            0.5            2.97            12.4            0.5            4.03            21.0            1.1            5.25
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
Total assets before effect of derivatives               110.2            9.3            8.44           183.8           11.3            6.15           363.9           24.4            6.71
Effect of derivatives ALM (3)                            19.4            0.9            4.64            64.7            2.6            4.02           137.7            7.7            5.59
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
Total assets after effect of derivatives                129.6           10.2            7.87           248.5           13.9            5.59           501.6           32.1            6.40
                                                        =====          =====           =====           =====          =====           =====           =====          =====           =====

LIABILITIES
Deposits of the public                                   21.9           (0.5)          (2.28)           31.1           (0.9)          (2.89)           46.0           (1.7)          (3.70)
Deposits of Bank of Israel                              371.0          (15.8)          (4.25)          601.0          (23.7)          (3.94)          889.9          (45.2)          (5.08)
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
Total liabilities before effect of derivatives          392.4          (16.3)          (4.15)          632.1          (24.6)          (3.89)          935.9          (46.9)          (5.01)
Effect of derivatives ALM (3)                            31.2           (1.2)          (3.85)              -              -               -               -              -               -
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
Total liabilities after effect of derivatives           424.1          (17.5)          (4.13)          632.1          (24.6)          (3.89)          935.9          (46.9)          (5.01)
                                                        =====          =====           =====           =====          =====           =====           =====          =====           =====
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                               4.29                                           2.26                                           1.70
INTEREST MARGIN INCLUDING DERIVATIVES                                                   3.74                                           1.70                                           1.39

ISRAELI CURRENCY -LINKED TO THE CPI

ASSETS
Credit to the Public                                    292.4           30.1           10.29           441.2           34.4            7.80           539.3           27.9            5.17
Credit to governments                                     3.7            0.2            5.40             5.9            0.1            1.69             7.6              -               -
Deposits with banks                                       2.1            0.2            9.52             7.2            0.6            8.33            13.7            0.8            5.84
Debentures                                                0.2              -               -             0.5              -               -             0.8              -               -
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
Total assets before effect of derivatives               298.4           30.5           10.22           454.8           35.1            7.72           561.4           28.7            5.11
Effect of derivatives ALM (3)                            31.6            1.7            5.38               -              -               -               -              -               -
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
Total assets after effect of derivatives                330.0           32.2            9.76           454.8           35.1            7.72           561.4           28.7            5.11
                                                        =====          =====           =====           =====          =====           =====           =====          =====           =====

LIABILITIES
Deposits of the public                                   17.0           (1.7)          (10.0)           28.4           (2.2)          (7.75)           51.6           (2.6)          (5.04)
Deposits of the Government                              248.7          (17.0)          (6.84)          280.0          (14.1)          (5.04)          335.9           (7.2)          (2.14)
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
Total liabilities before effect of derivatives          265.7          (18.7)          (7.04)          308.4          (16.3)          (5.29)          387.5           (9.8)          (2.53)
Effect of derivatives ALM (3)                             7.7           (0.6)          (7.79)           40.0           (2.6)          (6.50)           43.3           (1.1)          (2.54)
                                                        -----          -----           -----           -----          -----           -----           -----          -----           -----
Total liabilities after effect of derivatives           273.4          (19.3)          (7.06)          348.4          (18.9)          (5.42)          430.8          (10.9)          (2.53)
                                                        =====          =====           =====           =====          =====           =====           =====          =====           =====
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                               3.18                                           2.43                                           2.58
INTEREST MARGIN INCLUDING DERIVATIVES                                                   2.70                                           2.30                                           2.58


                                       29`

`AVERAGE BALANCE SHEETS AND INTEREST RATES (CONT'D)
IN TERMS OF NIS OF DECEMBER 2008

REPORTED AMOUNTS                                                           2008                                                2007                                                 2006
                                                         ------------------------------------------           ------------------------------------------           ------------------------------------------
                                                                        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)
                                                         -------          -------           -------           -------          -------           -------           -------          -------           -------
                                                               NIS MILLIONS                    %                    NIS MILLIONS                    %                    NIS MILLIONS                    %
                                                         ------------------------           -------           ------------------------           -------           ------------------------           -------

FOREIGN CURRENCY-DOMESTIC OPERATIONS (4)
ASSETS
Credit to the Public                                     4,640.4            262.1              5.65           5,583.9           (126.0)            (2.26)          6,370.5            (90.9)            (1.43)
Credit to governments                                          -                -                 -               4.9             (0.1)            (2.04)             16.9             (0.9)            (5.33)
Deposits with Bank of Israel                                 0.2                -                 -               0.4                -                 -               0.6                -                 -
Deposits with banks                                         11.8              0.4              3.39              12.5             (0.2)            (1.60)             18.5             (1.2)            (6.49)
                                                         -------          -------           -------           -------          -------           -------           -------          -------           -------
Total assets                                             4,652.4            262.5              5.64           5,601.7           (126.3)            (2.25)          6,406.5            (93.0)            (1.45)
                                                         =======          =======           =======           =======          =======           =======           =======          =======           =======

LIABILITIES
Deposits of the public                                       0.3                -                 -               2.0                -                 -               4.5             (0.1)            (2.22)
Deposits of the Government                               4,624.9           (254.5)            (5.50)          5,550.2            129.3              2.33           6,260.1             91.4              1.46
Deposits of banks                                              -                -                 -               3.9              0.1              2.56              11.4              0.9              7.89
                                                         -------          -------           -------           -------          -------           -------           -------          -------           -------
Total liabilities before effect of derivatives           4,625.2           (254.5)            (5.50)          5,556.1            129.4              2.33           6,276.0             92.2              1.47
Effect of derivatives ALM (3)                               12.1             (2.2)           (18.18)             24.7              0.3              1.21              94.4              5.0              5.35
                                                         -------          -------           -------           -------          -------           -------           -------          -------           -------
Total liabilities after effect of derivatives            4,637.3           (256.7)            (5.54)          5,580.8            129.7              2.32           6,370.4             97.2              1.53
                                                         =======          =======           =======           =======          =======           =======           =======          =======           =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                                      0.14                                                 0.08                                                 0.02
INTEREST MARGIN INCLUDING DERIVATIVES                                                          0.10                                                 0.07                                                 0.08

TOTAL
Monetary assets generating financial income              5,061.0            302.3              5.97           6,240.3            (79.9)            (1.28)          7,331.8            (39.9)            (0.54)
Effect of derivatives ALM (3)                               51.0              2.6              5.10              64.7              2.6              4.02             137.7              7.7              5.59
                                                         -------          -------                             -------          -------                             -------          -------
Total monetary assets generating financing
income                                                   5,112.0            304.9              5.96           6,305.0            (77.3)            (1.23)          7,469.5            (32.2)            (0.43)
                                                         =======          =======                             =======          =======                             =======          =======

Monetary liabilities generating financing
expenses                                                 5,283.8           (289.5)            (5.48)          6,496.6             88.5              1.36           7,599.4             35.5             (0.47)
Effect of derivatives ALM (3)                               51.0             (4.0)            (7.84)             64.7             (2.3)            (3.55)            137.7              3.9              2.83
                                                         -------          -------                             -------          -------                             -------          -------
Total liabilities generating financing expenses          5,334.8           (293.5)            (5.50)          6,561.3             86.2              1.31           7,737.1             39.4              0.51
                                                         =======          =======                             =======          =======                             =======          =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES                                                      0.49                                                 0.08                                                (0.07)
INTEREST MARGIN INCLUDING DERIVATIVES                                                          0.46                                                 0.08                                                 0.08


                                       30`

`AVERAGE BALANCE SHEETS AND INTEREST RATES (CONT'D)
IN TERMS OF NIS OF DECEMBER 2008

REPORTED AMOUNTS                                                      2008                                               2007                                                2006
                                                   ------------------------------------------          ------------------------------------------          ------------------------------------------
                                                                   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)
                                                   -------           -------          -------          -------           -------          -------          -------           -------          -------
                                                         NIS MILLIONS                    %                    NIS MILLIONS                   %                    NIS MILLIONS                   %
                                                   -------------------------          -------          -------------------------          -------          -------------------------          -------

Financing commissions and other financing
income                                                                  82.2                                                30.0                                                23.7
Other financing expenses                                                (9.6)                                               (9.6)                                              (12.7)
                                                                     -------                                             -------                                             -------
Financing income before allowance for
doubtful debts                                                          84.0                                                29.3                                                18.2
Allowance for doubtful debts
(including general and supplementary provisions)                        16.9                                                13.8                                               (21.7)
                                                                     -------                                             -------                                             -------

Earnings from financing operations after
allowance for doubtful debts                                           100.9                                                43.1                                                (3.5)
                                                                     =======                                             =======                                             =======
Other monetary assets                                894.9                                               865.1                                               868.7
General and supplementary allowance for
doubtful debts                                       (43.7)                                              (49.0)                                              (55.1)
Non-monetary assets                                   42.0                                                48.7                                                57.1
                                                   -------                                             -------                                             -------
Total assets                                       5,954.2                                             7,105.1                                             8,202.5
                                                   =======                                             =======                                             =======

Other monetary liabilities                            86.6                                                85.8                                                79.3
Non-monetary liabilities                               0.4                                                 1.1                                                 1.6
Capital resources                                    583.4                                               521.6                                               522.2
                                                   -------                                             -------                                             -------
Total liabilities and capital resources            5,954.2                                             7,105.1                                             8,202.5
                                                   =======                                             =======                                             =======

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 he 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.


                                       31`

`The following table summarizes our assets and liabilities outstanding as of
December 31, 2008, 2007, and 2006:

                                          IN MILLIONS OF NIS
                                -----------------------------------
                                           REPORTED AMOUNTS
                                -----------------------------------
                                 2008           2007           2006
                                -----          -----          -----

Total assets                    5,757          6,483          7,516

Assets consisting of
credits to the public           5,107          5,521          6,519

Total liabilities*              5,113          5,926          7,006

Liabilities
consisting of deposits          5,049          5,855          6,923

* Not including Preference shares

     The following table shows the linkage basis (currency) breakdown of our
credit to the public outstanding as of December 31, 2008, 2007 and 2006:

                                                           IN MILLIONS OF NIS
                                                   -----------------------------------
                                                            REPORTED AMOUNTS
                                                   -----------------------------------
                                                    2008           2007           2006
                                                   -----          -----          -----

Non-linked Israeli currency                           74            104            214

CPI linked Israeli currency                          235            340            465

Dollar and linked thereto                          4,785          5,060          5,819

Other foreign currency and linked thereto             13             17             21
                                                   -----          -----          -----

TOTAL                                              5,107          5,521          6,519
                                                   =====          =====          =====


                                       32`

`INVESTMENT PORTFOLIO

     The following table presents the book or market value of our investment
portfolio as of December 31 of 2004, 2005, 2006, 2007 and 2008:

                                                                       IN MILLIONS OF NIS
                                                  ------------------------------------------------------------
                                                  2008          2007          2006          2005          2004
                                                  ----          ----          ----          ----          ----

Marketable Non-Government bonds                      -             -             -             -           0.2
Non-marketable Non-
Government bonds                                   0.2           0.5           0.7           2.6           3.5

Non-marketable shares                              8.4          11.8          16.7          29.6          30.5
Marketable and available for sale shares          29.3          34.0          33.0          31.0          25.8
                                                  ----          ----          ----          ----          ----

Total                                             37.9          46.3          50.4          63.2          60.0
                                                  ====          ====          ====          ====          ====

INTERNATIONAL OPERATIONS

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


                                       33`

`LOAN PORTFOLIO

     TOTAL CREDIT TO THE PUBLIC

     As of December 31, 2008, the total credit to the public amounted to NIS
5,107 million compared with NIS 5,521 million as of December 31, 2007. 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 4,699
million as of December 31, 2008 compared with NIS 4,963 million as of December
31, 2007. Net of such credit, the credit to the public amounted to NIS 408
million as of December 31, 2008 compared with NIS 558 million as of December 31,
2007 (a 27% 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.

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.


                                       34`

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

                                                                                                     DECEMBER 31, 2008
                                               -------------------------------------------------------------------------------------------------------------------------------

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

Agriculture                                        2.5              0.1              2.6                -               2.1                -              2.6              0.5%
Industry                                         175.5             10.7            186.2             (7.5)            138.7                -            186.2             32.2%
Construction and real estate                      37.4             40.8             78.2             (4.0)             64.0                -             78.2             13.5%
Electricity                                    4,819.0              5.2          4,824.2                -              39.7          4,699.5            124.7             21.6%
Commerce                                           3.8              2.4              6.2              0.6               6.2                -              6.2              1.1%
Restaurants and hotels                             4.3              2.2              6.5             (2.6)              6.4                -              6.5              1.1%
Transport and storage                             13.2                -             13.2             (0.1)                -                -             13.2              2.3%
Communications and computer services               2.9              0.4              3.3                -               1.9                -              3.3              0.6%
Financial services                                28.0             64.4             92.4                -               1.4                -             92.4             16.0%
Other business services                           22.6              1.5             24.1             (0.1)              5.1                -             24.1              4.2%
Public and community services                     36.5              0.1             36.6              0.2              23.0                -             36.6              6.3%
Private households                                 3.4                -              3.4                -               0.3                -              3.4              0.6%
                                               -------          -------          -------          -------           -------          -------          -------          -------
Total                                          5,149.1            127.8          5,276.9            (13.5)            288.8          4,699.5            577.4            100.0%
                                               =======          =======          =======          =======           =======          =======          =======          =======
Credit risk included in the
 various industry sectors:
Agricultural settlement movements (4)             92.1              2.2             94.3            (11.8)             49.6
Local authorities and entities
   controlled by them                              2.2                -              2.2                -                 -

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, 2008 was NIS 531.1 million


                                       35`

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

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


                                       36`

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

                                                                                              DECEMBER 31, 2006
                                               -----------------------------------------------------------------------------------------------------------
                                                                                         ANNUAL
                                                                                       EXPENSE FOR                                                % OF
                                                                                       THE SPECIFIC                                               SECTOR
                                                BALANCE    OFF-BALANCE       TOTAL      ALLOWANCE                                 TOTAL RISK       FROM
                                                 SHEET        SHEET         RISK OF        FOR         BALANCE OF                    NET OF      TOTAL RISK
                                                CREDIT        CREDIT       CREDIT TO     DOUBTFUL     PROBLEMATIC    GOVERNMENT    GOVERNMENT    NET OF GOV'T
                                                RISK (1)     RISK (2)       PUBLIC        DEBTS       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.


                                       37`

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

                                                                                       DECEMBER 31, 2005
                                               ---------------------------------------------------------------------------------------------------
                                                                                        ANNUAL
                                                                                     EXPENSE FOR                                           % OF
                                                                                     THE SPECIFIC                                          SECTOR
                                               BALANCE    OFF-BALANCE     TOTAL       ALLOWANCE                              TOTAL RISK    FROM
                                                SHEET        SHEET       RISK OF         FOR     BALANCE OF                   NET OF    TOTAL RISK
                                               CREDIT       CREDIT      CREDIT TO     DOUBTFUL   PROBLEMATIC   GOVERNMENT   GOVERNMENT  NET OF GOV'T
                                               RISK (1)     RISK (2)      PUBLIC       DEBTS     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.


                                       38`

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

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


                                       39`

`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, 2008. 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                 58.8          1.8         17.2          2.9            -         80.7
CPI-linked Israeli Currency                  9.9         11.7         20.5        143.3        152.2        337.6
Foreign Currency and linked thereto        151.6        136.7        272.6      2,140.4      4,883.2      7,584.5
                                         -------      -------      -------      -------      -------      -------
TOTAL                                      220.3        150.2        310.3      2,286.6      5,035.4      8,002.8
                                         =======      =======      =======      =======      =======      =======

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:

                                                                                   AS OF DECEMBER 31
                                                              ---------------------------------------------------------
                                                               2008         2007         2006         2005        2004
                                                              -----        -----        -----        -----      -------

Non income bearing                                             22.1         69.7        171.2        267.0        400.2
Restructured (2)                                               24.4         31.5         74.1         97.9        108.3
Designated for restructuring (3)                                8.5         17.3         26.9         13.5         24.3
Temporarily in arrears                                          1.9          8.7         14.5         64.2        117.9
Under special supervision*                                    170.5        181.7        208.5        282.8        353.8
                                                              -----        -----        -----        -----      -------
Total balance sheet credit to
   problematic borrowers (1)                                  227.4        308.9        495.2        725.4      1,004.5
 Off-balance sheet credit risk in respect of
   problematic borrowers (1)                                   61.4         81.2         88.0         73.7        121.6
                                                              -----        -----        -----        -----      -------
Overall credit risk in respect of problematic
   borrowers (1) (4)                                          288.8        390.1        583.2        799.1      1,126.1
                                                              =====        =====        =====        =====      =======

*    Including NIS 164.5 million as of December 31, 2008 in respect of debts for
     which a specific allowance exists (NIS 169.7 as of December 31, 2007, NIS
     183.1 million as of December 31, 2006, NIS 74.9 million as of December 31,
     2005 and NIS 116.1 million as of December 31, 2004).

(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).


                                       40`

`(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.

     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 the Bank's operations in the future as long as
these debts are classified as non-income bearing. Interest income that was not
credited to income for non-income bearing debts for the year ending December 31,
2008 was NIS 9 million, in comparison to NIS 9 million for the year ending
December 31, 2007, and NIS 23 million for the year ending December 31, 2006.

     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 letters 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.

     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.


                                       41`

`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, 2008, 2007, 2006,
2005, and 2004:

                                                      IN MILLIONS OF NIS

                                  2008         2007          2006           2005          2004
                                -------       -------       -------       -------       -------
                                                       REPORTED AMOUNTS
                                ---------------------------------------------------------------

Credit risk exposure to
the largest six
borrowers/borrower groups*        303.7         313.1         368.6         433.2         542.3
Total credit to the
public**                        5,107.1       5,521.1       6,519.1       7,680.7       7,993.4
Percentage of the
borrower/borrower group of
the total credit to the
public                              5.9%          5.7%          5.7%          5.6%          6.8%

*    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 (Reported Amounts):

         o      December 31, 2008      NIS 4,699.5 million

         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


                                       42`

`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:

REPORTED AMOUNTS                        2008                  2007                   2006                 2005                  2004
                                   ---------------       ---------------       ---------------       ---------------       ---------------
                                    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                           (7.5)        55       (7.2)        97        7.2         26       15.5         28       29.8         38
Construction and real estate       (4.0)        30        0.6         (8)       7.5         27       31.7         56       24.3         31
Electricity                           -          -          -          -          -          -       19.0         34        2.6          3
Commerce                            0.6         (4)      (0.6)         8        2.1          8        2.5          4        4.2          5
Restaurants and hotels             (2.6)        19          -          -        0.7          3        0.9          2        0.5          1
Transport and storage              (0.1)         1          -          -        0.1          -        0.1          -          -          -
Communications and computer
services                              -          -        0.8        (11)      (1.1)        (4)       1.3          2       (0.5)        (1)
Financial services                    -          -       (1.2)        16        1.3          5      (17.7)       (31)       4.7          6
Other business services            (0.1)         1        0.8        (11)       6.7         24        3.4          6       10.6         14
Public and community services       0.2         (2)      (0.4)         6        1.2          4       (0.5)        (1)       1.1          1
Private households                    -          -          -                   0.5          2          -          -        1.1          1
TOTAL                             (13.5)       100       (7.4)       100       27.6        100       56.2        100       79.1        100
                                   ----       ----       ----       ----       ----       ----       ----       ----       ----       ----
Credit risk included in the
various industry sectors:
Agricultural settlement
movements                         (11.8)        87       (6.3)        85        2.1          8       (1.5)        (3)      (1.8)        (2)
Local authorities                     -          -          -          -          -          -          -          -          -          -


                                       43`

`DEPOSITS

     The following tables provide an analysis of the maturity of deposits as of
December 31, 2008. 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, 2008

                                                        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               17.5        0.1        0.1          -       17.7
CPI-linked Israeli Currency                0.4        0.4        1.0        9.2       11.0
Foreign Currency and linked thereto        0.1          -          -          -        0.1

DEPOSITS OF THE GOVERNMENT AS OF DECEMBER 31, 2008

                                                              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                11.7         17.4         24.1        186.7        239.9
Foreign Currency and linked thereto        135.3        136.5        271.8      7,027.7      7,571.3


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. In August 2009, we moved again to new offices, at 12 Yad Harutzim,
Tel Aviv, which are much smaller than our prior offices.


                                       44`

`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, 2008, to NIS 27 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 was the controlled realization of our credit assets
over a period expiring on July 31, 2008. For a more detailed description of the
Run-Off Plan, see "Item 4. Information on the Company-Business Overview-Adoption
of the Run-Off Plan."

     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 Arrangement Plan, 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 the Approval of the Arrangement Plan between
the Bank and its Shareholders."

     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 Arrangement Plan for the approval of the
Court.


                                       45`

`Prior to adopting the above resolution, our Board of Directors received 1)
expert opinions regarding the reasonability of the criteria for determining the
minimum price for the sale of our shares as part of such Arrangement Plan, and
regarding the fairness ofthe formula for division of the Sale proceeds as part
of theArrangement Plan vis-a-vis the public shareholders; and 2) a report
prepared by Professor A. Barnea 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; 3) a legal opinion
regarding the reasonableness of the arrangement for paying partial dividend to
the holders of the C Share, CC Shares and CC1 Shares, that would apply under the
Arrangement Plan if the Sale will not be effected.

     The Board of Directors' decision to submit the Arrangement Plan 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 the public shareholders of
the bank than winding-up the Bank.

     On July 6, 2008, the Bank filed with the District Court of Tel Aviv a
motion for the approval of the Plan between the Bank and its shareholders under
Section 350 of the Companies Law. On October 30 and November 6, 2008, the
Arrangement Plan was approved by the class meetings of the Bank's shareholders.
On November 24, 2008, the Arrangement Plan was approved by the District Court of
Tel Aviv.

     On April 6, 2009, as part of the sale process of our shares included in the
Arrangement Plan, the GCA published a newspaper notice on behalf of the
government of Israel according to which those interested in purchasing all of
our issued capital are entitled to approach the Authority and submit
applications by May 21, 2009. After this date, we were notified by the GCA that
it received applications from five parties interested in participating in the
sale process. The GCA representatives screened the applicants to determine which
of them to invite to participate in the next stages of the sale process (review
of the Bank's records in the Data Room, submission of price bids etc.). On July
13, 2009, we opened the Data Room for the purpose of the preparation of
due-diligence examinations by the parties whose continued participation in the
sale process has been approved by the GCA. As of the date of the filing of this
Report, the submission of price bids has not yet begun.

     On June 10, 2009, the Knesset's Finance Committee approved our
privatization method, as required by the Government Companies Law - 1975.

     The principal elements of the Arrangement Plan are summarized in Item 4.
Information on the Company-Business Overview- Adoption of the Approval of the
Arrangement Plan between the Bank and its Shareholders".

     If the sale of our shares is not completed pursuant to the Arrangement Plan
by December 31, 2009, it may be expected that our continued activity will be
determined by the State of Israel. We might continue to operate under a regimen
similar to our prior Run-Off Plan or we might enter into liquidation
proceedings.


                                       46`

`A.   DEVELOPMENT OF INCOME AND EXPENSES

NET INCOME - Our net income amounted to NIS 53.0 million in 2008, compared with
net income of NIS 22.2 million in 2007 and a loss of NIS 17.1 million in 2006.

The pre-tax income in 2008 amounted to NIS 62.5 million. This income was
impacted by the refund of the interest which was previously charged in respect
of the credit line furnished by the Bank of Israel, in an amount of NIS 48.6
million.

PROFIT FROM FINANCING OPERATIONS BEFORE THE ALLOWANCE FOR DOUBTFUL DEBTS -
amounted to NIS 84.0 million in 2008, compared with NIS 29.3 million in 2007 and
NIS 18.2 million in 2006.

The increase in financing income derived mainly from the following factors:

-    The refund of the interest in an amount of NIS 48.6 million from the Bank
     of Israel in respect of the interest charged to the Bank in previous years
     in excess of the Bank of Israel rate. The refund was approved upon the
     repayment on December 31, 2008 of the credit line that was furnished to us
     by the Bank of Israel. The refund was included in the income from financing
     activity under the item entitled "other financing income".

-    An increase in interest income collected in respect of problematic debts,
     in an amount of NIS 21.8 million, compared with NIS 17.4 million in 2007
     and NIS 9.4 million in 2006.

-    A decrease in the volume of problematic debts classified as non-income
     bearing. The average balance of non-interest bearing debts in 2008 amounted
     to NIS 54 million, compared with NIS 109 million in 2007. The balance of
     these debts constituted 10.3% of total monetary assets (excluding credit to
     the Israel Electric Company guaranteed by the State), compared with 13.7%
     in 2007.

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

-    An increase in the weighted margin in the Index-linked segment which is our
     major activity segment.

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


                                       47`

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

     An analysis of our financing operations in the various linkage segments,
indicates as follows:

UNLINKED SHEKEL SEGMENT - The average balance of assets in this segment amounted
to NIS 110 million in 2008, compared with NIS 184 million in 2007, a decrease of
40%. The margin in this segment, including the effect of derivatives, was 3.74%
in 2008, compared with 1.70% in 2007.

Please note that most of the non-income bearing debt is found in this segment.
The balance of the non-income bearing debts in this segment amounted to NIS 12
million as of December 31, 2008, compared with NIS 42 million as of December 31,
2007. The improvement in the margin of this segment compared with 2007, derived
both from the decrease in the volume of non-income bearing debt and its relative
weight out of total credit, and from the decrease in the rate of interest and
the impact thereof on the non-accrual of income in respect of the aforementioned
debts.

CPI-LINKED SHEKEL SEGMENT - The average balance of assets in this segment
amounted to NIS 298 million in 2008, compared with NIS 455 million in 2007, a
decrease of 35.0%. The decrease in the volume of activity of this segment
derives both from the overall decline in the activity of the Bank 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 2.70% in 2008, compared with 2.30% in 2007. The increase in
this margin of activity derives mainly from the fact that at the beginning of
2008, a significant amount of credit was repaid. Such credit bore low interest
when compared with other credit in this segment. As a result, the weighted
interest rate on the credit increased, following which the weighted margin in
this segment also increased.

FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT - The overall average
volume of assets in this segment (comprised nearly entirely of U.S. dollars or
dollar-linked) amounted to NIS 4,652 million in 2008, compared with NIS 5,602
million in 2007. Credit in this segment includes credit guaranteed by the State
that was granted to the Israel Electric Corporation 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 amounted to
NIS 4,534 million in 2008, compared with NIS 5,445 million in 2007. Excluding
the said credit, the average balance of assets in this segment amounts to NIS
118 million, compared with NIS 157 million in 2007, a decrease of 25%. The
margin in this segment, including the effect of derivatives, was 0.10% in 2008,
compared with 0.07% in 2007. The low margin in this segment is influenced by the
volume of credit guaranteed by the State as abovementioned. 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.


                                       48`

`The average of the total financial assets (excluding state-guaranteed credit to
the Israel Electric Company) amounted to NIS 527 million in 2008, compared with
NIS 795 million in 2007, a decrease of 34%.

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

THE ALLOWANCE FOR DOUBTFUL DEBTS - In our allowance for doubtful debts, an
amount of NIS 16.9 million was recorded as income in this item in 2008, compared
with income of NIS 13.8 million in 2007 and an expense of NIS 21.7 million in
2006. In the specific allowances for doubtful debts, income of NIS 13.5 million
was recorded in 2008, compared with income of NIS 7.3 million in 2007 and an
expense of NIS 27.6 million in 2006. The decrease recorded in 2008 was
influenced by a significant component, of NIS 8.5 million, derived from the
collection of debts that had been written off in the past. This collection was
derived mainly from a non-recurring receipt from the agricultural settlement
segment, as a result of the sale of the holdings of the kibbutzim in the sharse
of "Tnuva". The supplementary allowance for doubtful debts reflected a decrease
of NIS 3.4 million in 2008, compared with a decrease of NIS 6.5 million in 2007
and NIS 5.9 million in 2006.

     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 41.8 million as of December 31,
2008, constituting 9.3% 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 45.2 million in 2007
which constituted 7.5% 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 8.7% of the
balance of the credit (versus 6.4% at December 31, 2007).


                                       49`

`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,
                                                                           ----------------
                                                                            2008       2007
                                                                           -----      -----

Non income bearing                                                          22.1       69.7
Restructured (2)                                                            24.4       31.5
Designated for restructuring (3)                                             8.5       17.3
Temporarily in arrears                                                       1.9        8.7
Under special supervision*                                                 170.5      181.7
                                                                           -----      -----
Total balance sheet credit to problematic borrowers (1)                    227.4      308.9
Off-balance sheet credit risk in respect of problematic borrowers (1)       61.4       81.2
                                                                           -----      -----

Overall credit risk in respect of problematic borrowers (1) (4)            288.8      390.1
                                                                           =====      =====

*    Including an amount of NIS 164.5 million (NIS 169.7 million on December 31,
     2007) 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.


                                       50`

`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.

INCOME FROM FINANCING ACTIVITY AFTER THE ALLOWANCE FOR DOUBTFUL ACCOUNTS
amounted to NIS 100.9 million in 2008, compared to NIS 43.1 million in 2007.

OPERATING AND OTHER INCOME - This income amounted to NIS 3.0 million in 2008,
compared with income of NIS 11.5 million in 2007. The decrease in this income
derived mainly from the decrease in income from investments in shares which
amounted to NIS 1 million in 2008 compared with NIS 8.7 million in 2007.

Revenues from operating commissions in 2008 amounted to NIS 0.6 million,
compared with NIS 1.1 million in 2007, reflecting a decrease in activities
customers execute through the Bank.

OPERATING AND OTHER EXPENSES - Amounted to NIS 41.4 million in 2008, compared
with NIS 30.8 million in 2007. Payroll expenses amounted to NIS 19.9 million in
2008 compared with NIS 18.5 million in 2007. Regarding payroll expenses, please
note that the payroll expenses of 2008 were influenced by the losses incurred by
the central pension fund of the employees. The nominal losses in the pension
fund amounted to NIS 2.5 million. These losses were reflected in the expenses
that were incurred to supplement the severance pay. When ignoring this loss,
there was actually a decrease in the payroll expenses.

Operating expenses included an expense of NIS 9.0 million in respect of early
retirement, due to the retirement arrangements that were approved as part of the
privatization process of the Bank.

Maintenance and depreciation expenses for 2008 amounted to NIS 2.9 million,
similar in amount to 2007.

Other operating expenses amounted to NIS 9.6 million in 2008, compared with NIS
9.4 million in 2007. There was a significant decrease in the components of this
item as part of the efficiency plan that was implemented by us in connection
with the Run-off Plan. On the other hand, there was an increase in legal fees in
connection with the privatization of the Bank and in connection with the filing
requirements in the U.S.

PROVISION FOR TAXES - The provision for taxes on profits in 2008 amounted to NIS
9.5 million, compared with NIS 1.6 million in 2007. The provision for taxes
derived from the fact that the losses carried forward from previous years cannot
be offset against profit tax. We received tax assessments through the 2003 tax
year. We have tax loss carryforwards of NIS 665 million in respect of which no
deferred taxes were recorded.

The provision for taxes in 2008 was calculated on the basis of our income
reported in the financial statements as of December 31, 2008, including income
of NIS 48.6 million in respect of the refund of interest from the Bank of Israel
from prior years. We requested from the Income Tax authorities to recognize the
refund as a refund on account of the 2002 and 2003 tax years in which we had
income tax losses. In the event that our request is accepted, the provision for
taxes will be reduced by an amount of NIS 6.5 million. The handling of our
request has not yet been completed and we are uncertain as to how this issue
will be resolved.


                                       51`

`TOTAL ASSETS

     Our total assets as of December 31, 2008 decreased to NIS 5,757 million as
compared to NIS 6,483 million as of December 31, 2007 and NIS 7,516 million as
of December 31, 2006. The main component of the net change in the total assets
was the reduction of our credit portfolio. The above figures include a state
guaranteed credit to the Israel Electric Corporation Ltd.(NIS 4,699 million as
of December 31, 2008, NIS 4,963 million as of December 31, 2007 and NIS 5,671
million as of December 31, 2006), 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,
2008 decreased to NIS 5,113 million as compared to NIS 5,926 million as of
December 31, 2007 and NIS 7,006 million as of December 31, 2006. The main
component of the net change in the total liabilities was the reduction of our
deposits, which decreased from NIS 6,923 million as of December 31, 2006 to NIS
5,855 million as of December 31, 2007 to NIS 5,049 million as of December 31,
2008 (14% 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 5,671 million as of December 2006, NIS 4,963
million as of December 31, 2007 and NIS 4,699 million as of December 31, 2008.

B.   LIQUIDITY AND CAPITAL RESOURCES

SOURCES OF FUNDS

     Our main sources of liquidity at the present time are (a) liquid cash
balances, (b) Treasury deposits, and (c) any collections we obtain on existing
loans to customers.

     Due to the repayment of the perpetual deposit, we had liquid cash balances
of NIS 575 million as of December 31, 2008. These balances allow us to meet all
of our liabilities without regard to the pace at which we realize our other
assets.

     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.

DEPOSITS OF THE PUBLIC - Amounted to NIS 27 million as of December 31, 2008,
compared with NIS 55 million as of December 31, 2007. Deposits of the public
include deposits linked to the Index in an amount of NIS 9 million, compared
with NIS 25 million as of December 31, 2007. These deposits are linked,
long-term deposits and savings plans deposited with us prior to our having
ceased accepting new deposits (August 2002). The balance of public deposits in
an amount of NIS 18 million derives from deposits connected to credit.


                                       52`

`DEPOSITS OF THE GOVERNMENT - The balance of Government deposits as of December
31, 2008 amounted to NIS 5,023 million, compared with NIS 5,319 million as of
December 31, 2007. The main component of the Government deposits is foreign
currency denominated deposits, which served as the source for granting long-term
loans. The balance of the Government's foreign currency deposits amounted to NIS
4,797 million as of December 31, 2008, compared with NIS 5,062 million as of
December 31, 2007. Of the total amount of government foreign currency deposits,
an amount of NIS 4,699 million derives from a deposit designated to grant
long-term credit to the Israel Electric Company Ltd., compared with NIS 4,963
million as of December 31, 2007. The credit and deposit have parallel terms
except for a negligible margin that we have in respect of this credit. As
mentioned above, to secure the credit, we also obtained a government guarantee.

Another component of these deposits is the CPI-linked deposits that were
received from the Government as part of the arrangement of the kibbutzim. These
deposits served as a source for rescheduling these debts. The balance of the
Government's CPI-linked deposits as of December 31, 2008 amounted to NIS 226
million, compared with NIS 257 million as of December 31, 2007. These deposits
are long-term deposits paid in installments, concurrent with the period in which
the arrangement loans were granted (until the end of 2013).

In respect of government deposits, in 2008 we recorded an expense of NIS 271.6
million. In 2007, we recorded income of NIS 115.2 million in respect of these
deposits. 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
2007, income was recorded in respect of this deposit, since the negative
exchange rate differentials were higher than the interest in respect of the
deposit.

     DEPOSITS FROM BANKS - On December 31, 2008, we repaid the balance of the
credit line furnished to us by the Bank of Israel. As a result, there was no
outstanding balance in this item as of December 31, 2008. As of December 31,
2007, the balance of this item was NIS 481 million, deriving from the balance of
the credit line at that time.

CASH FLOW

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

     CASH AND DEPOSITS WITH BANKS. The balance of our deposits with banks
amounted to NIS 575 million, as of December 31, 2008, compared with NIS 34
million as of December 31, 2007 and NIS 66 as of December 31, 2006. The increase
is a result of the repayment of the perpetual deposit on December 31, 2008 in
the amount NIS 857.8 million. All of the deposits are held with Israeli banks.
Of the said amount, an amount of NIS 574 million is deposited in deposits with
maturity dates of up to seven days.


                                       53`

`The balance of our deposits with banks as of December 31, 2008 was
comprised as follows:

     o    NIS 575.3 million short-term deposits with other banks in Israel.
          (This amount includes NIS 10.5 million, as of December 31, 2008, 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 1.2 million long-term CPI-linked deposits.

          Cash flow from current operations in 2008 showed a surplus of NIS 53.6
          million.

     Cash flow from asset operations in 2008 shows a decline in the assets in an
amount equal to approximately NIS 1,308 million, resulting primarily from the
repayment of our perpetual deposits in the amount of NIS 857.2 million and a
decline in loans, which was approximately NIS 421 million.

     Cash flow from liabilities in 2008 showed a decline of approximately NIS
818 million in our liabilities, including deposits of the public, deposits of
banks and deposits of the Government. Due to the repayment of our perpetual
deposits and after we repaid the balance of the special line of credit from the
Bank of Israel, our cash balance increased to NIS 574 million as of December 31,
2008.

EQUITY CAPITAL

     Our shareholders' equity including preference shares amounted to NIS 643
million as at December 31, 2008, compared with NIS 557 million as at December
31, 2007.

     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 539 million
(compared with NIS 447 million as at December 31, 2007).

     The increase in the value of the preference share capital during 2008
derived mainly from the changes that occurred as a result of the approval of the
Compromise and Arrangement Plan pursuant to Article 350 of the Companies Law -
1999 between us and our shareholders. As part of the plan, it was stipulated
that in the event that the sale of our shares Bank is consummated by December
31, 2009, the State will pay us as interest on the perpetual deposit, part of
the accrued preference dividend that we will pay our shareholders, while the
balance of the preference dividend will be credited to the preference
shareholders from our sources. This part, in an amount of NIS 98 million, was
reflected in the increase in the preference shares and a decrease in our
shareholders' equity.


                                       54`

`Shareholders' equity at December 31, 2008 amounted to NIS 104 million,
compared with NIS 110 million on December 31, 2007. The change in shareholders'
equity is comprised, among other things, of the annual income of NIS 53 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 to NIS 43 million in
2008 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 these amounts that increased the shareholders' equity was set-off
the increase in the preference shares as a result of the dividend that will be
paid from our sources, in the event that the sale of our shares is not carried
out, and which amount to NIS 98 million.

     Of the total amount in respect of the preferred shares which amounted to
NIS 539 million at December 31, 2008, an amount of NIS 203 million is in respect
of profit-sharing preference shares (compared with NIS 171 million as at
December 31, 2007). 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.

CAPITAL ADEQUACY

     On December 31, 2008, our ratio of capital to risk assets was 18.4%, higher
than the 9% minimum rate stipulated in Proper Banking Procedures and compared
with 15.4% as of December 31, 2007.

     On August 1, 2008, our "banking license" expired. In his letter dated July
27, 2008, the Supervisor of Banks announced that he was exempting us from
complying with part of the Proper Banking Procedure Directives, including the
directive requiring us to maintain a minimum capital ratio. Our Board of
Directors also believes that this requirement is irrelevant to the Bank,
especially in view of the fact that the balance of our liabilities is less than
our total equity.

     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.


                                       55`

`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, 2008, 2007 and 2006:

                                                                   2008
                                                       -----------------------------
                                                      SPECIFIC SUPPLEMENTARY
                                                     ALLOWANCE   ALLOWANCE
                                                        (1)         (2)        TOTAL
                                                       -----       -----       -----
                                                              REPORTED AMOUNTS
                                                       -----------------------------
                                                               NIS MILLIONS
                                                       -----------------------------

Balance of allowance at beginning of year              572.6        45.2       617.8
                                                       -----       -----       -----

Current allowances                                       4.1           -         4.1
Reduction in allowances                                 (9.1)       (3.4)      (12.5)
Collection of debts written-off in previous years       (8.5)          -        (8.5)
                                                       -----       -----       -----
Amount charged to the income statement                 (13.5)       (3.4)      (16.9)
                                                       -----       -----       -----

Debts written-off(3)                                   (28.0)          -       (28.0)
                                                       -----       -----       -----

Balance of allowance at end of year                    531.1        41.8       572.9
                                                       =====       =====       =====

Amount of allowance not deducted from credit
 to public                                               0.1           -         0.1
                                                       -----       -----       -----

                                                                  2007
                                                       -----------------------------
                                                      SPECIFIC  SUPPLEMENTARY
                                                     ALLOWANCE    ALLOWANCE
                                                        (1)         (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(3)                                   (78.4)          -       (78.4)
                                                       -----       -----       -----

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
                                                       -----       -----       -----


                                       56`

`2006
                                                       -----------------------------
                                                      SPECIFIC SUPPLEMENTARY
                                                     ALLOWANCE   ALLOWANCE
                                                        (1)         (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(3)                                   (44.9)          -       (44.9)
                                                       -----       -----       -----
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
                                                       -----       -----       -----

(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, 2007 - NIS 38.9
     million; as of December 31, 2006 - NIS 38.9 million).

(3)  Less collection of debts written off in previous years.

     The following table summarizes the balance of overall credit risk of
problem loans in 2008, 2007 and 2006 and the allowance for doubtful debts
relating to them:

                                                                AS OF DECEMBER 31
                                                     ----------------------------------------
                                                                IN MILLIONS OF NIS
                                                     ----------------------------------------
                                                       2008            2007            2006
                                                     --------        --------        --------

Overall Credit Risk of Problem Loans                    288.8           390.1           583.2
Annual Expense for Allowance for Doubtful Debts         (16.9)          (13.8)           21.7
Percentage of Annual Expense for Allowances for
Doubtful Debts out of Overall Credit of Problem
Loans                                                    (5.8)%          (3.5)%           3.7%

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, 2008 and 2007:


                                       57`

`DECEMBER 31     DECEMBER 31
                                          2008            2007
                                       ----------      ----------
                                            IN MILLIONS OF NIS
                                       --------------------------

TRANSACTIONS THE BALANCE OF WHICH
 REPRESENTS A CREDIT RISK -
Guarantees securing credit                  122.7           157.9
Guarantees to home purchasers                15.8            17.9
Other guarantees and liabilities              4.1             4.6

     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
                                                --------------------------
                                                   2008            2007
                                                ----------      ----------

Income from guarantees issued by us                    0.9             1.7
Expenses on guarantees issued in our favor               -               -

     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

     During 2003, we signed a rental agreement in respect of our office premises
for the period ending in August 2009. The annual rental payment and management
fees in respect of this commitment, which are linked to the CPI, in respect of
the period January 1, 2009 to August 31, 2009 amount to NIS 0.8 million. In July
2009, we signed a new rental agreement for smaller offices. This agreement is
for a period of two years, until August 2011, with an option to renew for an
additional year. We have the right to cancel the rental agreement beginning on
April 1, 2010, with advance notice of 4 months. The annual rental payment and
management fees in respect of this commitment, which are linked to the CPI, in
respect of the period from August 1, 2009 to July 31, 2010 amount to 0.4 NIS
million.


                                       58`

`As of January 1, 2004 we have outsourced our computer services, according
to which we signed an agreement to receive computer services for a period of
five years. As part of the agreement, the company with which we signed the
agreement undertook to provide us with ongoing management and operational
services of our 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. During 2008, this agreement was
extended for a period of three additional years until December 10, 2011.
Commencing on January 1, 2010, we have the option of terminating the commitment
upon six months' advance notice. The cost of the computer services for 2009 will
amount to NIS 3.0 million.

     During 2006, we 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.

     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 18A to our financial
statements under Item 17.

DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY PERIODS

A.   VOLUME OF OPERATIONS

1.   Stated amount of derivative instruments ALM (1)

                                        DECEMBER 31, 2008                DECEMBER 31, 2007
                                    --------------------------      --------------------------
                                    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                         36.4            83.8            30.4            17.0
                                    ----------      ----------      ----------      ----------

Total                                     36.4            83.8            30.4            17.0
                                    ==========      ==========      ==========      ==========

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

                                        DECEMBER 31, 2008                DECEMBER 31, 2007
                                    --------------------------      --------------------------
                                    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                  0.4               -               -              0.5
Gross negative fair value                    -             1.1            (0.6)               -
                                    ----------      ----------      ----------       ----------

Total                                      0.4             1.1            (0.6)             0.5
                                    ==========      ==========      ==========       ==========


                                       59`

`B.   DERIVATIVE INSTRUMENTS CREDIT RISKACCORDING TO THE OPPOSITE PARTY TO THE
     CONTRACT

                                                                        DECEMBER 31, 2008
                                                            ------------------------------------------
                                                                         REPORTED AMOUNTS
                                                            ------------------------------------------
                                                                          NIS MILLIONS
                                                            ------------------------------------------
                                                              BANKS       CENTRAL BANKS       TOTAL
                                                            ----------      ----------      ----------

Gross positive fair value of derivative instruments                0.4               -             0.4
Off-balance sheet credit risk in
 respect of derivative instruments (2)                            12.0               -            12.0
                                                            ----------      ----------      ----------

Total credit risk in respect of derivative instruments            12.4               -            12.4
                                                            ==========      ==========      ==========

                                                                        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
                                                            ==========      ==========      ==========

(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, 2008, deposits with banks in the amount of NIS 10.5
million have been pledged by the Bank in favor of those banks (December 31, 2007
- NIS 10.0 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, 2008
                                                        ------------------------------------------
                                                                     REPORTED AMOUNTS
                                                        ------------------------------------------
                                                                      FROM 3 MONTHS
                                                      UP TO 3 MONTHS     TO 1 YEAR        TOTAL
                                                        ----------      ----------      ----------
                                                       NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                        ----------      ----------      ----------

CPI/Shekel interest contracts                                 36.4               -            36.4
Foreign currency contracts                                    83.8               -            83.8
                                                        ----------      ----------      ----------

Total                                                        120.2               -           120.2
                                                        ==========      ==========      ==========


                                       60`

`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
                                                        ==========      ==========      ==========

     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.

     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 0.1 million in 2008 compared with NIS 1.3 million for 2007
and 1.9 for 2006.

MATURITY PROFILE OF OUR CONTRACTUAL OBLIGATIONS

     The following table sets forth as of December 31, 2008 the maturity profile
of our contractual obligations.

                                                              AS OF DECEMBER 31, 2008
                                                    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
Subordinated Debt*                 7,904.5         618.0       1,174.3       1,153.9       4,885.4          62.9
                                  ========      ========      ========      ========      ========      ========

CONTINGENT LIABILITIES AND
COMMITMENTS
Rental Agreement                       0.7           0.7             -             -             -             -
IT Outsource Contract                  7.8           2.6           5.2             -             -             -
Stated Amount of Derivative
Instruments                          120.2         120.2             -             -             -             -
                                  --------      --------      --------      --------      --------      --------

Total Contingent Liabilities
and Commitments                      128.7         123.5           5.2             -             -             -
                                  ========      ========      ========      ========      ========      ========

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


                                       61`

`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 7,411.9 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 535.4 million

         1-3 years                  NIS 1,059.7 million

         4-5 years                  NIS 1,044.9 million

         More than 5 years          NIS 4,771.9 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.

     At present, it is impossible to assess if and when the sale of our shares
pursuant to the Arrangement Plan will reach fruition and what the impact will be
on the Bank if the sale of our shares does not take place.

     The financial statements have been prepared under the going concern
assumption since there is no substantial doubt as to our ability to continue
operating as a going concern and since our liquidation is not deemed imminent.
Nevertheless, in future accounting periods we may need to change the basis of
presentation of our financail statements to liquidation basis.

     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 appropriate.


                                       62`

`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.

     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 outside 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
outside 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 206 million as of December 31, 2008 (NIS 252 million as of
December 31, 2007).

     Our Management classifies problematic debts on the basis of the
classifications and criteria set out in the Provisions of Proper Banking
Procedure Directives. 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.


                                       63`

`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.

     In its letter dated January 25, 2009, the Bank of Israel notified us that
we are exempt from making supplementary and general provisions for doubtful
debts in accordance with the directives of the Bank of Israel. Our Board of
Directors decided to make the abovementioned provisions in accordance with the
provisions for reporting to the public, as set out above. During 2009, the Board
of Directors will reassess this policy, taking into consideration economic
developments and developments relating our continued operations.

     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, 2008 is NIS 41.8 million
(December 31, 2007 - NIS 45.2 million), comprising 9.3% of credit to the public
(excluding the credit to the Israel Electric Company, guaranteed by the State
from the State's deposit) before the aforementioned provision, compared with
7.5% as of December 31, 2007.

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 fair value of the marketable securities
is determined on the basis of the stock exchange price as of the balance sheet
date. The balance of marketable securities at market value as of December 31,
2008 was NIS 29 million (on December 31, 2007 - NIS 34 million). This data does
not necessarily reflect the price that will be obtained on the sale of a large
number of the securities.

CONTINGENT LIABILITIES - There are a number of legal suits pending against us.
Each of the suits is handled by an outside attorney. 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 attorneys handling the cases 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.


                                       64`

`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 8, 2009, 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)         68      Chairman of the Board of
                                           Directors of the Bank                    August 2002

Richard Armonn(1,4,5)              74      Deputy Chairman of the Board of
                                           Directors of the Bank                    1971(6)

Avi Olshansky(1,4,8)               72      Director                                 November 1997

Yacob Eizner(2,4,8)                62      Director                                 October 2002

Shulamit Eshbol(2,3,9,14)          43      Director                                 November 2002

Yeheskel Beinisch(2,3,9,15)        67      Director                                 November 2002

Moshe Gavish(1,3,9,16)             60      Director                                 November 2002

Ehud Green (2,3,4,10)              54      Director                                 December 2002

Aharon Hildesheimer(1,2,11)        66      Director                                 March 2006

Ben-Zion Dagan(3,4,7,13)           75      Director                                 July 2002

Shlomith Zuta(17)                  49      Director                                 September 2009

(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. Tenure ended March 22, 2009.

(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.
     Tenure ended March 22, 2009 and was renewed on September 8, 2009.

(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.

(14) Tenure ended November 13, 2008.

(15) Did not serve as a director from November 13, 2008 until January 14, 2009.

(16) Did not serve as a director from November 13, 2008 until December 25, 2008.

(17) Outside director elected by our shareholders at the special general meeting
     of the shareholders on September 3, 2009 in accordance with the Companies
     Law


                                       65`

`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., 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..


                                       66`

`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 is a director of Kaman Capital Ltd. and 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., Darkei Energy 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.

     DR. SHLOMITH ZUTA, DIRECTOR. Dr. Zuta was appointed as a director on
September 3, 2009. She is a member of our Audit Committee and Financial
Statement Review Committee. Dr. Zuta is an outside director. Dr.Zuta holds
Masters and Doctorate degrees in Finance from New York University and Masters
(Operations Research) and Bachelor of Science (Theoretical Mathematics) degrees
from Tel Aviv University. She serves as an adviser to various entities. Dr. Zuta
has served as a director of Union Bank and Tsur Shamir and as the head economist
of the Israel Securities Authority. She served as a member of the Investment
committee of the Makefet Fund and Tel Aviv University. Dr. Zuta is a director of
the following companies:Sela Capital Real Estate Ltd., Analyst Provident Funds
Ltd. and Mercantile Mutual Funds Ltd.


                                       67`

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

IDENTITY OF OFFICERS

     The name, age and position of each of our executive officers, as of
September 8, 2009, 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)        68      Chairman of the Board                      August 2002

Uri Galili(2)              64      General Manager                            July 2002

Arieh Savir(3)             63      Deputy General Manager                     September 2002

Rimon Shmaya(4)            60      Comptroller                                April 2001
                                   Comptroller & Financial Risks Manager      January 1998
                                   Member of the Management                   May 1996

Nathan Dekel(5,8)          58      Operations & Controls Manager              April 2004
                                   Operations Manager                         July 1999
                                   Member of the Management                   August 1990

Michael Warzager(6)        54      General Counsel                            March 1998

Itzhak David(7)            54      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.


                                       68`

`(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.

     (8) Mr. Nathan Dekel ceased his employment with the Bank as of August 31,
2009.

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. The outside directors are appointed for
three year terms. The term of our last outside directors expired in March 2009
and from that date there were no outside directors serving in our Board. We
recently received the particulars of the State of Israel's candidate for serving
as an outside director and the appointment of both outside directors (Dr.
Shlomit Zuta and Mr. Aharon Hildesheimer) was approved by the general meeting on
September 3, 2009. The directors who are appointed by the banks serve as such
until removed by the appointing bank.


                                       69`

`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 agreed to reduce its Board members to 4, Bank Leumi le-Israel B.M. agreed
to reduce its Board members to 2, Israel Discount Bank Ltd. agreed to reduced it
representatives to 1 and Bank Hapoalim B.M. agreed to reduce its members on the
Board to 1.These reduced numbers 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.

     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.

     Pursuant to the Companies Law, if at the time that an outside director is
to be appointed, all the other members of the Board of Directors are of the same
gender, then the appointed outside director shall be of the opposite gender. The
term of our last outside directors expired on March 23, 2009. At that time, all
of the members of our Board were male. In accordance with the above arrangement,
we approached our major sharehoders requesting of them to provide us, in
advance, with their candidates for the posts of outside directors that have been
vacated. According to the consent reached among the above three banking groups,
their candidate will be the same outside director who was previously appointed
with their recommendation, so that his term will be renewed for three more
years. In light of the fact that this director is a male, and in order to abide
by the above provision of the Companies Law, the State of Israel's candidate to
serve as the other outside director must be a female, and she must be appointed
first. We recently received the particulars of the State of Israel's candidate
for serving as an outside director and the appointment of both outside
directors, Mr. A. Hildesheimer and Dr. S. Zuta, was approved by our general
meeting on September 3, 2009.


                                       70`

`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.

     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, 2008 was NIS
4,931,000 and we set aside and made provisions of NIS 2,038,000 to provide
severance pay, retirement or similar benefits for our directors and executive
officers.

     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 and as of
February 2009 stood at NIS 43,596.


                                       71`

`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. This compensation stood at NIS 2,284 as of February
2009.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.

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

A.   Compensation for the year 2008

                                   Severance     Additional
    Name               Salary        Pay(1)        Amounts           Total
    ----              --------      --------      --------         --------
                                     IN THOUSANDS OF NIS
                      -----------------------------------------------------

Raanan Cohen               629           262           108              999
Uri Galili                 746           265            93            1,104
Arieh Savir                636           235            70              941
Nathan Dekel               633           239            62              934
Rimon Shmaya               628           231            64              923
Michael Warzager           622           148           147(2)           917
Itzhak David               340           106             -              446

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

     (2)  Includes an amount of NIS 90 thousand paid in January 2009.

B.   Remuneration in connection with the early retirement agreement approved in
     connection with the privatization of the Bank (included in early retirement
     expenses):

                                             Amount
                                              In NIS
                                            thousands
                                            ---------

Raanan Cohen                                   311
Uri Galili                                     365
Arieh Savir                                    310
Nathan Dekel*                                  377
Michael Warzager*                              386
Rimon Shmaya*                                  223
Itzhak David                                   266

*    The remuneration will be paid only in the event of dismissal or resignation
     treated as dismissal (resignation in the event of the liquidation of the
     Bank, privatization, or after January 1, 2010).


                                       72`

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

     Commencing on July 15, 2002, Mr. U. Galili has served as our General
Manager. Commencing on August 14, 2002, Dr. Ra'anan Cohen has served as our
Chairman of the Board of Directors. On September 1, 2002, Mr. A. Savir joined
the Bank's management. Mr. Savir serves as Deputy General Manager and as our
Credit Supervisor.

     During 2008, our Board of Directors decided to extend the tenure of Messrs.
A. Galili, Dr. R. Cohen, and A. Savir until the earliest of December 31, 2009,
the date on which the Bank is privatized or commencement of liquidation
proceedings. The extension of the terms of employment of Dr. R. Cohen until that
date was also ratified by our General Meeting.

     On May 4, 2008, the Supervisor of Wages and Labor Agreements at the Finance
Ministry approved the decisions of our institutions which had been passed back
in 2007 whereby the Chairman of the Board, the General Manager and the Deputy
General Manager are entitled upon conclusion of their tenure (with the
conclusion of tenure including the transfer of control of the Bank) to
additional severance pay (beyond the amounts provided for them to managers
insurance policies and/or pension funds) at a rate of one month's salary for
every year of service and the relative part of a month in respect of each part
of a year. During 2008, in connection with the early retirement plan and the
plan for the privatization of the Bank, our institutions approved that Messrs.
A. Galili, Dr. R. Cohen, and A. Savir shall be entitled upon termination of
their tenure to redemption of three months' advance notice, in lieu of actual
notice of three months as stipulated in their employment agreements and to a
three-month period of paid acclimation time, with the redemption thereof based
on their monthly salaries at the time of the termination of the tenure. The
decision of our institutions was also ratified by the Supervisor of Wages and
Labor Agreements at the Finance Ministry. The total cost of the benefits that
were approved for all of the three amounts to NIS 2.1 million as of December 31,
2008. In respect of this liability, we set up an appropriate provision in its
accounting records.

     During 2006, the employment contracts of three senior employees employed
under "personal contracts" were amended so as to apply to such contracts the
terms of termination that apply to the employees who are employed under the
Bank's collective agreements. During 2008, the institutions of the Bank ratified
the application to these contracts of the terms of the collective agreement
dated November 16, 2008. The application of the terms of the collective
agreements to the aforementioned three employees was ratified by the Supervisor
of Wages and Labor Agreements at the Finance Ministry.

     In respect of these liabilities, amounting at December 31, 2008 to NIS 7.7
million (December 31, 2007 - NIS 6.7 million), there is an appropriate provision
included in the reserve for severance pay.


                                       73`

`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.


                                       74`

`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.

     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.


                                       75`

`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 2008, 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.

     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.


                                       76`

`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 2008, 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.

     During 2008, 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.


                                       77`

`During 2008, 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.

     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.


                                       78`

`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, 2009, 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.

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.

DR. SHLOMITH ZUTA: Member of the Audit Committee and the Financial Statement
Review Committee. Dr. Zuta was appointed as a director on September 3, 2009.
Dr.Zuta holds Masters and Doctorate degrees in Finance from New York University
and Masters (Operations Research) and Bachelor of Science (Theoretical
Mathematics) degrees from Tel Aviv University. She serves as an adviser to
various entities. Dr. Zuta has served as a director of Union Bank and Tsur
Shamir and as the head economist of the Israel Securities Authority. She served
as a member of the Investment committee of the Makefet Fund and Tel Aviv
University. Dr. Zuta is a director of the following companies:Sela Capital Real
Estate Ltd., Analyst Provident Funds Ltd. and Mercantile Mutual Funds Ltd.


                                       79`

`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 September 1, 2009, we had 25 employees, as follows:

     Personnel/Training Staff                   1
     Compliance and Auditing                    1
     Officers                                   5
     Professional Staff                         7
     Support Staff                             11

     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, 2008 is about 21% of the number that were employed on December 31,
2002.

     13 of our employees as of December 31, 2008 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.


                                       80`

`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. On November 16, 2008,
a new collective agreement was signed by us, the Histadrut and the Bank's
workers committee, in connection with the termination arrangements of employees
who are employed under the Bank's collective agreements. This agreement was
approved by the Supervisor of Wages and Labor Agreements at the Finance Ministry
and it replaces the previous collective agreements that regulated the terms of
termination of these employees.

     The agreement of November 16, 2008 sets forth the right of management to
dismiss employees as part of the reduction in our activity, extends the validity
of the reductions that were agreed to in the past in connection with the wages
of the employees and the fringe benefits to which they are entitled, and grants
various benefits to employees in the event of dismissal (including resignations
to be treated as dismissals). According to the agreements, there are two
termination tracks for dismissed employees: a severance track and a pension
track. A dismissed employee in the pension track is one whose seniority is at
least 20 years and who is at least 50 years old and who, upon dismissal is
entitled to early pension. A dismissed employee who does not meet these two
conditions together, belongs to the severance track, in which he is entitled to
enhanced severance pay. In the event of the privatization or liquidation of the
Bank and/or if the privatization is not implemented by December 31, 2009, then
immediately thereafter, employees are allowed to resign and be treated as if
they had been dismissed, but we have the right to require the employee to
continue working for an additional period of time. According to the agreement,
part of the termination payments to the employees will be deposited in trust
with a trust company. For this purpose, we engaged the trust company of an
Israeli bank which will serve as trustee. The collective agreement of November
16, 2008 will be in effect until the termination of the last employee to which
the agreement applies. The waivers and part of the benefits set forth in the
aforementioned collective agreements also apply and/or will apply to some of the
employees of the Bank who are employed under personal contracts.

     We recorded the necessary provisions to cover the agreement. As of December
31, 2008, the balance of the provision in respect of the severance pay to be
paid to the employees amounts to NIS 21.1 million (excluding payroll tax),
compared with an amount of NIS 18.2 million as of December 2007.

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.


                                       81`

`ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.   MAJOR SHAREHOLDERS

RELATIONSHIP OF THE BANK TO THE GOVERNMENT OF ISRAEL

     As of December 31, 2008, the State of Israel held approximately 80.2% 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.

     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.


                                       82`

`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 2007 and 2008 and their purchase prices were as follows:

                          2008                                                                  2007
-------------------------------------------------------------      ---------------------------------------------------------------
                                                     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               30             -              -            90             D           290          0.01%             -          90

DD             245          0.34%             -         1,000            DD           308          0.44%             -       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.

     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 83.43% instead of 81.53% as reported as of August 31, 2009. 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.


                                       83`

`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 August 1, 2009 is set forth below:

     6% C Shares - 1,065 holders in the United States, holding 2,015,774 shares.

     6% CC Shares - 704 holders in the United States, holding 116,388 shares.

     7-1/2% D Shares - 549 holders in the United States, holding 11,813 shares.

     7-1/2% DD Shares - 1,301 holders in the United States, holding 6,741
shares.

PRINCIPAL HOLDERS OF VOTING SECURITIES

     The following table sets forth, as of August 1, 2009, 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:

                                                                         NUMBER OF                         PERCENTAGE 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.


                                       84`

`(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.

     (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 an
affiliated company.

     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, 2008, the
balance of the credit was NIS 4,699 million (as at December 31, 2007 - NIS 4,963
million). Income of NIS 249 million was recorded in respect of the
aforementioned credit in 2008 (in 2007 - an expense of NIS 127 million; in 2006
- a total expense was recorded in respect of this credit in an amount 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 2008, the income that was recorded, constituted more than 10% of
the profit from financing operations before the allowance for doubtful debts.

     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, 2008, the overall balance of the Government
deposits amounted to NIS 5,023 million compared with NIS 5,319 million as at
December 31, 2007. Financing expense in an amount of NIS 272 million was
recorded in 2008 in respect of the Government deposits, compared with income of
NIS 115 million in 2007 and income of NIS 84 million in 2006.


                                       85`

`C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.

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, 2009:

     (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 were to
pay the compensation by August 22, 2008. To the best of our knowledge, a portion
of the agreed payment to the plaintiffs has yet to be made.

     (B) 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. On November 24,
2008, we and the plaintiff reached an agreement whereby we will pay to the
plaintiff the amount of NIS 100,000 (approx. $25,000) plus VAT, to cover the
plaintiff's legal fees, and the objection of the plaintiff to the Arrangement
Plan between us and our shareholders will be rejected and the aforesaid appeal
filed by the plaintiff to the Supreme Court on the decision to reject the motion
to certify the derivative action will be rescinded. We paid the agreed amount on
November 30, 2008 and the appeal was rescinded.


                                       86`

`(C) 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.

     (D) 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. The District Labor Court
dismissed the action and refused to grant the amount that the plaintiffs
requested in their motion for partial judgment. In November 2008, the plaintiffs
filed an appeal to the National Labor Court.


                                       87`

`(E) 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. Pursuant to the
Arrangement Plan between us and our shareholders, approved by the Court on
November 2, 2008, the above originating motion against us and our appeal against
the denial of its originating motion, were dismissed.


                                       88`

`(F) 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. On March 14,
2006, the action against the receiver was dismissed at the outset for failure to
show cause of action and the action continued, therefore, only against us and
the land-owner. In November 2008, following a settlement agreement between the
parties, we paid the plaintiff approximately NIS 300,000 and the claim was
dismissed.

     (G) 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.


                                       89`

`(H) 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.

     (I) On August 24, 2009, a customer of ours filed a suit in the Haifa
District Court for an amount of NIS 10 million. The plaintiff purchased, along
with another individual, part of a buiding project that we financed. The
purchase was from the receiver of the project, who was appointed pursuant to our
application to the court. We granted a loan to the plaintiff and the other
purchaser to finance the purchase from the receiver. The plaintiff and the other
purchaser did not make timely payments of the loan and we demanded immediate
re-payment of the loan. In response, the plaintiff rescinded the purchase
agreement between him and the receiver regarding the parts of the project
purchased by him and the other purchaser. The suit was filed against us and the
receiver and against the other purchaser (borrower). In the suit, the plaintiff
claims, among other things, that he was not provided with tax certificates
required in order to transfer the rights in the parts of the project purchased
by him and the additional purchaser with the Land Registrar, that this is a
material breach of the purchase agreement between him and the receiver and
therefore his rescission of the agreement was lawfully proper. In his suit, the
plaintiff estimates his damages at approximately NIS 40 million, sets them off
against the balance of his debt to us - according to his claim, in the amount of
approximately NIS 7 million - and fixes his claim, after the set-off and for the
purpose of the court fee, at NIS 10 million. We reject the claim and have
transferred the handling of the suit to our attorneys.

     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.


                                       90`

`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
                      ------     ------     ------     ------     ------     ------     ------     ------

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                     227         94      2,308      1,008      2,040        873        572        315
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
   1st Quarter           438        342      4,112      4,112      3,901      3,380      1,840        803
   2nd Quarter           390        275      4,112      3,300      3,853      2,960      1,588        832
   3rd Quarter           330        260      3,500      3,497      3,250      2,998        932        666
   4th Quarter           250        220      3,497      2,250      3,200      2,250        755        603
2009
   January               220        198      2,250      1,950      2,250      2,140        699        625
   February              238        193      2,361      1,900      2,200      1,947        696        470
   March                 224        193      1,900      1,805      2,200      2,100        536        450
   April                 290        217      2,775      1,805      2,667      2,092        944        490
   May                   284        225      2,775      2,300      2,667      2,400        790        625
   June                  256        250      2,649      2,644      2,728      2,659        997        790
   July                  270        256      2,644      2,644      2,681      2,659        969        764
   August                370        270      3,527      2,644      3,360      2,728      1,111        870
   September             400        316      3,750      2,999      3,999      3,360      1,111        895

     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.

B.   PLAN OF DISTRIBUTION

     Not applicable.


                                       91`

`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;

(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.


                                       92`

`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.


                                       93`

`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;

     (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 five 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.


                                       94`

`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.

     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.


                                       95`

`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.

     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.


                                       96`

`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, attached to this Report as Exhibit
1.1.

     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.

     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.


                                       97`

`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).

     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


                                       98`

`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.


                                       99`

`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:

     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.


                                      100`

`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 the
Approval of the Arrangement Plan between the Bank and its Shareholders" 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 rented
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. In July
2009, we signed a new rental agreement for smaller offices, of approximately
4,300 square feet, plus storage space. This agreement is for a period of two
years, until August 2011, with an option to renew for an additional year. We
have the right to cancel the rental agreement beginning on April 1, 2010, with
advance notice of 4 months. The annual rental payment in respect of this
agreement, which are linked to the CPI, in respect of the period from August 1,
2009 to July 31, 2010 amount to approximately $5,600. In addition, we will pay
maintenance, municipal property tax and other related expenses.

     o Perpetual Deposit Agreement - In accordance with agreements (by way of an
exchange of letters) entered into at various times between the State and the
Bank, we deposited with the Treasury the proceeds of the issuance of our
Preference shares, shares of classes C, CC, CC1, D, and DD. Pursuant to these
agreements, we are entitled to receive in respect of the amounts deposited by
us, as above, dollar interest at a annual rate of 7.5% of the dollar value of
the amounts of the deposit (as they were at the date of deposit), to be paid to
us by the State in a grossed-up manner, on the dates on which we declare the
payment of a dividend in respect of those Preference shares, such that following
payment of various taxes and levies, the net amount of the interest to be paid
to us by the State will amount to the aforementioned rate of 7.5%. The
aforementioned agreements stipulate that the principal amounts deposited by us
will be repaid to us by the Treasury upon liquidation of the Bank or at the time
and for the purpose of redeeming Preference shares of classes D and DD (which
were issued as redeemable shares), with these principal amounts being linked to
the rate of the dollar, while the date of deposit with the Treasury until
October 1, 1987 and from October 1, 1987 until the date of their repayment to
the bank, they will be linked to the higher of the Consumer Price Index or the
dollar.


                                      101`

`According to the Arrangement Plan between us and our shareholders that was
approved by the court on November 24, 2008, the balance of the perpetual deposit
as of December 31, 2008, except for an amount of $7.9 million that reflects the
proceeds of the issuance of the D and DD shares held by the public (not by the
State), was repaid to us on December 31, 2008. The amount that was repaid was
NIS 857.5 million. The amount of $7.9 million that remained from the perpetual
deposit will continue to be a deposit linked solely to the dollar and will not
be linked to a choice of the dollar or the Index as it was until December 31,
2008.

     For more details, see Note 8 of the financial statements in Item 17 of this
Annual Report on Form 20-F.

     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. During
2008, this agreement was extended for a period of three additional years until
December 10, 2011. Commencing on January 1, 2010, the Bank has the option of
terminating the commitment upon six months' advance notice. The cost of the
computer services for 2009 will amount to NIS 2.6 million.

     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.


                                      102`

`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.

     On November 16, 2008, a new collective agreement was signed by us, the
Histadrut and our workers committee, in connection with the termination
arrangements of employees who are employed under the Bank's collective
agreements. This agreement was approved by the Supervisor of Wages and Labor
Agreements at the Finance Ministry and it replaces the previous collective
agreements that regulated the terms of termination of these employees. The
agreement of November 16, 2008 sets forth the right of management to dismiss
employees as part of the reduction in our activity, extends the validity of the
reductions that were agreed to in the past in connection with the wages of the
employees and the fringe benefits to which they are entitled, and grants various
benefits to employees in the event of dismissal (including resignations to be
treated as dismissals). According to the agreements, there are two termination
tracks for dismissed employees: a severance track and a pension track. A
dismissed employee in the pension track is one whose seniority is at least 20
years and who is at least 50 years old and who, upon dismissal is entitled to
early pension. A dismissed employee who does not meet these two conditions
together, belongs to the severance track, in which he is entitled to enhanced
severance pay. In the event of the privatization or liquidation of the Bank
and/or if the privatization is not implemented by December 31, 2009, then
immediately thereafter, employees are allowed to resign and be treated as if
they had been dismissed, but we have the right to require the employee to
continue working for an additional period of time. According to the agreement,
part of the termination payments to the employees will be deposited in trust
with a trust company. For this purpose, we engaged the trust company of an
Israeli bank which will serve as trustee. The collective agreement of November
16, 2008 will be in effect until the termination of the last employee to which
the agreement applies. The waivers and part of the benefits set forth in the
aforementioned collective agreements also apply and/or will apply to some of our
employees who are employed under personal contracts.

     We recorded appropriate provisions in our books for these agreements. The
agreements that were signed were approved by the Commissioner of Wages and Labor
Agreements in the Ministry of Finance.


                                      103`

`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.

     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 write-offs of part of these credits
and to long-term rescheduling of the remainder.

     The Government financed 35% of the write-offs 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 write-offs that were approved for them.

     See Note 4B(2) 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, 2008 was approximately 1.24 billion U.S.
dollars, comprising approximately 92% of the total credit to the public at that
date.

     According to the Arrangement Plan between us and our shareholders which was
approved by the court on November 24, 2008, if the sale of our shares is
consummated by December 31, 2009, we will assign, to the entity it is so
instructed to by the Accountant General, our rights in connection with the
aforementioned loans furnished to the Israel Electric Company Ltd. and the
aforementioned deposits that were deposited with us by the State as a source for
providing the loans. The State approached us requesting to modify the manner in
which the loans of the Electric Company are secured to the Bank, so that instead
of their being secured by a State guarantee it would be agreed between the State
and us that the loans would become loans "at the risk" of the deposits that were
the source for providing the loans, in such a manner that we would be obliged to
pay the deposits to the State only if the Electric Company will pay its loans to
us. The State falls under the definition of "a controlling shareholder" of the
Bank according to Section 268 of the Companies Law - 1999. On June 14, 2009 our
Board of Directors deliberated the approval of the requested modification, after
it was presented with a legal opinion stating that the modification should not
be deemed an "extraordinary transaction" which also requires the approval of the
Audit Committee and the General Meeting. In light of the opinion and after the
Board was satisfied that this is a technical modification which is not
detrimental to us and that essentially the loans remain loans not within our
risk but rather the full risk of the State, as they were to date, the Board of
Directors approved the requested modification. Following the above modification
there may be a change in the accounting presentation of the loans and the
deposits that were the source for the loans. Pursuant to the public reporting
directives published by the Supervisor of the Banks and which are still
applicable to us, if the payment of deposits to a depositor is conditioned on
the extent of the collection of credit and the banking entity has no risk of
loss from the credit, they should be set-off against each other and presented in
a net amount in the balance sheet. This will mean that the loans to the Electric
Company and the deposits which were the source of the loans will not be included
in our balance sheet, and the reference to them will be given within the
framework of the Note for Contingent Liabilities and Special Commitments.


                                      104`

`o Understandings with the Ministry of Finance - In light of the possible
privatization of the Bank, of which the steps to move it forward are now taking
place, we and the Ministry of Finance held discussions regarding the payment of
the deposits of the State of Israel with us and regarding settling reciprocal
financial claims between us and the State. As a result of these discussions, on
June 29, 2009 a protocol was signed, summarizing the discussions between us and
the Ministry of Finance (the office of the accountant-general) according to
which: 1) Loans of the Bank to the Israel Electric Company (whose balance as of
March 31, 2009 was approximately NIS 5.12 billion, equal to approx. $1.2
billion) and the deposits of the State with us that were the source for these
loans shall be assigned to the State while paying compensation to us in the
amount of NIS 500,000 (approx. $125,000) for loss of margin; 2) We will make an
early-repayment of the deposits that the State deposited with us in connection
with arrangements in the agricultural sector (as of March 31, 2009,
approximately NIS 214 million, equal to approx. $53 million) and the deposits
that the State deposited with us from monies that it raised with the guarantee
of the American government (as of March 31, 2009, approximately NIS 105 million,
equal to approx. $26 million), while paying an early-payment fee by us of NIS 5
million (approx. $1.2 million); 3) We shall pay to the State NIS 12.5 million
(approx. $3.1 million) to settle reciprocal claims between us and the State in
connection with credits that we granted in the past "at the risk", in full or in
part, of the State and for the assignment to us of the right to the balance of
the collection of these credits; 4) The State shall pay to us NIS 8.1 million
(approx. $2 million) for the handling of credits that we granted in the past "at
the risk" of the State and for the share of the State in the expenses of the
handling of our securities whose consideration was deposited with the Ministry
of Finance; 5) We shall return to the State the sum of NIS 8.6 million (approx.
$2.1 million) for tax advances that were returned to us and which we paid, with
financing from the State, for interest on its perpetual deposits with the
Ministry of Finance.

     According to the above, in addition to the return to the State of the
balance of its deposits with us (at their value on the date of return), we shall
pay to the State for the above reciprocal calculations (including the
early-payment fee and including for the right to the balance of the collections
of the credits "at the risk" of the Ministry of Finance), the sum of NIS 17.5
million (approx. $4.3 million).

     The purpose of the above understandings is to settle the reciprocal claims
and to close the accounting between us and the State for various items, and thus
also simplify and clarify the relationship between us and the State prior to our
expected privatization.


                                      105`

`The summary of the discussions points out that the understandings are
subject to the approval of all of the required parties in the office of the
accountant-general and the approval of the organs of the Bank, including its
General Meeting.

     The State is a "controlling party" of the Bank, as this term is defined in
Article 268 of the Companies Law - 1999, and therefore the content of the
summary of the discussions requires, as far as the Bank is concerned, the
approval of the Audit Committee, the Board of Directors and the General Meeting
of the Bank, in this order. On September 8, 2009, the Audit Committee and the
Board of Directors approved the above understandings. Our General Meeting will
convene on October 14, 2009 to deliberate this matter.

     The summary of the discussions stipulates that after the receipt of the
required approvals, an agreement shall be signed between us and the State based
upon and in accordance with the summary and then it will be implemented.

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 May 5, 2009.

     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.


                                      106`

`Foreign residents are exempt from tax on capital gains on the sale of
traded securities provided the capital gain is not attributable to a permanent
establishment of the seller in Israel. Foreign residents are exempt from tax on
capital gains on the sale of untraded securities (provided the company's assets
do not principally comprise rights in Israeli real estate) if (i) they were
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; or (ii) if were acquired on or after January 1, 2009
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;
and (b) 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.

     Interest, discount and linkage differentials deriving from bonds listed on
the Tel Aviv Stock Exchange, paid to foreign residents are exempt from tax
subject to certain conditions, the principal ones being that: (a) the foreign
resident is not a substantial shareholder in the issuer (i.e. he does not hold
10% or more of the means of control in the issuer); (b) he is not a relative of
the issuer; and (c) he does not have a special relationship with the issuer, is
not employed by the issuer and does not sell or provide it with services or
products, unless he has satisfied the tax assesing officer that such interest or
discount were not influenced by the existence of this special relationship.


                                      107`

`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 for it 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;


                                      108`

`o    securities traders that use a mark-to-market accounting method;

     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 on the secondary market after their original issuance. This discussion
also does not consider the tax treatment of persons 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 U.S. 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.


                                      109`

`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 U.S.-Israeli tax 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.


                                      110`

`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.


                                      111`

`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.


                                      112`

`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.

     At the beginning of 2009, further to the repayment of the perpetual
deposits and the increase in the liquid monetary balances held by us, it was
decided to set up an Investment Committee on behalf of the Board of Directors.
The committee will instruct our management regarding the composition of the
investments for the above balances and regarding the manner of managing our
financial exposure. The committee will establish the manner and frequency of
reporting on the execution of the said policy.

     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.


                                      113`

`In respect of each of the linkage segments listed above, we set out
frameworks of maximum permissible surpluses and deficits. These restrictions are
set in connection with our total equity (including Preference shares classified
for accounting purposes as a liability).

     The limits set 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 100 million, and a maximum
deficit of NIS 50 million.

UNLINKED SHEKEL SEGMENT - A maximum surplus of NIS 500 million, and a maximum
deficit of NIS 50 million.

FOREIGN CURRENCY/FOREIGN CURRENCY LINKED SEGMENT - A maximum surplus equal to
the value of the Preference shares. It is impossible to have a deficit in this
segment since the Preference shares are linked to the dollar.

     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 net of liabilities in
respect of our Preference shares which are classified from an accounting
standpoint as liabilities, since as mentioned above 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:

                                                       NIS millions
                                                       (approximate)
                                                         --------

Unlinked shekel segment - surplus assets                      497
Index-linked segment - surplus assets                           3
Foreign currency denominate/linked - surplus assets           104
Non-monetary items - surplus assets                            39
                                                         --------
                                                              643
                                                         ========

     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.


                                      114`

`The following table presents the sensitivity of the impact of changes in
the exchange rate of the dollar as of December 31, 2008 (in NIS millions) on our
total equity (including Preference shares). The impact is computed prior to the
tax effect:

Percentage change in dollar rate         (5)%     (10)%       5%      10%
-----------------------------------   -----     -----     -----    -----
Impact on the results of operations    (5.2)    (10.4)      5.2     10.4

     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 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 discepancy 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):

                              UNLINKED SHEKEL                                       FOREIGN CURRENCY AND
                                  SEGMENT               INDEX-LINKED SEGMENT           LINKED THERETO
                          ----------------------       ----------------------      -----------------------
                          12/31/08      12/31/07       12/31/08      12/31/07      12/31/08       12/31/07
                          --------      --------       --------      --------      --------       --------

Total assets                  0.08          0.08           3.97          4.13          5.99           6.28
Total liabilities             0.08          0.09           2.46          2.97          6.05           6.34
Discrepancy in years             -         (0.01)          1.51          1.16         (0.06)         (0.06)

     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,
2008 is 3.97 years versus an average lifespan of the liabilities of this segment
of 2.46 years. The discepancy in the average lifespan, therefore, is 18 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.


                                      115`

`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.

     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
limits are as follows:

UNLINKED SEGMENT - a maximum decrease in value of NIS 4 million.

INDEX-LINKED SEGMENT - a maximum decrease in value of NIS 14 million.

FOREIGN CURRENCY/FOREIGN CURRENCY-LINKED SEGMENT - a maximum decrease in value
of NIS 3 million.

     The frequency of reporting on the compliance with the limits in connection
with the exposure to changes in interest rates, was, until 2004, on a quarterly
basis. As a result of the decrease in the volume of our activity, the frequency
of such reports was changed to semi-annual reports (twice a year).

     The following table presents the major 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):

                                              INCREASE ON        DECREASE OF
LINKAGE SEGMENT                               INTEREST BY 1%     INTEREST BY 1%
---------------                                 --------           --------

Index-linked                                      (6.5)               7.0
Foreign currency / linked thereto                  0.8               (0.7)

     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.


                                      116`

`The following table is an analysis of our exposure to fluctuations in
interest rates as of December 31, 2008. The table includes the fair value of our
assets and liabilities, calculated as explained below:

ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS AT DECEMBER 31, 2008
Reported amounts

                                                                                         DECEMBER 31, 2008
                               ------------------------------------------------------------------------------------------------------------------------------------
                                 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                   632.7         -         -           -         -           -         -         -      2.4       635.1       642.6      2.02      0.08
Total liabilities               17.5         -         -           -         -           -         -         -     24.7        42.2        42.2      0.80      0.08
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------     -------     -----     -----
Difference                     615.2         -         -           -         -           -         -         -    (22.3)      598.9       600.4      1.22         -
Effect of futures
transactions                   (75.5)    (20.4)        -           -         -           -         -         -        -        95.9
Exposure to interest rate
fluctuations                  (539.7)    (20.4)        -           -         -           -         -         -    (22.3)      497.0
Cumulative segment exposure   (539.7)    519.3     519.3       519.3     519.3       519.3     519.3     519.3    497.0       497.0
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------
ISRAELI CURRENCY -
 LINKED TO THE CPI
Total assets                     4.4       9.9      41.3        70.2      44.7        48.9      20.4         -        -       239.8       262.2      5.71      3.97
Total liabilities                0.3      12.8      47.5       124.5      84.4         1.7       1.1         -        -       272.3       270.2      2.46      2.46
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------     -------     -----     -----
Difference                       4.1      (2.9)     (6.2)      (54.3)    (39.7)       47.2      19.3         -        -       (32.5)       (8.0)     3.25      1.51
Effect of futures
transactions                    15.4      20.4         -           -         -           -         -         -        -        35.8
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------
Exposure to interest rate
fluctuations                    19.5      17.5      (6.2)      (54.3)    (39.7)       47.2      19.3         -        -         3.3
Cumulative segment exposure     19.5      37.0      30.8       (23.5)    (63.2)      (16.0)      3.3       3.3        -         3.3
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------
FOREIGN CURRENCY AND
 LINKED THERETO
Total assets                    35.7     136.2     389.3       933.2     801.1     1,564.8     953.1         -     29.9     4,843.3     4,851.7      6.93      5.99
Total liabilities                1.2     133.4     389.6       934.5     803.0     1,575.2     961.1         -    540.2     5,338.2     5,356.2      6.88      6.05
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------     -------     -----     -----
Difference                      34.5       2.8      (0.3)       (1.3)     (1.9)      (10.4)     (8.0)        -   (510.3)     (494.9)     (504.5)     0.05     (0.06)
Effect of futures
transactions                    60.1         -         -           -         -           -         -         -        -        60.1
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------
Exposure to interest rate
fluctuations                    94.6       2.8      (0.3)       (1.3)     (1.9)      (10.4)     (8.0)        -   (510.3)     (434.8)
Cumulative segment exposure     94.6      97.4      97.1        95.8      93.9        83.5      75.5      75.5   (434.8)     (434.8)
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------
OVERALL EXPOSURE TO
  FLUCTUATIONS
 IN INTEREST RATES
Total assets**                 672.8     146.1     430.6     1,003.4     845.8     1,613.7     973.5         -     70.0     5,755.9     5,794.2      6.41      5.25
Total liabilities               19.0     146.2     437.1     1,059.0     887.4     1,576.9     962.2         -    564.9     5,652.7     5,668.6      6.65      5.79
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------     -------     -----     -----
Exposure to interest rate
fluctuations                   653.8      (0.1)     (6.5)      (55.6)    (41.6)       36.8      11.3         -   (494.9)      103.2       125.6     (0.24)    (0.54)
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------

Cumulative exposure            653.8     653.7     647.2       591.6     550.0       586.8     598.1     598.1    103.2       103.2
                               -----     -----     -----     -------     -----     -------     -----     -----    -----     -------

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 in an amount of NIS 37.7 million, which are stated in the
     "without fixed maturity date" column.


                                      117`

`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 result of 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, we maintain large liquid reserves and we have not
accepted new deposits for a number of years. The discount rate of the
liabilities is based on the State's cost of borrowing, plus a margin of 1% -
1.5%.

     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.

     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
as of the 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 41.8
million as of December 31, 2008 (on December 31, 2007 - NIS 45.3 million), were
not deducted from the balance of credit to the public for cash flows purposes in
assessing the fair value.


                                      118`

`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 based on
the State's cost of borrowing, plus a margin of 15 - 1.5%.

     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.

     DERIVATIVE FINANCIAL INSTRUMENTS - As part of our asset and liability
policy, we conduct 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 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.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.


                                      119`

`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.


                                      120`

`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.

     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.


                                      121`

`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.

     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.


                                      122`

`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.

     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), and since the dismissal of the motion could be
interpreted as denying us also of our right to the accumulated interest against
payment of the dividend in arrears on the Preferred Shares, 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. The appeal was filed with the Supreme Court on January 6, 2008.


                                      123`

`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 we did 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.

     Following the approval of the Arrangement Plan by the court on November 24,
2008, and pursuant to the details set forth in the Plan, the perpetual deposit
was returned to the Ministry of Finance on December 31, 2008, except the sum of
approximately $7.9 million, which represents the proceeds from the D shares and
DD shares issued to the public and which will continue to be handled as a
perpetual deposit with the Ministry of Finance.


                                      124`

`Following the approval of the Plan and pursuant to the details set forth
therein, the originating motion filed by the abovementioned financial
institutions and the appeal filed by us on January 6, 2008 to the Supreme Court
were dismissed. Under the terms of the Plan, the dismissal of the appeal will be
binding on us and on the State only for the relations between us with regard to
the part of the Perpetual Deposit for the various C type shares.

     The Arrangement Plan that was approved contains two alternative scenarios,
each of which includes stipulations and results regarding the issue of the
dividend that accrued on the C, CC, CC1, D, and DD shares:

     SCENARIO I - the sale of the shares of the Bank, in accordance with the
Arrangement Plan, by December 31, 2009.

     In this case, the D and DD shares not held by the State of Israel will be
redeemed in accordance with the terms of redemption set out in the terms of the
issuance of those shares, so that as part of the redemption, the D and DD
shareholders will be paid the full preferred dividend in arrears that accrued on
their shares in respect of the period from July 2002 up to and including the day
preceding the date of redemption (such arrears will be paid back-to-back by the
State to the Bank as interest on its perpetual deposits with the Treasury in
respect of that period).

     The D and DD shares held by the State will not be redeemed, rather they
will constitute part of the sold shares and the State will not receive for them
the prefereed dividend in arrears accrued thereupon.

     The C, CC, and CC1 shares will constitute part of the sold shares, and the
holders thereof will not receive the preferred dividend in arrears that accrued
on their shares. Notwithstanding, the calculation of their share of the
consideration of the overall sale also takes into account their claim to receive
the dividend in arrears.

     The shareholders will waive all claims against the Bank, including
regarding the distribution or non-distribution of a dividend, including the
cumulative dividend in arrears.

     SCENARIO II - the sale of the shares of the Bank, in accordance with the
Arrangement Plan, will not be completed by December 31, 2009.

     In this case:

     o    On December 31, 2009, or when a liquidation order is issued against
          the Bank, or when a resolution for voluntary liquidation is passed by
          the General Meeting of the Bank (the earliest of the three options),
          the Bank will pay the holders of the C, CC, and CC1 shares (and will
          receive back-to-back from the State as interest on the perpetual
          deposits of the Bank with the Treasury in respect of the period until
          their return to the Bank) half of the preferred dividend in arrears,
          at an annual rate of 6% that accrued on their shares in respect of the
          period July 1, 2002 - July 31, 2008, plus linkage differentials and
          interest by law.


                                      125`

`o    The holders of the C, CC, and CC1 shares will waive all claims against
          the Bank, regarding the non-distribution of a dividend in the period
          starting July 1, 2002 and ending on the date of the payment of the
          dividend in arrears, without such waiver constituting a derogation of
          their rights pursuant to the articles of the Bank to the accrual of a
          preferred dividend in respect of their shares, including in respect of
          the aforementioned period.

     o    The State will waive all claims against the Bank, the receiver of the
          Bank, and the liquidation fund of the Bank in connection with 50% of
          the preferred dividend in arrears that accrued on the D and DD shares
          held by the State, in respect of the period that began on July 1, 2002
          and ended on July 31, 2008.

     o    The Bank will waive all claims against the State in connection with
          the payment of interest on the perpetual deposits held by it with the
          Treasury, except for that part thereof that reflects the proceeds of
          the issue of the D and DD shares held by the public.

     The significance of the aforementioned stipulations of the Arrangement Plan
is as follows:

     PARTICIPATING PREFERENCE SHARES (C, CC, CC1) - In the event that the sale
of the shares of the Bank is not consummated by December 31, 2009, they will
receive half of the preferred dividend (at an annual rate of 6%) accrued in
respect of their shares from July 1, 2002 through July 31, 2008, in a total
amount of NIS 28.1 million (plus linkage differentials and interest by law, from
July 31, 2008 until the date of the actual payment). Concurrently, the Bank will
receive an identical amount from the State as interest on the perpetual deposits
of the Bank with the Treasury. In view of this, the abovementioned amount was
not recorded in the financial statements of the Bank. The balance of the
preferred dividend accrued on the shares from July 1, 2002 through December 31,
2008, in an amount of NIS 35.0 million, was added to the liability in respect of
the Preference shares. In the event that the sale of the shares of the Bank as
part of the Arrangement is implemented, the Preference shareholders waive all of
their claims to the dividend in arrears that accrued until the date of the sale.

     NON-PARTICIPATING PREFERENCE SHARES (D AND DD1) HELD BY THE STATE - In the
event that the sale of the shares of the Bank is not consummated by December 31,
2009, the State will waive half of the preferred dividend (at an annual rate of
7.5%) accrued on its shares from July 1, 2002 until July 31, 2008, in an amount
of $14.6 million. Therefore, this amount was not recorded in the financial
statements of the Bank. The balance of the preferred dividend that accrued on
these shares from July 1, 2002 until December 31, 2008, in an amount of NIS 63.0
million, was added to the liability in respect of these Preference shares. In
the event that the sale of the shares of the Bank as part of the Compromise and
Arrangement Plan is implemented, the State as the holder of these shares waives
all of its claims to the dividend in arrears that accrued until the date of the
sale.


                                      126`

`NON-PARTICIPATING PREFERENCE SHARES (D AND DD1) HELD BY THE PUBLIC - The
right of the shareholders to receive the preferred dividend in arrears that
accrued on their shares is fully preserved. The amount of the preferred dividend
that accrued on these shares is NIS 14.6 million as of December 31, 2008. This
amount was not recorded in the financial statements and it is equal to the
amount of the interest on the balance of the perpetual deposits of the Bank with
the Treasury which was also not recorded in the financial statements of the
Bank. In the event that the sale of the shares of the Bank as part of the
Compromise and Arrangement Plan is implemented, the Bank will redeem these
shares at their dollar value and will pay the entire dividend in arrears.
Concurrently, the State will pay the Bank as interest on the perpetual deposit
the entire dividend in arrears in respect of these shares.

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, 2008, 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.

     We are late in filing this Report on Form 20-F. However we are of the
opinion that this does not affect our conclusion regarding the effectiveness of
our disclosure controls and procedures, in light of the fact that we prepare
quarterly and annual financial statements (according to Israeli GAAP) and these
statements are reported in Israel on a current basis and translated and reported
thereafter to the SEC. In addition, all of our Immediate Reports, are likewise
translated and reported to the SEC. In our opinion, the information contained in
the financial statements according to Israeli GAAP , together with the
information in the Immediate Reports, provide the relevant information to our
shareholders on a timely basis.


                                      127`

`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.

     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, 2008 and concluded that our internal control over financial
reporting was effective as of December 31, 2008. 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 registered 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, 2008.

     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.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our Board of Directors has determined that we have three Audit Committee
financial experts (as defined in the instructions to Item 16A of Form 20-F)
serving on the Audit Committee, Mr. Yacob Eizner, Mr. Aharon Hildesheimer and
Dr. Shlomith Zuta. Mr. Eizner is an appointee of Bank Leumi le-Israel B.M, Mr.
Hildesheimer is an outside director and Dr. Shlomith Zuta is an outside
director. Mr. Eizner, Mr. and Dr. Zuta are "independent" (as defined by NASDAQ
Rules 4200(a)(15) and 4350(c) and (d)).


                                      128`

`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 2008, 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 2007 and 2008 was established by our Board of
Directors.

     KPMG - Somekh Chaikin, Certified Public Accountants (Isr.), served as our
independent public accountant for the fiscal year 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 fiscal years 2008 and 2007, Kesselman
& Kesselman served as our independent public accountant. For the years ended
December 31, 2008 and 2007, the aggregate fees billed and/or agreed to by
Kesselman & Kesselman are as follows:


                                      129`

`2008          2007
                           --------      --------
                            (IN THOUSANDS OF NIS)
                           ----------------------

Audit Fees(1)                   932         1,056
Audit-related Fees(2)             -             -
Tax Fees(3)                      30            30
                           --------      --------

TOTAL                           962         1,086
                           ========      ========

(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.


                                      130`

`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, 2008 and December 31, 2007
and the statements of income (loss), shareholders' equity and cash flows for the
years ended December 31, 2008, 2007 and 2006, including the notes thereto and
together with the Report of Independent Registered Public Accounting Firm
thereon, are included at pages F-1 to F- 147 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).


                                      131`

`4.6       Summary of Special Collective Agreement with Employees.

     4.7       Summary of the Terms of Employment of the Chairman of the Board
               of the Bank (incorporated by reference to the Report on Form 6-K
               of Industrial Development Bank of Israel Limited filed on July
               14, 2008).

     4.8       Summary of Indemnification Agreement for Directors and Senior
               Officers (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, 2007).

     4.9       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).

     4.10      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).

     4.11      Summary of Understandings between the Bank and the Ministry of
               Finance (incorporated by reference to the Report on Form 6-K of
               Industrial Development Bank of Israel Limited filed on June 30,
               2009).

     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      Application to Court to approve the 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 Reports on
               Form 6-K of Industrial Development Bank of Israel Limited filed
               on July 7, 2008 and August 14, 2008).


                                      132`

`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: October 22, 2009.


                                      133`

`THE INDUSTRIAL DEVELOPMENT BANK
                                OF ISRAEL LIMITED

                              FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2008`

`Industrial Development Bank of Israel Limited

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2008
--------------------------------------------------------------------------------

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 accompanying balance sheets of Industrial Development Bank
of Israel Limited ("the Bank") as of December 31, 2008 and 2007 and the related
statements of income (loss), shareholders' equity, and cash flows for each of
the years ended on those dates. 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). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether 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,
2008 and 2007 and the results of its operations and its cash flows for each of
the years ended on those dates, in conformity with accounting principles
generally accepted in Israel and 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.

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 in
Israel.

As discussed in Note 1A, the Bank experienced severe liquidity problems starting
in August 2002, which were caused by increased withdrawal of public deposits,
the decisions of the Bank's Board of Directors to adopt the "Run-Off" plan for
the controlled realization of the Bank's credit assets, the cancellation of the
license of the Bank as from August 1, 2008, and the blueprint for the sale of
all of the shares of the Bank, all as detailed in the above note. Additionally,
Note 1 states, among other things, that: "at present, it is not possible to
ascertain if and when the sale of the Bank's shares pursuant to the Arrangement
Plan will be carried out and what will be the consequences to the Bank should
the sale of the shares of the Bank not be carried out."


                                      F - 1`

`--------------------------------------------------------------------------------
                                            |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

Further, see Note 21 which discusses the litigations pending against the Bank.

                                             Kesselman & Kesselman
                                             Certified Public Accountants (Isr.)

Tel Aviv
February 25, 2009 (except for Notes 32 and 33
as to which the date is October 22, 2009)


                                     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 statements of income (loss), changes in
shareholders' equity, and cash flows, for the year ended December 31, 2006 of
Industrial Development Bank of Israel Limited (the Bank). 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 report dated July 31, 2007 we referred to uncertainties which raised
substantial doubts as to the ability of the Bank to continue operating as a
going concern and we mentioned that 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. As described in
Note 1A and Note 16A to the financial statements, the "Run-Off" plan ended on
July 31, 2008, the "banking license" of the Bank expired on August 1, 2009, the
Bank repaid the credit line from the Bank of Israel in full on December 31,
2008, and the Supervisor of Banks notified the Bank that he was exempting the
Bank from maintaining a minimum capital ratio. Accordingly, our present opinion
on the 2006 financial statements, as presented herein, is different from our
previous report.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of its operations, the changes in the
shareholders' equity and its cash flows for the year ended December 31, 2006, 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.


                                     F - 3`

`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

We call attention to the following:

A.   Note 1A to the financial statements regarding the severe liquidity problems
     the Bank experienced in August 2002, which were caused by increased
     withdrawals of public deposits, the decision of the Bank's Board of
     Directors to adopt the "Run-Off" plan and the announcement of the Governor
     of the Bank of Israel regarding the expiration of the Bank's license as
     from August 1, 2008, as detailed in the said Note.

B.   Note 21 to the financial statements regarding the litigation pending
     against the Bank and its executive officers, as detailed in the said Note.

Somekh Chaikin
Certified Public Accountants (Isr.)

Tel-Aviv, Israel

July 31, 2007 (except for Note 1A regarding the ending of the "Run-Off" plan,
the expiration of the Bank's license and the repayment of the credit line from
the Bank of Israel and Note 16A regarding the exemption from minimum capital
ratio requirement, as to which the date is October 22, 2009)


                                     F - 4`

`Industrial Development Bank of Israel Limited

BALANCE SHEETS AS OF DECEMBER 31
--------------------------------------------------------------------------------

Reported amounts

                                                                2008           2007
                                                              -------        -------
                                                   NOTE    NIS MILLIONS    NIS MILLIONS
                                                 -------      -------        -------

ASSETS

Cash and deposits with banks                         2          575.3           33.8

Securities                                           3           37.9           46.3

Credit to the public                                 4        5,107.1        5,521.1

Credit to the Government                             5            2.8           24.7

Fixed assets                                         6            0.5            0.8

Other assets                                         7            3.3            7.2

Perpetual deposits with the Israeli Treasury         8           29.9          848.8
                                                              -------        -------

Total assets                                                  5,756.8        6,482.7
                                                              =======        =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits of the public                               9           26.7           54.6

Deposits of banks                                   10              -          481.2

Deposits of the Government                                    5,022.6        5,319.2

Perpetual deposit                                   11            0.1            0.1

Capital notes                                       12              -           20.2

Other liabilities                                   13           63.9           50.7

Non-participating shares                            14          335.8          276.0

Participating preference shares                     15          203.6          170.6
                                                              -------        -------

Total liabilities                                             5,652.7        6,372.6

Shareholders' equity                                16          104.1          110.1
                                                              -------        -------

Total liabilities and shareholders' equity                    5,756.8        6,482.7
                                                              =======        =======

----------------------------------------    ----------------------------    --------------------------
Dr. Raanan Cohen - Chairman of the Board    Uri Galili - General Manager    Rimon Shmaya - Comptroller

Date of approval of the financial statements: February 25, 2009 (except for
Notes 32 and 33, as to which the date is October 22, 2009

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


                                     F - 5`

`Industrial Development Bank of Israel Limited

STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------

Reported amounts

                                                               2008           2007         2006
                                                               -----         -----        -----
                                                    NOTE    NIS MILLIONS  NIS MILLIONS  NIS MILLIONS
                                                   ------      -----         -----        -----

Profit from financing operations
 before allowance for doubtful debts                 23         84.0          29.3         18.2
Allowance for doubtful debts                         4C        (16.9)        (13.8)        21.7
                                                               -----         -----        -----
Profit (loss) from financing operations
 after allowance for doubtful debts                            100.9          43.1         (3.5)
                                                               -----         -----        -----
OPERATING AND OTHER INCOME
Operating commissions                                24          0.6           1.1          1.3
Gains from investments in shares                     25          1.0           8.7         16.4
Other income                                         26          1.4           1.7          3.8
                                                               -----         -----        -----
Total operating and other income                                 3.0          11.5         21.5
                                                               -----         -----        -----

OPERATING AND OTHER EXPENSES
Salaries and related expenses                        27         19.9          18.5         17.6
Expenses in respect of employee retirement           18          9.0             -          0.5
Maintenance and depreciation of buildings
 and equipment                                                   2.9           2.9          2.7
Other expenses                                       28          9.6           9.4         14.3
                                                               -----         -----        -----
Total operating and other expenses                              41.4          30.8         35.1
                                                               -----         -----        -----
Income (loss) from ordinary operations before
   taxes on income                                              62.5          23.8        (17.1)
Provision for taxes on income from ordinary
   operations                                        29          9.5           1.6            -
                                                               -----         -----        -----

NET EARNINGS (LOSS) FOR THE YEAR                                53.0          22.2        (17.1)
                                                               =====         =====        =====

                               NET EARNINGS (LOSS) PER SHARE
                           --------------------------------------
                            2008           2007            2006
                           -------        -------        --------
                             NIS            NIS            NIS
                           -------        -------        --------

"A" ordinary shares        3,509.9        1,470.2        (1,132.4)
                           =======        =======         =======

                       WEIGHTED QUANTITY OF SHARES USED IN COMPUTING
                                  EARNINGS PER SHARE
                           ----------------------------------
                            2008          2007          2006
                           ------        ------        ------

"A" ordinary shares        15,100        15,100        15,100
                           ======        ======        ======

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


                                     F - 6`

`Industrial Development Bank of Israel Limited

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY*
--------------------------------------------------------------------------------

Reported amounts

                                                            ACCUMULATED
                                                             DIFFERENCE               ADJUSTMENTS
                                               SHARE             ON      ACCUMULATED      FROM
                                             CAPITAL        TRANSLATION DIFFERENCE ON PRESENTATION
                                                AND              OF     TRANSLATION   OF AVAILABLE-
                                             PREMIUM           DOLLAR        OF         FOR-SALE                    TOTAL
                                                ON             LINKED    CPI LINKED    SECURITIES   ACCUMULATED  SHAREHOLDERS'
                                              SHARES         DEPOSIT(*)   DEPOSIT(*)  AT FAIR VALUE    LOSS         EQUITY
                                              -------         -------       -------       -------     -------       -------
                                                                            NIS MILLIONS
                                              -----------------------------------------------------------------------------

BALANCE AS OF DECEMBER 31, 2005               1,199.4          (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 OF JANUARY 1, 2006
 FOLLOWING THE IMPLEMENTATION OF
 STANDARD NO. 22                                207.1               -         293.7           6.1      (513.9)         (7.0)
Net loss                                            -               -             -             -       (17.1)        (17.1)
Adjustments from presentation of
available-for-sale securities at fair               -               -             -           2.6           -           2.6
value
Translation differences relating to
CPI-linked perpetual  deposit (*)                   -               -          41.5             -           -          41.5
                                              -------         -------       -------       -------     -------       -------

BALANCE AS OF DECEMBER 31, 2006                 207.1               -         335.2           8.7      (531.0)         20.0

CHANGES DURING 2007
Net earnings                                        -               -             -             -        22.2          22.2
Adjustments from presentation of
available-for-sale securities at fair               -               -             -           0.8           -           0.8
value
Translation differences relating to
CPI-linked perpetual  deposit (*)                   -               -          67.1             -           -          67.1
                                              -------         -------       -------       -------     -------       -------

BALANCE AS OF DECEMBER 31, 2007                 207.1               -         402.3           9.5      (508.8)        110.1
CHANGES DURING 2008
NET EARNINGS                                        -               -             -             -        53.0          53.0
ADJUSTMENTS FROM PRESENTATION OF
AVAILABLE-FOR-SALE SECURITIES AT FAIR
VALUE                                               -               -             -          (4.4)          -          (4.4)
TRANSLATION DIFFERENCES RELATING TO
CPI-LINKED PERPETUAL  DEPOSIT (*)                   -               -          43.4             -           -          43.4

ARRANGEMENT PLAN BETWEEN THE BANK AND
ITS SHAREHOLDERS
ARRANGEMENT REGARDING INTEREST ON THE
PERPETUAL DEPOSIT AGAINST DIVIDENDS IN
ARREARS ON THE PREFERENCE SHARES (*)                -               -         (98.0)            -           -         (98.0)
REFUND OF THE PERPETUAL DEPOSIT WHICH
IN EFFECT IS THE PAYMENT OF THE STATE
IN RESPECT OF THE B1 SHARE (*)                  347.7               -        (347.7)            -           -             -
                                              -------         -------       -------       -------     -------       -------

BALANCE AS OF DECEMBER 31, 2008                 554.8               -             -           5.1      (455.8)        104.1
                                              =======         =======       =======       =======     =======       =======

*    See Note 1D to the financial statements.

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


                                     F - 7`

`Industrial Development Bank of Israel Limited

STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------

REPORTED AMOUNTS

                                                                      2008           2007            2006
                                                                    -------         -------         -------
                                                                 NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                                    -------         -------         -------

CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net earnings (loss) for the year                                       53.0            22.2           (17.1)
Adjustments to reconcile net earnings/loss to net cash flows
 generated by operating activities:
Depreciation on equipment                                               0.4             0.4             0.4
Allowance for doubtful debts                                           (8.4)          (13.0)           22.9
Loss (gain) on sale of available-for-sale securities                    2.4            (3.3)          (10.3)
Reserve for severance pay and pensions, net                             6.5            (4.9)           (0.6)
Erosion of capital notes and perpetual deposit                         (0.3)           (3.0)           (1.8)
                                                                    -------         -------         -------
Net cash provided by (used in) operating activities                    53.6            (1.6)           (6.5)
                                                                    -------         -------         -------

CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Deposits with banks, net                                                2.6             9.2             6.5
Available-for-sale securities, net                                      1.6             8.2            25.7
Credit to the public, net                                             421.1         1,010.5         1,139.6
Credit to governments, net                                             21.9            16.8            17.5
Other assets, net                                                       3.9             4.9             3.5
Perpetual deposit with the Israeli treasury                           857.2               -               -
Acquisition of fixed assets                                            (0.1)           (0.1)           (0.3)
                                                                    -------         -------         -------
Net cash provided by activities
 related to assets                                                  1,308.2         1,049.5         1,192.5
                                                                    -------         -------         -------

CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
 LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes                                           (19.9)           (1.7)           (0.2)
Deposits of the public, net                                           (27.9)          (12.3)         (111.3)
Deposits of banks, net                                               (481.2)         (287.1)         (280.5)
Deposits of the Government, net                                      (296.6)         (768.2)         (795.6)
Other liabilities, net                                                  7.9            (2.0)            1.6
                                                                    -------         -------         -------
Net cash used in activities
 relating to liabilities and shareholders' equity                    (817.7)       (1,071.3)       (1,186.0)
                                                                    -------         -------         -------

INCREASE (DECREASE) IN CASH                                           544.1           (23.4)              -

BALANCE OF CASH AS AT BEGINNING OF YEAR                                30.0            53.4            53.4
                                                                    -------         -------         -------

BALANCE OF CASH AS AT END OF YEAR                                     574.1            30.0            53.4
                                                                    =======         =======         =======


                                     F - 8`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING POLICIES

     A.   THE RUN-OFF PLAN, THE COMPROMISE AND ARRANGEMENT PLAN BETWEEN THE BANK
          AND ITS SHAREHOLDERS, THE REPAYMENT OF THE PERPETUAL DEPOSITS AND
          REPAYMENT OF THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL

     Due to increased withdrawals of deposits during the third quarter of 2002,
     the Bank experienced severe liquidity problems, following which the Bank,
     on August 22, 2002, requested a special line of credit from the Governor of
     the Bank of Israel. The Bank repaid the credit line in full on December 31,
     2008.

     On August 1, 2009, the "banking license" of the Bank expired, in accordance
     with the announcement of the Governor of the Bank of Israel.

     THE ACTIVITY OF THE BANK DURING AND SUBSEQUENT TO THE RUN-OFF PLAN

     The principal components of the "Run-Off" plan that was implemented by the
     Bank were a controlled realization of the Bank's credit assets and a
     significant reduction in manpower and in operating expenses.

     The Bank is prohibited from accepting new deposits and from renewing
     existing deposits which have matured. Commencing August 1, 2008, the date
     on which the banking license of the Bank expired, the Bank became subject
     to a restriction pursuant to the Banking Law (Licensing) - 1981, whereby
     the number of depositors in the Bank shall not exceed twenty nine.

     The reduction in the Bank's operations was also accompanied by a reduction
     in the Bank's staff and in the Bank's operating expenses.

     Both during and subsequent to the Run-Off Plan which ended on July 31,
     2008, the Bank has been refraining from granting new credit and its
     activity focuses on the collection of the existing credit. The Bank intends
     on continuing this reduced framework of activity until the completion of
     the sale of the shares of the Bank as part of the Arrangement Plan, or
     until other developments occur in the event that the sale of the shares is
     not implemented.

     At present, it is not possible to ascertain if and when the sale of the
     Bank's shares pursuant to the Arrangement Plan will be carried out and what
     will be the consequences to the Bank should the sale of the shares of the
     Bank not be carried out.

     GOVERNMENT RESOLUTION 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, as part of a
     petition to approve the arrangement pursuant to Article 350 of the
     Companies Law. 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 sale, 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    The Accountant General of the Ministry of Finance was authorized to
          carry out a number of steps in connection with the privatization of
          the Bank.

     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.


                                     F - 9`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     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 was
     assessed by the Finance Ministry and the Government Companies Authority.

     THE COMPROMISE AND ARRANGEMENT PLAN PURSUANT TO ARTICLE 350 OF THE
     COMPANIES LAW - 1999 BETWEEN THE BANK AND ITS SHAREHOLDERS

     Further to the Government resolution regarding the privatization of the
     Bank and in accordance with the resolution of the Board of Directors of the
     Bank at its meeting of May 26, 2008, the Bank filed a petition with the Tel
     Aviv - Jaffa District Court on July 6, 2008 to approve the Compromise and
     Arrangement Plan pursuant to Article 350 of the Companies Law between the
     Bank and its shareholders.

     Prior to passing the resolution regarding the filing of the petition to
     have the Arrangement Plan approved, 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, as well as a 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 Report
     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, which according to
     the Arrangement Plan constitutes an alternative to the sale of the shares
     of the Bank in the event that such sale 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 Report made by the Bank
     on May 27, 2008 (except for minor changes, this description is in line with
     the plan that was included in the petition that was filed by the Bank 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 were asked to approve as one unit.

     1.   The first part will be implemented immediately upon the approval of
          the Arrangement Plan (by the class meetings of the 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 reflects the proceeds of the issuance of the D and
          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 originating 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 originating
          motion on the matter of the accrual of the interest on its perpetual
          deposits with the Treasury will also be rejected.


                                     F - 10`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     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-class shareholders (C, CC and CC1) by a majority of 75% of the value
          represented by the vote. 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, as above,
          which is attached to the Arrangement Plan. The State shall refund to
          the Bank the remainder 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. In addition, the Bank will waive
          any claim, demand, or suit toward the State in connection with the
          perpetual deposit, the payment of interest in respect thereof, and its
          refunding to the Bank. The Bank will assign 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 assigned 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.

     3.   The third part (the dividend arrangement) is an alternative to the
          second part (the sale arrangement) 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).


                                     F - 11`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

          Subject to the carrying out of the dividend arrangement, the Bank will
          waive any claim, demand, or suit toward the State in connection with
          the payment of interest in respect of part of the perpetual deposit
          which reflects the considerations of the issuance of the Group C
          shares, and the Group D shares that are owned by the State (without it
          detracting from any claim, demand, or suit of the Bank in connection
          with the payment of the interest on the balance of the perpetual
          deposit) and in respect of the refund of the perpetual deposit by the
          State.

     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, therefore concurrent with the
     submission of a request to the court to approve the Arrangement Plan, on
     July 6, 2008, the Bank submitted to the court a request to reduce its
     capital. The request was approved by the court on November 20, 2008.

     An arrangement pursuant to Article 350 of the companies Law - 1999 is
     subject to the approval of the meetings of the different classes of
     shareholders of the Bank as well as the approval of the court.

     On October 30, 2008 and November 6, 2008, the Arrangement Plan was approved
     by the meetings of the classes of shareholders of the Bank and on November
     24, 2008, the plan was approved by the Court.

     Further to the approval of the Arrangement Plan and pursuant to the
     stipulations therein, the Government repaid to the Bank the perpetual
     deposits it had deposited with the Treasury (except the part thereof that
     reflects the consideration of the issuance of D and DD shares held by the
     public), the Bank repaid the balance of the credit line placed at its
     disposal by the Bank of Israel, the originating motion filed against the
     Bank in the matter of the renewal of the distribution of a dividend was
     rejected, as was the appeal of the Bank against the court decision that
     rejected the Bank's originating motion in the matter of the accrual of
     interest on the perpetual deposits of the Bank with the Treasury.

     THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL, REPAYMENT OF THE
     PERPETUAL DEPOSITS AND THE REFUND OF THE EXCESS INTEREST

     Further to the liquidity problems suffered by the Bank in the third quarter
     of 2002, a special line of credit was placed at the disposal of the Bank by
     the Bank of Israel. The initial amount of the credit line was NIS 2.2
     billion. The balance of the credit line was continuously reduced concurrent
     with the collection of the credit portfolio of the Bank. The repayment date
     of the credit line was postponed by the Governor of the Bank of Israel a
     number of times and recently, it was extended to December 31, 2008 or until
     the Arrangement Plan was approved by the court. Commencing on October 10,
     2005, the Government undertook responsibility for the repayment of the
     credit line. Until July 29, 2003, the credit line bore interest at the Bank
     of Israel rate plus 5% during part of the period and plus 3% for the rest
     of the period. After the aforementioned date and until July 31, 2008, the
     credit line bore interest at only the Bank of Israel rate, whereas
     commencing August 1, 2008 and thereafter, the rate was the Bank of Israel
     rate plus 1.5%. As mentioned time and again in the quarterly and annual
     financial statements of the Bank, the Bank was of the opinion that the Bank
     of Israel should credit the Bank for all of the amounts of interest in
     excess of the "Bank of Israel interest" with which the Bank was debited by
     the Bank of Israel from August 2002 until July 29, 2003. According to the
     Bank's calculations, the amount of the aforementioned excess interest, plus
     interest at the rate of the credit line, until December 31, 2008, was NIS
     90 million. In the period preceding December 31, 2008, the date on which
     the perpetual deposits of the Bank with the Treasury were repaid,
     negotiations were conducted between the Bank and the Bank of Israel
     regarding the demand of the Bank that the aforementioned excess interest be
     refunded. At the conclusion of the negotiations, the Bank and the Bank of
     Israel reached an agreement whereby the Bank of Israel will refund to the
     Bank an amount of NIS 48.6 million in respect of the excess interest, and
     in return, the Bank will waive its claims regarding the balance of the
     excess interest.


                                     F - 12`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     According to the Arrangement Plan, on December 31, 2008, the State repaid
     to the Bank the perpetual deposits in the Treasury, except for the part
     thereof that reflects the proceeds of the issuance of the D and DD shares
     held by the public, in a total amount of NIS 857.5 million. From this
     amount, an amount of NIS 304.5 million was paid by the Treasury to the Bank
     of Israel in respect of the repayment of the balance of the line of credit.

     The balance of the repayment of the aforementioned perpetual deposits, in
     an amount of NIS 553.0 million, was transferred to the Bank. As a result,
     as of December 31, 2008, the Bank held liquid monetary balances in excess
     of all of its liabilities to its creditors (not including the deposit of
     the Government that served as the source for the credit granted to the
     Israel Electric Company that was secured by a government guarantee).

     B.   GENERAL

     The financial statements of the Bank are presented in accordance with the
     directives and guidelines of the Supervisor of Banks and in accordance with
     generally accepted accounting principles. In a letter dated May 29, 2008,
     the Supervisor of Banks announced that the financial statements of the Bank
     have to be presented in accordance with his directives for an additional
     three-year period following the date the "banking license" of the Bank was
     cancelled (August 1, 2008).

     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.

     C.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS

     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
     were 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.


                                     F - 13`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     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 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 cancels Opinion No. 53,
     "Accounting Treatment of Convertible Liabilities" and Opinion No. 48,
     "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.

     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, was reflected in the statement of 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
     shareholders' equity in the item entitled "Accumulated difference on
     translation of CPI-linked deposit" (see Note 8).


                                     F - 14`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     On December 31, 2008, most of the perpetual deposit of the Bank with the
     Israeli Treasury was repaid, as part of the first part of the Compromise
     and Arrangement Plan between the Bank and its shareholders which was
     approved by the court on November 24, 2008. The repayment included the
     difference between the valuation of the Index-linked perpetual deposit and
     the valuation of the preference shares which are linked to the dollar. This
     difference amounted to NIS 445.7 million. As part of the Arrangement that
     was approved by the court and the repayment of the perpetual deposit, in
     the event that the sale of the shares of the Bank is not consummated by
     December 31, 2009, the Bank waived its claim to receipt of interest in an
     amount of NIS 98.0 million in respect of its perpetual deposit with the
     Treasury, against a cumulative dividend to the preferred shareholders. In
     view of the above, the aforementioned amount was carried to the credit of
     the preferred shareholders against a capital reserve in respect of the
     accrued difference from the Index-linked deposit thus reducing the
     shareholders' equity of the Bank. As a result of the repayment, an amount
     of NIS 347.7 million (representing the balance of the NIS 445.7 million
     less the NIS 98.0 million) was recorded, as the consideration in respect of
     the B1 share, to the share capital and premium of the Bank, against a
     capital reserve maintained in respect of this difference (see also Note
     16).



                                     F - 15`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     Commencing January 1, 2009, further to the repayment of the perpetual
     deposit and due to the fact that the preference shares are classified as a
     liability, the Bank will record the following through the statement of
     income: 1) exchange rate differentials in respect of the preference shares
     and, 2) the current accrual of the dividend in respect to the preferred
     shares.

     E.   EXCHANGE RATES AND LINKAGE

     (1)  Assets and liabilities denominated in, or linked to, foreign currency,
          except for investments in securities, 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.

     (5)  Following are details of exchange rates and the CPI and the rates of
          change therein:

                                   DECEMBER 31                            RATE OF CHANGE DURING
                        ----------------------------------            -----------------------------
                        2008           2007           2006            2008         2007        2006
                        ----           ----           ----            ----         ----        ----
                                                                        %            %           %
                                                                      ----         ----        ----

Representative
 exchange rate
 of US$1
 (in NIS)               3.802          3.846          4.225           (1.1)       (9.0)       (8.2)

CPI in points
 for:
 December               198.4          191.1          184.9            3.8         3.3        (0.1)

 November               198.7          190.0          184.9            4.6         2.8        (0.3)

     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 adjusted value as at balance sheet
     date. Such value 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.


                                     F - 16`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     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
     adjusted value of available-for-sale securities, net of the related tax
     effect, is recorded as a capital reserve. Non-marketable shares and shares
     that have no readily-available fair value are stated at their cost, net of
     a provision for decline in value which is not of a temporary nature and
     which is carried to profit and loss. Dividends received in respect of
     available-for-sale investments deriving from profits in the distributing
     company immediately prior to the date of investment, are carried to profit
     and loss.

     SECURITIES FOR TRADING

     Such securities are stated at their fair value, and income resulting from
     such adjustment is recognized on a current basis. The fair value of
     securities for trading is determined based on their stock market prices as
     at balance sheet date.

     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 entity
     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.


                                     F - 17`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     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 entity is required to make a supplementary allowance for doubtful
     debts if the total liabilities of a certain sector to the banking entity
     exceed 20% of the total liabilities of the public to the banking
     corporation (hereinafter - "the limit on sector indebtedness").

     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 from December 31, 2003
     and thereafter, the Bank did not record a supplementary allowance for
     doubtful debts in respect of deviations from the aforementioned limits.

     It should be 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 deviances would
     have impacted on the financial results of the Bank in the subsequent
     reporting periods.

     On August 1, 2008, the "banking license" of the Bank expired. In his letter
     dated July 27, 2008, the Supervisor of Banks announced that he was
     exempting the Bank from complying with Proper Banking Directive 315 which
     relates to the supplementary and general allowance for doubtful debts. The
     Bank continues to present its financial statements in accordance with the
     guidelines of the Supervisor of Banks. In the public reporting directives,
     the Bank is required to set up a supplementary and a general provision in
     accordance with Proper Banking Directive 315. As a result, the Bank applied
     to the Supervisor of Banks to obtain clarifications regarding his position
     on this issue. In the application, the Bank set out its position whereby
     over the years, as a result of the decline in the volume of the Bank's
     credit, the weight of the general provision for doubtful debts increased to
     a large percentage relative to the customers' debts and that the Bank is of
     the opinion that the rate of the general provision should be fixed relative
     to the balance of the customers' debts.


                                     F - 18`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     In his letter dated January 25, 2009, the Supervisor of Banks announced
     that he was exempting the Bank from both compliance with Proper Banking
     Directive 315 and from the section of the public reporting directives that
     is based on Directive 315. In addition, the Supervisor of Banks announced
     that he was not addressing the issue of the appropriateness of the rate of
     the general provision for doubtful debts which the Bank believes should be
     performed.

     Taking into consideration the recent events in the Israeli economy and the
     economic uncertainty regarding economic developments in the economy, the
     Board of Directors of the Bank decided, for the time being, to continue
     making the supplementary and the general provisions for doubtful debts in
     accordance with the public reporting directives, and taking into account
     the extenuations received by the Bank in the past, as it has done to date.
     The Board of Directors will reassess this policy during the course of 2009,
     taking into consideration economic developments in the economy and
     developments relating to the continued activity of the Bank.

     The aggregate balance of the general allowance and the supplementary
     allowance for doubtful debts, calculated as stated above, in accordance
     with the directives of the Bank of Israel, as of December 31, 2008,
     constitutes 7.30% 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, 2007 -
     5.94%).

     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 entity is 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.


                                     F - 19`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     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.

     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. On November 16, 2008, ,
     further to the approval of the sales process of the shares of the Bank, a
     special collective agreement was signed in connection with the retirement
     arrangements of the employees. According to these agreements 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 these 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 in an opinion prepared
     by a pension expert.

     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 in the
     shareholders' equity as a component of other comprehensive income,
     according to the designated purpose of the instrument. The Bank does not
     execute hedging transactions and, therefore, there are no changes carried
     to equity.

     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 - 20`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     N.   TAXES ON INCOME

     The Bank implements Accounting Standard No.19 of the Israel Accounting
     Standards Board, TAXES ON INCOME, subject to the directives of the
     Supervisor of Banks. According to the directives of the Supervisor of
     Banks, deferred taxes receivable may be set up in respect of loss
     carryforwards when realization of the tax in the foreseeable future is
     certain. The Bank does not set up in its financial statements any deferred
     tax assets in respect of tax loss carryforwards, since it does not expect
     any taxable income which is certain over the foreseeable future.

     The provision for taxes on the income of the Bank, which is defined as a
     "financial institution" for Value Added Tax (hereinafter - VAT) purposes,
     includes VAT on profit in accordance with the Value Added Tax Law. VAT
     levied on salaries paid by financial institutions is included in the
     statement of income under "Salaries and related expenses". In the years
     2002 through and including 2006, "Salaries and related expenses" did not
     include a provision in respect of salary VAT receivable, due to losses for
     purposes of VAT on profit.

     O.   STATEMENT OF CASH FLOWS

     Cash flows from activity in assets and liabilities are presented net,
     except for 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.   EARNINGS (LOSS) PER SHARE

     The Bank implements Accounting Standard No. 21, EARNINGS PER SHARE of the
     Israel Accounting Standards Board. According to the provisions of the
     Standard, the Bank computes earnings per share in respect of income from
     continuing operations allocated to ordinary shareholders. Earnings 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.

     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 - 21`

`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 entity 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 - 22`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     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 entities, 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 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 July 1, 2011. 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.

          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.


                                     F - 23`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 2 - CASH AND DEPOSITS WITH BANKS

                                                  DECEMBER 31  DECEMBER 31
                                                     2008         2007
                                                    -----        -----
                                                   REPORTED     REPORTED
                                                   AMOUNTS      AMOUNTS
                                                    -----        -----
                                                NIS MILLIONS  NIS MILLIONS
                                                    -----        -----

Cash and deposits with Bank of Israel                   -          5.9
Deposits with commercial banks (1)                  575.3         27.9
                                                    -----        -----

Total                                               575.3         33.8
                                                    =====        =====

Including cash, deposits with Bank of Israel
 and with banks for an initial period not
 exceeding three months                             574.1         30.0
                                                    =====        =====

     (1)  As to pledge on deposits with commercial banks - see Note 17 below.


                                     F - 24`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 3 - SECURITIES

     A.   COMPOSITION

                                                     DECEMBER 31, 2008
                              --------------------------------------------------------------
                                                        NON-REALIZED  NON-REALIZED
                                                        GAINS FROM    LOSSES FROM
                             CARRYING      ADJUSTED     ADJUSTMENTS   ADJUSTMENTS     FAIR
                               VALUE       VALUE (1)  TO FAIR VALUE  TO FAIR VALUE   VALUE (2)
                              -------       -------       -------      -------       -------
                                                     REPORTED AMOUNTS
                              --------------------------------------------------------------
                                                       NIS MILLIONS
                              --------------------------------------------------------------

AVAILABLE-FOR-
 SALE SECURITIES

Other debentures                  0.2           0.2             -            -           0.2
Shares of others                 37.7          32.6           5.2         (0.1)      (3)37.7
                              -------       -------       -------      -------       -------
Total available-
 for-sale securities             37.9          32.8        (4)5.2      (4)(0.1)         37.9
                              -------       -------       -------      -------       -------

Total securities                 37.9          32.8           5.2         (0.1)      (3)37.9
                              =======       =======       =======      =======       =======


                                                     DECEMBER 31, 2007
                              --------------------------------------------------------------
                                                        NON-REALIZED  NON-REALIZED
                                                        GAINS FROM    LOSSES FROM
                             CARRYING      ADJUSTED     ADJUSTMENTS   ADJUSTMENTS     FAIR
                               VALUE       VALUE (1)   TO FAIR VALUE TO 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            -       (3)45.8
                              -------       -------       -------      -------       -------
Total available-
 for-sale securities             46.3          36.8        (4)9.5            -          46.3
                              -------       -------       -------      -------       -------

Total securities                 46.3          36.8           9.5            -       (3)46.3
                              =======       =======       =======      =======       =======

     (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 8.4 million (December
          31, 2007 - NIS 11.8 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 shares - see Note 25.



                                     F - 25`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (1)

     A.   COMPOSITION

                                                DECEMBER 31       DECEMBER 31
                                                   2008              2007
                                                  -------          -------
                                                      REPORTED AMOUNTS
                                                  ------------------------
                                                NIS MILLIONS    NIS MILLIONS
                                                  -------          -------

Credit                                            5,148.9          5,566.3
General and supplementary allowances for
 doubtful debts (1)                                  41.8             45.2
                                                  -------          -------

Total                                             5,107.1          5,521.1
                                                  =======          =======

     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
                                                                                   2008            2007
                                                                               ------------    ------------
                                                                                     REPORTED AMOUNTS
                                                                               ----------------------------
                                                                               NIS MILLIONS    NIS MILLIONS
                                                                               ------------    ------------

     a.   Non-income bearing credit to problematic borrowers -
          Unlinked Israeli currency                                                    11.8            41.1
          Israeli currency linked to the CPI                                            1.7             3.9
          Denominated in or linked to foreign currency                                  2.3             3.5
                                                                               ------------    ------------
                                                                                       15.8            48.5
                                                                               ============    ============

     b.   Credit restructured during the year, without waiver of income -
          Unlinked Israeli currency                                                    13.7            23.3
          Israeli currency linked to the CPI                                            2.9             1.1
          Denominated in or linked to foreign currency                                    -             1.0

     c.   Credit to borrowers  where there is an as-yet
           an unimplemented Management decision to restructure
           their debt                                                                     -             9.3

     d.   Credit temporarily in arrears                                                 1.9             8.7
          Interest income recorded in respect of such credit                            0.1             0.7

     e.   Credit under special supervision                                            143.6           139.8

     (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 - 26`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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 - 27`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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 January 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 was included in the Bank's income for 2008.

          Composition of the credit to the agricultural sector:

                                                                    DECEMBER 31   DECEMBER 31
                                                                       2008          2007
                                                                      -------       -------
                                                                        REPORTED AMOUNTS
                                                                      ---------------------
                                                                   NIS MILLIONS   NIS MILLIONS
                                                                      -------       -------

Kibbutzim (including regional enterprises and organizations)             88.8         168.3
Moshavim                                                                  3.3           5.5
                                                                      -------       -------

Total credit for kibbutzim and moshavim                                  92.1         173.8
                                                                      =======       =======


                                     F - 28`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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
                                                                             2008               2007
                                                                         ------------       ------------
                                                                                REPORTED AMOUNTS
                                                                         -------------------------------
                                                                         NIS MILLIONS       NIS MILLIONS
                                                                         ------------       ------------

     a.   Non-income bearing loans to problematic borrowers -
          Unlinked Israeli currency                                               0.2                1.2
          Denominated in or linked to foreign currency                            0.2                1.0
          Israeli currency linked to the CPI                                      5.9               19.0
                                                                         ------------       ------------
                                                                                  6.3               21.2
                                                                         ============       ============
     b.   Restructured credit to borrowers-

          1.       Credit restructured during the current
                    year with waiver of income -
                   Israeli currency linked to the CPI                             5.0                4.8
                   Average repayment period (years)                               5.8                3.0
                   Weighted interest rate                                         5.2%               2.0%
                   Unlinked Israeli currency                                      2.8                0.9
                   Average repayment period (years)                               0.8                0.5
                   Weighted interest rate                                         5.2%               3.0%

          2.       Credit restructured in prior years
                    with waiver of income -
                   Israeli currency linked to the CPI                               -                0.4

     c.   Credit to borrowers in respect of which
           there is an as-yet unimplemented
           management decision to restructure their debt                          8.5                8.0

     d.   Credit under special supervision                                       27.0               41.9

     e.   Credit not included in above credit to problematic borrowers           42.5               96.6
          Interest income recorded in the income statements in respect
           this credit                                                            4.0                7.1

     (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 organizations related to the
          Kibbutz sector.


                                     F - 29`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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
                                                                              2008           2007
                                                                          ------------   ------------
                                                                                REPORTED AMOUNTS
                                                                          ---------------------------
                                                                          NIS MILLIONS   NIS MILLIONS
                                                                          ------------   ------------

     Balance of credit to local authorities at
      balance sheet date                                                        2.2           4.0

     CREDIT (1) GRANTED TO LOCAL AUTHORITIES INCLUDES:

     b.    Credit not included in above credit to problematic borrowers         2.2           4.0
           Interest income recorded in income statements with respect of
            such credit                                                         0.3           0.4

     (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 organizations related to the
          Kibbutz sector.


                                     F - 30`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     C.   ALLOWANCE FOR DOUBTFUL DEBTS

                                                                            2008
                                                           --------------------------------------
                                                          SPECIFIC      SUPPLEMENTARY
                                                        ALLOWANCE (1)    ALLOWANCE (2)     TOTAL
                                                           -------         -------        -------
                                                                       REPORTED AMOUNTS
                                                           --------------------------------------
                                                                         NIS MILLIONS
                                                           --------------------------------------

Balance of allowance at beginning of year                    572.6            45.2          617.8
                                                           -------         -------        -------

Current allowances                                             4.1               -            4.1
Reduction in allowances                                       (9.1)           (3.4)         (12.5)
Collection of debts written-off in previous years             (8.5)              -           (8.5)
                                                           -------         -------        -------
Amount charged to the income statement                       (13.5)           (3.4)         (16.9)
                                                           -------         -------        -------

Debts written-off (3)                                        (28.0)              -          (28.0)
                                                           -------         -------        -------

Balance of allowance at end of year                          531.1            41.8          572.9
                                                           =======         =======        =======

Amount of allowance not deducted from credit
 to public                                                     0.1               -            0.1
                                                           -------         -------        -------

                                                                            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 (3)                                        (78.4)              -          (78.4)
                                                           -------         -------        -------

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
                                                           -------         -------        -------

     (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,
          2007 - NIS 38.9 million; as of December 31, 2006 - NIS 38.9 million),
          see also Note 1.G.

     (3)  Less collection of debts written off in previous years.


                                     F - 31`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)

     C.   ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)

                                                                            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 (3)                                        (44.9)              -          (44.9)
                                                           -------         -------        -------

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
                                                           -------         -------        -------

     (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,
          2007 - NIS 38.9 million; as of December 31, 2006 - NIS 38.9 million),
          see also Note 1.G.

     (3)  Less collection of debts written off in previous years.


                                     F - 32`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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, 2008
                                ------------------------------------------
                               NUMBER OF                           CREDIT
                              BORROWERS (3)    CREDIT (1)          RISK (2)
                                -------        ----------          -------
AMOUNT OF CREDIT PER BORROWER              REPORTED AMOUNTS
-----------------------------   ------------------------------------------
NIS THOUSANDS                                 NIS MILLIONS
-----------------------------   ------------------------------------------

Up to 10                             34               0.1                -
From 10 to 20                        33               0.5                -
From 20 to 40                        18               0.5                -
From 40 to 80                        19               1.1              0.1
From 80 to 150                       17               1.7              0.2
From 150 to 300                      32               5.6              1.2
From 300 to 600                      44              19.3              0.5
From 600 to 1,200                    50              38.6              2.4
From 1,200 to 2,000                  25              35.1              3.7
From 2,000 to 4,000                  25              60.8              7.6
From 4,000 to 8,000                   4              17.2              4.1
From 8,000 to 20,000                  7              74.0             13.3
From 20,000 to 40,000                 2              38.0             30.1
From 40,000 to 200,000                3             156.9             64.6
From 3,200,000 and up                 1        (4)4,699.5                -
                                -------        ----------          -------

                                    314           5,148.9            127.8
                                =======        ==========          =======

     (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 - 33`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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, 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)4,963.2                -
                                -------     ----------          -------

                                    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.

     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 - 34`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 5 - CREDIT TO GOVERNMENT

                                                             DECEMBER 31    DECEMBER 31
                                                                2008          2007
                                                               -------      -------
                                                               REPORTED     REPORTED
                                                               AMOUNTS      AMOUNTS
                                                               -------      -------
                                                            NIS MILLIONS  NIS MILLIONS
                                                               -------      -------

Deposit with the Treasury in connection with exchange
 rate insurance of capital notes (*)                                 -         20.2
Credit to the Israeli Government                                   2.8          4.5
                                                               -------      -------

Total credit to the Israeli Government                             2.8         24.7
                                                               =======      =======

(*)  On December 31, 2008, this deposit was repaid and was used as a source for
     the repayment of the balance of the capital notes issued by the Bank (see
     Note 12).

NOTE 6 - FIXED ASSETS

     A.   This item includes equipment, computers, furniture and motor vehicles
          as follows:

                                   AT           CHANGES DURING THE YEAR          AT
                                JANUARY 1        --------------------        DECEMBER 31
                                   2008         ADDITIONS    DISPOSALS         2008
                                  ------         ------        ------         ------
                                                   REPORTED AMOUNTS
                                  --------------------------------------------------
                               NIS MILLIONS   NIS MILLIONS  NIS MILLIONS    NIS MILLIONS
                                  ------         ------        ------         ------

Cost                                57.7            0.1         (49.2)           8.6
Accumulated depreciation           (56.9)          (0.4)         49.2           (8.1)
                                  ------         ------        ------         ------

Net book value                       0.8           (0.3)            -            0.5
                                  ======         ======        ======         ======

     B.   The average rate of depreciation is 23% (2007 - 25%).


                                     F - 35`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 7 - OTHER ASSETS

                                                         DECEMBER 31   DECEMBER 31
                                                            2008         2007
                                                           ------       ------
                                                          REPORTED     REPORTED
                                                          AMOUNTS       AMOUNTS
                                                           ------       ------
                                                        NIS MILLIONS  NIS MILLIONS
                                                           ------       ------

Prepaid expenses                                              0.4          1.1
Payroll tax receivable                                        2.3          2.8
Debit balances in respect of derivative financial
  instruments                                                 0.4          0.5
Sundry receivables and debit balances                         0.2          2.8
                                                           ------       ------

Total other assets                                            3.3          7.2
                                                           ======       ======

NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY

                                                                       DECEMBER 31  DECEMBER 31
                                                                          2008         2007
                                                                        -------       -------
                                                                        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

Deposit in respect of the "D" redeemable non-participating
 preference shares linked to the U.S. dollar (C)                            6.3         119.5

Deposit in respect of the "DD" redeemable non-participating
 preference shares linked to the U.S. dollar (C)                           23.6         405.1
                                                                        -------       -------

Total perpetual deposits with the Treasury                                 29.9         848.8
                                                                        =======       =======


                                     F - 36`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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 earnings, 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
          at 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.

          Concurrent with the signing of the abovementioned 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 Preference shares of the "C", "CC", "CC1", "D"
          and "DD" classes and payment of the cumulative preferred dividends in
          arrears to these Preference 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
          amounted to NIS 279.6 million. As of December 31, 2008, this
          difference amounts to NIS 445.7 million (December 31, 2007 - NIS 402.3
          million). On December 30, 2008, the total amount of these deposits was
          NIS 887.1 million. As part of the first part of the Compromise and
          Arrangement Plan pursuant to Article 350 of the Companies Law between
          the Bank and its shareholders which was approved by the court on
          November 24, 2008, an amount of NIS 857 million was repaid out of the
          deposits on December 31, 2008. Further to the repayment of the
          deposit, the difference of NIS 347.7 million (net of NIS 98.0 million,
          see Note 1D) was carried to the share capital and premium of the Bank,
          as consideration for the B1 shares against a capital reserve that was
          set up in respect of the aforementioned difference (see C below). For
          information pertaining to the Compromise and Arrangement Plan, see
          Note 1.



                                     F - 37`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)

     B.   As noted, up to May 6, 1996, the abovementioned 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 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. On December 31,
          2008, the aforementioned deposit was repaid in full, as part of the
          first part of the Compromise and Arrangement Plan. The amount that was
          paid and that relates to these shares was NIS 339 million. For more
          information in connection with the interest on this deposit in respect
          of the period up to the date of payment, see Note 1 - the Compromise
          and Arrangement Plan between the Bank and its shareholders.

     C.   Up to May 6, 1996, the abovementioned 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. As part of the first part of the Arrangement, an amount of NIS
          518 million was paid out of the deposits in respect of
          non-participating Preference D and DD shares, with the remaining
          balance amounting to NIS 29.9 million. This remaining balance reflects
          the balance of the holdings of the public in the D and DD shares. The
          interest in respect of the remaining balance of the deposit was not
          included in the financial statements of the Bank and it is identical
          to the accumulated amount of the dividend in respect of these shares
          which has not been paid since the Bank ceased paying dividends which
          also have not been included in the financial statements. The remaining
          deposit is linked to the exchange rate of the dollar. For more
          information pertaining to the interest on the aforementioned deposit
          in respect of the period from July 1, 2002 through the date of
          repayment of the deposit, see Note 1 in connection with the Compromise
          and Arrangement Plan between the Bank and its shareholders.


                                     F - 38`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 9 - DEPOSITS OF THE PUBLIC

                                       DECEMBER 31   DECEMBER 31
                                         2008           2007
                                        -------       -------
                                       REPORTED      REPORTED
                                        AMOUNTS       AMOUNTS
                                        -------       -------
                                     NIS MILLIONS   NIS MILLIONS
                                        -------       -------

On-demand deposits                          8.7          11.4
Fixed-term and other deposits              13.9          37.0
Savings deposits                            4.1           6.2
                                        -------       -------

Total deposits from the public             26.7          54.6
                                        =======       =======

NOTE 10 - DEPOSITS OF BANKS

                                                          DECEMBER 31  DECEMBER 31
                                                             2008        2007
                                                            -------    -------
                                                           REPORTED    REPORTED
                                                            AMOUNTS    AMOUNTS
                                                            -------    -------
                                                         NIS MILLIONS NIS MILLIONS
                                                            -------    -------

Special line of credit from the Bank of Israel (1)                -      481.2
                                                            -------    -------

Total deposits of banks                                           -      481.2
                                                            =======    =======

     (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 - 39`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 12 - CAPITAL NOTES

     This series of capital notes bearing interest at the rate of 7.5% per annum
     was issued at a par value of $49,976,000 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
     past years, notes of a par value of $ 44,730,755 were redeemed.
     Accordingly, the balance of notes still outstanding as of December 31, 2008
     amounted to $ 5,245,245. On December 31, 2008, the Bank initiated repayment
     of the entire balance of the principle. The repayment was implemented
     pursuant to the terms of the prospectus, plus a premium of 5%.
     Correspondingly, the deposit of the Bank with the Treasury, which bore
     terms that paralleled the terms of the capital notes was repaid - see Note
     5.

NOTE 13 - OTHER LIABILITIES

                                                                            DECEMBER 31    DECEMBER 31
                                                                               2008           2007
                                                                              -------       -------
                                                                             REPORTED       REPORTED
                                                                             AMOUNTS        AMOUNTS
                                                                              -------       -------
                                                                           NIS MILLIONS   NIS MILLIONS
                                                                              -------       -------

Excess of provision for severance pay and pensions over
 amounts funded (see Note 18)                                                    24.8          21.3

Provision for vacation pay and unutilized sick leave (see Note 18)                4.3           4.3

Prepaid income                                                                      -           0.5

Credit balances in respect of derivative financial instruments                    1.1           0.6

Allowance for doubtful debts in respect of an off-balance sheet item              0.1           1.3

Sundry creditors and credit balances                                             33.6          22.7
                                                                              -------       -------

Total other liabilities                                                          63.9          50.7
                                                                              =======       =======


                                     F - 40`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 14 - NON-PARTICIPATING SHARES

     A.   COMPOSITION:

                                                                         DECEMBER 31    DECEMBER 31
                                                                            2008          2007
                                                                          -------        -------
                                                                          REPORTED      REPORTED
                                                                          AMOUNTS        AMOUNTS
                                                                          -------        -------
                                                                       NIS MILLIONS   NIS MILLIONS
                                                                          -------        -------

"D" Preference shares linked to the US dollar (1)                            62.2           62.9
"DD" Preference shares linked to the US dollar (1)                          210.6          213.1
Dividends in arrears in respect of the aforementioned shares (2)             63.0              -
                                                                          -------        -------

Total non-participating shares                                              335.8          276.0
                                                                          =======        =======

     (1)  See Note 8 regarding a deposit with the Israeli Treasury in respect of
          non-participating Preference shares.

     (2)  For details of the amount of the dividend in arrears, see Note 16E.

     B.   ADDITIONAL DATA REGARDING THE NON-PARTICIPATING SHARES AND THE
          PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)


                                                                          AUTHORIZED         ISSUED AND PAID
                                                                          ---------       -------------------------
                                                                            2008             2008            2007
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)                4,920.0         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)                 126,000.0       116,358.9       116,358.9
                                                                          ---------       ---------       ---------

                        Total shares                                      144,459.9       134,753.1       134,753.1
                                                                          =========       =========       =========


                                     F - 41`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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 - 42`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 15 - PARTICIPATING PREFERENCE SHARES *

     A.   COMPOSITION:

                                                                        DECEMBER 31    DECEMBER 31
                                                                            2008           2007
                                                                          -------        -------
                                                                          REPORTED      REPORTED
                                                                          AMOUNTS        AMOUNTS
                                                                          -------        -------
                                                                       NIS MILLIONS   NIS MILLIONS
                                                                          -------        -------


"C" Preference shares linked to the US dollar (1)                            64.6           65.4
"CC" Preference shares linked to the US dollar (1)                           38.0           38.4
"CC1" Preference shares linked to the US dollar (1)                          66.0           66.8
Dividends in arrears in respect of the aforementioned shares (2)             35.0              -
                                                                          -------        -------

Total participating shares                                                  203.6          170.6
                                                                          =======        =======

     (1)  See Note 8 regarding a deposit with the Israeli Treasury in respect of
          non-participating Preference shares.

     (2)  For details of the amount of the dividend in arrears, see Note 16E.

     B.   ADDITIONAL DATA REGARDING THE PARTICIPATING PREFERENCE SHARES AND THE
          PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)

                                                                           AUTHORIZED           ISSUED AND PAID
                                                                             ------          ----------------------
                                                                              2008            2008            2007
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 0.0003                                       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 0.0003                                       5,220           5,204           5,204
                                                                             ------          ------          ------

                        Total shares                                         11,280          11,264          11,264
                                                                             ======          ======          ======

*    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 - 43`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     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.


                                     F - 44`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY

     A.   The following are details regarding the nominal value of the share
          capital and the principal rights attached thereto:

                                                                           AUTHORIZED           ISSUED AND PAID
                                                                            -------         -----------------------
                                                                              2008            2008            2007
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 Preferred Ordinary shares are traded on the Tel Aviv Stock Exchange.
     None of the other shares are traded.


                                     F - 45`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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
     outside 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., the nominee company of Israel Discount Bank
     Ltd., and Discount Investments Ltd., and the decision of the Government
     from March 2001. In accordance with the aforementioned agreement and
     Government decision, one outside 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 outside director is
     appointed by the general meeting on account of the State's rights to
     appoint directors and in accordance with its proposal. On the basis of the
     number of Ordinary "A" shares held by the aforementioned three banking
     groups and by the State, and the key for appointing a director in respect
     of each 1015 shares of this class, the three banking groups and the State
     are entitled to appoint a total of fourteen directors: the Leumi Group
     three directors, the Discount Group two directors, the Hapoalim Group
     (taking into consideration the rights to appoint directors is borrowed from
     other holders) two directors, and the State seven directors. The Chairman
     of the Board of the Bank is appointed by all the other members of the Board
     who were appointed, as above, by the holders of "A" class ordinary shares
     and, upon his appointment as the additional director, he also becomes the
     Chairman of the Board.

     In view of the reduction in the scope of the activity of the Bank and in
     the number of its employees, the aforementioned three banking groups and
     the State agreed to reduce the number of directors appointed by them by
     virtue of their holding Ordinary "A" shares, so that the State will
     actually appoint four directors only, the Leumi Group two directors, the
     Discount Group one director and the Poalim Group one director. These
     numbers include the outside directors who are appointed as above.

     D.   RIGHTS TO RECEIVE A PREFERRED 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 - 46`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION

     The Bank has not distributed any dividends since the third quarter of 2002,
     in which the Bank distributed to the holders of the Preference shares and
     of the Ordinary Preferred shares the quarterly dividend for the second
     quarter of 2002.

     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 on those classes and once a year, a participating
     dividend of 1.5% in respect of classes C, CC, and CC1. The last dividend
     paid by the Bank in respect thereof was a preferred dividend that was
     related to the second quarter of 2002. Following the losses of the Bank in
     2002 and after the Bank's Board of Directors - with the assistance of legal
     counsel - had discussed the various aspects concerning the dividend
     distribution (including the restrictions stipulated in the Companies Law -
     1999, the Bank's articles and the directives of the Supervisor of Banks),
     the Bank's Board of Directors decided to refrain at this point from
     distributing a dividend in respect of the aforementioned shares.

     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 was requested 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 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. The hearing on the two originating motions
     was consolidated. 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. On August 5, 2007, a ruling was
     rendered by the Tel Aviv District Court whereby it rejected the originating
     motion filed by the Bank against the Finance Minister and against the
     aforementioned financial institutions and stipulated that as long as a
     dividend is not distributed in respect of the preferred shares of the Bank,
     the interest on the perpetual deposits does not accrue.

     At its meeting on October 9, 2007, the Board of Directors of the Bank
     discussed the ramifications of the ruling. The Board of Directors decided
     that since the suit of the Bank (its originating 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 ruling 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. The Bank's appeal
     was submitted to the Supreme Court on January 6, 2008.


                                     F - 47`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)

     At the aforementioned meeting, the Board of Directors of the Bank also
     discussed the ramifications of the aforementioned ruling on the
     continuation of its policy regarding the distribution of the dividend on
     the Preference shares (Preferred C, CC, CC1, D and DD shares). In view of
     the stipulation of the ruling pertaining to the non-accrual of interest on
     the perpetual deposits of the Bank as long as a dividend is not distributed
     (a stipulation which the Bank is not appealing), and after the Board of
     Directors considered the interests of both the shareholders of the Bank and
     the creditors of the Bank (which in view of the ruling no longer gain
     anything by the non-distribution of the dividend), the Board of Directors
     reached the conclusion that it would be proper for the Bank to take steps
     toward renewing the distribution of the dividend. In connection with the
     above, the Board of Directors of the Bank decided (at the same meeting) to
     take the following steps: 1) to recommend to the general shareholders
     meeting of the Bank to amend the Articles of Association of the Bank in
     respect of two matters relating to the renewal of the distribution of the
     dividend. The first, the authorization to distribute a dividend not just
     out of profits (which are present are non-existent), rather also from the
     interest to be paid to the Bank on its perpetual deposits with the Finance
     Ministry, and the second, authorization to distribute a current preferred
     dividend on the preferred shares of the Bank, also without a distribution -
     prior or concurrent - of the preferred dividend in arrears on those shares
     (since, in view of the wording of the ruling, a claim may be made whereby
     the Bank is not entitled to the accrued interest on the perpetual deposits
     against the distribution of the dividends in arrears, a result that will
     prevent the Bank from distributing the dividends in arrears in the absence
     of adequate profits); 2) to convene a general meeting of the Bank to make
     the aforementioned change in the Articles of Association and to empower the
     Chairman of the Board to set the date for its convening; 3) to petition the
     Supervisor of Banks to grant approval for the distribution of the dividend
     to the preferred shareholders, subject to the aforementioned change in the
     Articles of Association and receipt of court approval of the proposed
     distribution (pursuant to the Companies Law - 1999, the distribution of a
     dividend not out of distributable profits requires court approval, and as
     of that date, the Bank did not have distributable income).

     In accordance with the aforementioned decision of the Board of Directors of
     the Bank, the general meeting of the Bank convened on January 7, 2008, and
     on its agenda were the aforementioned proposals to amend the Articles of
     Association of the Bank, so that the Articles of Association would no
     longer constitute an impediment to the renewal of the dividend
     distribution. The proposed amendments were put to a vote, but they were
     rejected by a majority of those voting. On February 5, 2008, the financial
     entities that had filed the originating motion against the Bank filed a
     petition with the court in which they requested to add the State as an
     additional respondent to the originating motion, due to, among other
     things, the vote of the State in the general meeting of the Bank against
     the proposed amendments to the Bank's Articles of Association. The Bank
     announced that it did not object to adding the State, as requested.

     As part of the Arrangement Plan between the Bank and its shareholders,
     which was approved by the court on November 24, 2008, it was stipulated
     that upon the approval of the plan, the originating motion submitted by the
     aforementioned financial institutions against the Bank will be rejected, as
     well as the appeal filed by the Bank against the court decision rejecting
     its originating motion on the matter of the accrual of the interest on its
     perpetual deposits with the Treasury.

     Accordingly, a short time after the aforementioned approval of the plan,
     the appropriate petitions were filed to reject both the originating motion
     of the aforementioned financial institutions and the appeal of the Bank,
     and the motion and the appeal were rejected, as requested.


                                     F - 48`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)

     E.   CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)

     The Arrangement Plan that was approved contains two alternative scenarios,
     each of which includes stipulations and results regarding the issue of the
     dividend that accrued on the C, CC, CC1, D, and DD shares:

     SCENARIO I - the sale of the shares of the Bank, in accordance with the
     Arrangement Plan, by December 31, 2009.

     In this case, the D and DD shares not held by the State of Israel will be
     redeemed in accordance with the terms of redemption set out in the terms of
     the issuance of those shares, so that as part of the redemption, the D and
     DD shareholders will be paid the full preferred dividend in arrears that
     accrued on their shares in respect of the period from July 2002 up to and
     including the day preceding the date of redemption (such arrears will be
     paid back-to-back by the State to the Bank as interest on its perpetual
     deposits with the Treasury in respect of that period).

     The D and DD shares held by the State will not be redeemed, rather they
     will constitute part of the sold shares and the State will not receive for
     them the prefereed dividend in arrears accrued thereupon.

     The C, CC, and CC1 shares will constitute part of the sold shares, and the
     holders thereof will not receive the preferred dividend in arrears that
     accrued on their shares. Notwithstanding, the calculation of their share of
     the consideration of the overall sale also takes into account their claim
     to receive the dividend in arrears.

     The shareholders will waive all claims against the Bank, including
     regarding the distribution or non-distribution of a dividend, including the
     cumulative dividend in arrears.

     SCENARIO II - the sale of the shares of the Bank, in accordance with the
     Arrangement Plan, will not be completed by December 31, 2009.

     In this case:

     o    On December 31, 2009, or when a liquidation order is issued against
          the Bank, or when a resolution for voluntary liquidation is passed by
          the General Meeting of the Bank (the earliest of the three options),
          the Bank will pay the holders of the C, CC, and CC1 shares (and will
          receive back-to-back from the State as interest on the perpetual
          deposits of the Bank with the Treasury in respect of the period until
          their return to the Bank) half of the preferred dividend in arrears,
          at an annual rate of 6% that accrued on their shares in respect of the
          period July 1, 2002 - July 31, 2008, plus linkage differentials and
          interest by law.

     o    The holders of the C, CC, and CC1 shares will waive all claims against
          the Bank, regarding the non-distribution of a dividend in the period
          starting July 1, 2002 and ending on the date of the payment of the
          dividend in arrears, without such waiver constituting a derogation of
          their rights pursuant to the articles of the Bank to the accrual of a
          preferred dividend in respect of their shares, including in respect of
          the aforementioned period.

     o    The State will waive all claims against the Bank, the receiver of the
          Bank, and the liquidation fund of the Bank in connection with 50% of
          the preferred dividend in arrears that accrued on the D and DD shares
          held by the State, in respect of the period that began on July 1, 2002
          and ended on July 31, 2008.

     o    The Bank will waive all claims against the State in connection with
          the payment of interest on the perpetual deposits held by it with the
          Treasury, except for that part thereof that reflects the proceeds of
          the issue of the D and DD shares held by the public.


                                     F - 49`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     The significance of the aforementioned stipulations of the Arrangement Plan
     is as follows:

     PARTICIPATING PREFERENCE SHARES (C, CC, CC1) - In the event that the sale
     of the shares of the Bank is not consummated by December 31, 2009, they
     will receive half of the preferred dividend (at an annual rate of 6%)
     accrued in respect of their shares from July 1, 2002 through July 31, 2008,
     in a total amount of NIS 28.1 million (plus linkage differentials and
     interest by law, from July 31, 2008 until the date of the actual payment).
     Concurrently, the Bank will receive an identical amount from the State as
     interest on the perpetual deposits of the Bank with the Treasury. In view
     of this, the abovementioned amount was not recorded in the financial
     statements of the Bank. The balance of the preferred dividend accrued on
     the shares from July 1, 2002 through December 31, 2008, in an amount of NIS
     35.0 million, was added to the liability in respect of the Preference
     shares. In the event that the sale of the shares of the Bank as part of the
     Arrangement is implemented, the Preference shareholders waive all of their
     claims to the dividend in arrears that accrued until the date of the sale.

     NON-PARTICIPATING PREFERENCE SHARES (D AND DD1) HELD BY THE STATE - In the
     event that the sale of the shares of the Bank is not consummated by
     December 31, 2009, the State will waive half of the preferred dividend (at
     an annual rate of 7.5%) accrued on its shares from July 1, 2002 until July
     31, 2008, in an amount of $14.6 million. Therefore, this amount was not
     recorded in the financial statements of the Bank. The balance of the
     preferred dividend that accrued on these shares from July 1, 2002 until
     December 31, 2008, in an amount of NIS 63.0 million, was added to the
     liability in respect of these Preference shares. In the event that the sale
     of the shares of the Bank as part of the Compromise and Arrangement Plan is
     implemented, the State as the holder of these shares waives all of its
     claims to the dividend in arrears that accrued until the date of the sale.

     NON-PARTICIPATING PREFERENCE SHARES (D AND DD1) HELD BY THE PUBLIC - The
     right of the shareholders to receive the preferred dividend in arrears that
     accrued on their shares is fully preserved. The amount of the preferred
     dividend that accrued on these shares is NIS 14.6 million as of December
     31, 2008. This amount was not recorded in the financial statements and it
     is equal to the amount of the interest on the balance of the perpetual
     deposits of the Bank with the Treasury which was also not recorded in the
     financial statements of the Bank. In the event that the sale of the shares
     of the Bank as part of the Compromise and Arrangement Plan is implemented,
     the Bank will redeem these shares at their dollar value and will pay the
     entire dividend in arrears. Concurrently, the State will pay the Bank as
     interest on the perpetual deposit the entire dividend in arrears in respect
     of these shares.

     F.   RIGHTS UPON LIQUIDATION

     Upon liquidation of the Bank, the balance of all the 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 of December 31, 2008, the
          accrued amount of the preferred dividend in arrears is NIS 140.7
          million (as of December 31, 2007 - NIS 170.1 million). Of the
          aforementioned dividend in arrears, an amount of NIS 98.0 million is
          included in the financial statements of the Bank as part of the entire
          amount of Preference shares. According to the Compromise and
          Arrangement Plan approved by the court, in the event that the sale of
          the shares of the Bank is not implemented, an amount of NIS 28.1
          million is supposed to be received from the State as payment of
          interest on the perpetual deposits and, therefore, that amount is not
          presented in the financial statements of the Bank. In the event that
          the sale of the shares of the Bank is consummated by December 31,
          2009, then as part of the arrangement, the shareholders of the
          Preference C, CC, and CC1 shares and the State, as holders of D and DD
          shares, waive their rights to receive the dividend in arrears that
          accrued to the date of the sale.


                                     F - 50`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

     o    Second - to pay cumulative preferred dividends in arrears to Preferred
          Ordinary shares. As of December 31, 2008, the dividends in arrears in
          respect of the Preferred Ordinary shares amount to NIS 520 (as of
          December 31, 2007 - NIS 440). In the event that the sale of the shares
          of the Bank is implemented, the shareholders waive their right to
          receive the dividend in arrears, as part of the Arrangement.

     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 of December 31, 2008, the aforementioned
          amounts to NIS 441.4 million (as of December 31, 2007 - NIS 446.6
          million).

     o    Fourth - to refund paid in capital of Preferred Ordinary shares. As of
          December 31, 2008, the aforementioned amounts to NIS 1,000 (as of
          December 31, 2007 - 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
          of December 31, 2008, the aforementioned amounts to NIS 14 thousand
          (as of December 31, 2007 - 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 and/or at any earlier
          date 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 of
          December 31, 2008, the aforementioned difference amounts to NIS 445.7
          million (as of December 31, 2007 - NIS 402.3 million). Since the
          aforementioned difference was received from the State at December 31,
          2008, this amount remains fixed and does not change.

     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 - 51`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
           BANKS

     The 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
                                   2008           2007
                                 -------        -------
                                 REPORTED       REPORTED
                                  AMOUNTS       AMOUNTS
                                 -------        -------
                               NIS MILLIONS   NIS MILLIONS
                                 -------        -------

First tier capital                  98.9          100.4
Second tier capital (1)             98.9          100.4
                                 -------        -------

Total capital                      197.8          200.8
                                 =======        =======

     (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 - 52`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
           BANKS (CONT'D)

     B.   WEIGHTED-BALANCES OF CREDIT RISK

          CREDIT RISK                              DECEMBER 31, 2008                 DECEMBER 31, 2007
                                               ------------------------          ------------------------
                                                             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                     575.3            115.1             33.8              5.6
Securities                                        37.9             32.7             46.3             36.8
Credit to the public (1)                       5,107.1            403.8          5,521.1            547.8
Credit to governments and
 perpetual deposits with the
 Israeli Treasury                                 32.7                -            873.5                -
Buildings and equipment                            0.5              0.5              0.8              0.8
Other assets                                       3.3              0.5              7.2              2.0
                                               -------          -------          -------          -------

Total assets                                   5,756.8            552.6          6,482.7            593.0
                                               =======          =======          =======          =======

OFF-BALANCE SHEET FINANCIAL
 INSTRUMENTS
Transactions representing credit risk            142.5            127.6            180.4            163.4
Derivative financial instruments                 120.0              2.4             47.5              0.9
                                               -------          -------          -------          -------

Total off-balance sheet financial
 instruments                                     262.5            130.0            227.9            164.3
                                               -------          -------          -------          -------

Total credit risk assets                       6,019.3            682.6          6,710.6            757.3
Market risk                                          -            386.8                -            548.0
                                               -------          -------          -------          -------

Total risk assets                              6,019.3          1,069.4          6,710.6          1,305.3
                                               =======          =======          =======          =======

     (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 - 53`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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
                                                                            2008           2007
                                                                           -------       -------
                                                                              %             %
                                                                           -------       -------

Ratio of first tier capital to total risk assets                               9.2           7.7
Ratio of second tier capital to total risk assets                              9.2           7.7
                                                                           -------       -------

Ratio of total first and second tier capital to total risk assets             18.4          15.4
                                                                           =======       =======

     On August 1, 2008, the "banking license" of the Bank expired. In his letter
     dated July 27, 2008, the Supervisor of Banks notified the Bank that he was
     exempting the Bank from various provisions of the Proper Banking Procedure
     Directives, including the directive that requires banking entitiess to
     maintain a minimum capital ratio.

NOTE 17 - LIENS AND RESTRICTIVE CONDITIONS

     A.   In connection with receipt 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 and June
          12, 2008), whereby the Bank registered a first degree floating pledge
          on all of its assets, excluding certain assets. On December 31, 2008,
          the Bank repaid the credit line. On January 11, 2009, the Companies
          Registrar (at the request of the Bank of Israel) erased the lien that
          was recorded in respect of the aforementioned debenture and its
          amendments.

     B.   As of December 31, 2008, deposits with banks in the amount of NIS 10.5
          million have been pledged by the Bank in favor of those banks
          (December 31, 2007 - NIS 10.0 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 - 54`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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. Commencing on August 14, 2002, Dr. Ra'anan Cohen
          has served as the Chairman of the Board of Directors of the Bank. 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 2008, the Board of Directors of the Bank decided to extend the
          tenure of Messrs. A. Galili, Dr. R. Cohen, and A. Savir until the
          earliest of December 31, 2009, the date on which the Bank is
          privatized or commencement of liquidation proceedings. The extension
          of the terms of employment of Dr. R. Cohen until that date was also
          ratified by the general meeting of the Bank.

          On May 4, 2008, the Supervisor of Wages and Labor Agreements at the
          Finance Ministry approved the decisions of the institutions of the
          Bank which had been passed back in 2007 whereby the Chairman of the
          Board of the Bank, the General Manager and the Deputy General Manager
          are entitled upon conclusion of their tenure (with the conclusion of
          tenure including the transfer of control of the Bank) to additional
          severance pay (beyond the amounts provided for them to managers
          insurance policies and/or pension funds) at a rate of one month's
          salary for every year of service and the relative part of a month in
          respect of each part of a year. During 2008, in connection with the
          early retirement plan and the plan for the privatization of the Bank,
          the institutions of the Bank approved that Messrs. A. Galili, Dr. R.
          Cohen, and A. Savir shall be entitled upon termination of their tenure
          to redemption of three months' advance notice, in lieu of actual
          notice of three months as stipulated in their employment agreements
          and to a three-month period of paid acclimation time, with the
          redemption thereof based on their monthly salaries at the time of the
          termination of the tenure. The decision of the institutions of the
          Bank was also ratified by the Supervisor of Wages and Labor Agreements
          at the Finance Ministry. The total cost of the benefits that were
          approved for all of the three amounts to NIS 2.1 million as of
          December 31, 2008. In respect of this liability, the Bank set up an
          appropriate provision in its accounting records.

     3.   On November 16, 2008, a new collective agreement was signed by the
          Bank, the Histadrut (the General Federation of Labor) and the Bank's
          workers committee, in connection with the termination arrangements of
          employees who are employed under the Bank's collective agreements.
          This agreement was approved by the Supervisor of Wages and Labor
          Agreements at the Finance Ministry and it replaces the previous
          collective agreements that regulated the terms of termination of these
          employees. The agreement of November 16, 2008 sets forth the right of
          management to dismiss employees as part of the reduction in the Bank's
          activity, extends the validity of the reductions that were agreed to
          in the past in connection with the wages of the employees and the
          fringe benefits to which they are entitled, and grants various
          benefits to employees in the event of dismissal (including
          resignations to be treated as dismissals). According to the
          agreements, there are two termination tracks for dismissed employees:
          a severance track and a pension track. A dismissed employee in the
          pension track is one whose seniority is at least 20 years and who is
          at least 50 years old and who, upon dismissal is entitled to early
          pension.



                                     F - 55`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS (CONT'D)

     A.   SEVERANCE PAY (cont'd)

     3.   (cont'd)

          A dismissed employee who does not meet these two conditions together,
          belongs to the severance track, in which he is entitled to enhanced
          severance pay. In the event of the privatization or liquidation of the
          Bank and/or if the privatization is not implemented by December 31,
          2009, then immediately thereafter, employees are allowed to resign and
          be treated as if they had been dismissed, but the Bank has the right
          to require the employee to continue working for an additional period
          of time. According to the agreement, part of the termination payments
          to the employees will be deposited in trust with a trust company. For
          this purpose, the Bank engaged the trust company of an Israeli bank
          which will serve as trustee. The collective agreement of November 16,
          2008 will be in effect until the termination of the last employee to
          which the agreement applies. The waivers and part of the benefits set
          forth in the aforementioned collective agreements also apply and/or
          will apply to some of the employees of the Bank who are employed under
          personal contracts.

          The Bank recorded the necessary provisions to cover the agreement. As
          of December 31, 2008, the balance of the provision in respect of the
          severance pay to be paid to the employees amounts to NIS 21.1 million
          (excluding payroll tax), compared with an amount of NIS 18.2 million
          as of December 2007.

     4.   During 2006, the employment contracts of three senior employees
          employed under "personal contracts" were amended so as to apply to
          such contracts the terms of termination that apply to the employees
          who are employed under the Bank's collective agreements. During 2008,
          the institutions of the Bank ratified the application to these
          contracts of the terms of the collective agreement dated November 16,
          2008. The application of the terms of the collective agreements to the
          aforementioned three employees was ratified by the Supervisor of Wages
          and Labor Agreements at the Finance Ministry.

          In respect of these liabilities, amounting at December 31, 2008 to NIS
          7.7 million (December 31, 2007 - NIS 6.7 million), there is an
          appropriate provision included in the reserve for severance pay.

     5.   The following table presents the data relating to provisions and
          funding for severance pay included in the balance sheet:

                                                          DECEMBER 31    DECEMBER 31
                                                             2008           2007
                                                            -------       -------
                                                            REPORTED     REPORTED
                                                            AMOUNTS       AMOUNTS
                                                            -------       -------
                                                         NIS MILLIONS   NIS MILLIONS
                                                            -------       -------

Provision for severance pay                                    48.1          43.4
Amounts funded with pension and provident funds
 (including earnings thereon)                                  23.3          22.1
                                                            -------       -------
Unfunded provision included in "Other liabilities"             24.8          21.3
                                                            =======       =======

          The Bank may not withdraw amounts funded other than for the purpose of
          discharging severance pay liabilities.


                                     F - 56`

`Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 18 - EMPLOYEE RIGHTS (CONT'D)

     B.   UNUTILIZED SICK LEAVE

     Employees who retire (to pension) 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 of the balance sheet date totals NIS 2.5 million (December 31,
     2007 - NIS 2.5 million) and is included in the "Other liabilities" item.

     C.   UNUTILIZED VACATION

     The balance of the provision for unutilized vacation is NIS 1.8 million as
     of the balance sheet date (December 31, 2007 - NIS 1.7 million). The
     balance is included in "Other liabilities" item.



                                     F - 57`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS

REPORTED AMOUNTS

                                                                     DECEMBER 31, 2008
                                    ----------------------------------------------------------------------------------
                                                                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                            558.9            1.2           15.1            0.1              -         575.3
Securities                                 -            0.2              -              -           37.7          37.9
Credit to the public                    73.8          235.1        4,785.4           12.8              -       5,107.1
Credit to governments                      -            2.8              -              -              -           2.8
Fixed assets                               -              -              -              -            0.5           0.5
Other assets                             2.4            0.5              -              -            0.4           3.3
Perpetual deposits with
 the Israeli Treasury                      -              -           29.9              -              -          29.9
                                    --------       --------       --------       --------       --------      --------

Total assets                           635.1          239.8        4,830.4           12.9           38.6       5,756.8
                                    --------       --------       --------       --------       --------      --------

LIABILITIES
Deposits of the public                  17.5            9.1            0.1              -              -          26.7
Deposits of
 the Government                            -          225.9        4,796.7              -              -       5,022.6
Perpetual deposit                        0.1              -              -              -              -           0.1
Other liabilities                       24.6           37.3            0.9            1.1              -          63.9
Non-participating shares                   -              -          335.8              -              -         335.8
Participating shares                       -              -          203.6              -              -         203.6
                                    --------       --------       --------       --------       --------      --------

Total liabilities                       42.2          272.3        5,337.1            1.1              -       5,652.7
                                    --------       --------       --------       --------       --------      --------

Difference                             592.9          (32.5)        (506.7)          11.8           38.6         104.1

Forward transactions, net              (95.9)          35.8           71.6          (11.5)             -             -
                                    --------       --------       --------       --------       --------      --------

Total                                  497.0            3.3         (435.1)           0.3           38.6         104.1
                                    ========       ========       ========       ========       ========      ========


                                     F - 58`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT'D)

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 - 59`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
          MATURITY DATE (1)

REPORTED AMOUNTS

                                                                                                  DECEMBER 31, 2008
                                 -----------------------------------------------------------------------------------------------------------------------------------------------------
                                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                             560.4         9.3        19.0         1.7         1.1         0.1           -           -           -           -      591.6       51.2       635.1
Liabilities                         10.7         6.8         0.2           -           -           -           -           -           -           -       17.7       24.7        42.2
                                 -------     -------     -------     -------     -------     -------     -------     -------     -------     -------    -------    -------     -------
Difference                         549.7         2.5        18.8         1.7         1.1         0.1           -           -           -           -      573.9       26.5       592.9
Derivative instruments
 excluding options                 (75.5)      (20.4)          -           -           -           -           -           -           -           -       95.9          -       (95.9)
ISRAELI CURRENCY LINKED
 TO THE CPI
Assets                               3.3         7.4        35.1        42.3        35.2        33.3        33.5        96.0        56.3           -      342.4          -       239.8
Liabilities                          0.2        12.2        43.1        48.9        49.6        46.8        46.5         2.3         1.8           -      251.4       37.3       272.3
                                 -------     -------     -------     -------     -------     -------     -------     -------     -------     -------    -------    -------     -------
Difference                           3.1        (4.8)       (8.0)       (6.6)      (14.4)      (13.5)      (13.0)       93.7        54.5           -       91.0      (37.3)      (32.5)
Derivative instruments
 excluding options                  15.4        20.4           -           -           -           -           -           -           -           -       35.8          -        35.8
FOREIGN CURRENCY AND
 LINKED THERETO
Assets                              27.9       135.7       409.3       541.2       536.9       533.1       529.1     2,628.8     2,254.4           -    7,596.4       33.2     4,843.3
Liabilities                          1.2       135.3       408.3       539.8       536.0       532.2       528.4     2,634.2     2,257.1           -    7,572.5      540.3     5,338.2
                                 -------     -------     -------     -------     -------     -------     -------     -------     -------     -------    -------    -------     -------
Difference                          26.7         0.4         1.0         1.4         0.9         0.9         0.7        (5.4)       (2.7)          -       23.9     (507.1)     (494.9)
Derivative instruments
 excluding options                  60.1           -           -           -           -           -           -           -           -           -       60.1          -        60.1
NON-MONETARY ITEMS
Assets                                 -           -           -           -           -           -           -           -           -           -          -       38.6        38.6
Liabilities                            -           -           -           -           -           -           -           -           -           -          -          -           -
                                 -------     -------     -------     -------     -------     -------     -------     -------     -------     -------    -------    -------     -------
Difference                             -           -           -           -           -           -           -           -           -           -          -       38.6        38.6

TOTAL AS OF DECEMBER 31, 2008
ASSETS                             591.6       152.4       463.4       585.2       573.2       566.5       562.6     2,724.8     2,310.7           -    8,530.4      123.0     5,756.8
LIABILITIES                         12.1       154.3       451.6       588.7       585.6       579.0       574.9     2,636.5     2,258.9           -    7,841.6      602.3     5,652.7
                                 -------     -------     -------     -------     -------     -------     -------     -------     -------     -------    -------    -------     -------
DIFFERENCE                         579.5        (1.9)       11.8        (3.5)      (12.4)      (12.5)      (12.3)       88.3        51.8           -      688.8     (479.3)      104.1
                                 =======     =======     =======     =======     =======     =======     =======     =======     =======     =======    =======    =======     =======

(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 52.1 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.


                                     F - 60`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
          MATURITY DATE (1) (CONT'D)

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    (4)510.0       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 OF 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 - 61`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS

     A.   OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

                                      DECEMBER 31   DECEMBER 31
                                         2008          2007
                                       --------      --------
                                       REPORTED      REPORTED
                                       AMOUNTS        AMOUNTS
                                       --------      --------
                                     NIS MILLIONS  NIS MILLIONS
                                       --------      --------

Transactions the balance of which
 represents a credit risk -

Guarantees securing credit                122.7         157.9
Guarantees to home purchasers              15.8          17.9
Other guarantees and liabilities            4.1           4.6

     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 and management fees in respect of this commitment,
          which are linked to the CPI, in respect of the period January 1, 2009
          to August 31, 2009 amount to NIS 0.8 million.

     3.   As of 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. During 2008, this agreement
          was extended for a period of three additional years until December 10,
          2011. Commencing on January 1, 2010, the Bank has the option of
          terminating the commitment upon six months' advance notice. The cost
          of the computer services for 2009 will amount to NIS 2.6 million.

     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.


                                     F - 62`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     C.   LETTERS OF INDEMNIFICATION FOR SENIOR OFFICERS AND OTHERS

     1)   In August 2002, the Bank issued to its officers and directors a letter
          of indemnification (the "first letter of indemnification") that was
          approved by the Audit Committee, Board of Directors and the
          shareholders' general meeting of the Bank. 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 first 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 first letter of indemnification
          are uncertain.


                                     F - 63`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     C.   INDEMNIFICATION AND EXEMPTION LETTERS FOR SENIOR OFFICERS (CONT'D)

          In May 2008, the Bank wrote an additional letter of indemnification to
          officers and directors of the Bank (hereinafter - the "Second Letter
          of Indemnification") which was also approved by the Audit Committee,
          the Board of Directors and the general meeting of the Bank. The second
          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 second letter of indemnification
          covers monetary indebtedness placed on the officers or directors in
          favor of another person by court ruling (including the 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 and/or collateral

          o    Receipt of a special credit line from the Bank of Israel, the
               management and repayment thereof

          o    Adoption of the Bank's Run-off Plan and the implementation
               thereof

          o    Certain actions in connection with the current operations and
               activity of the Bank during the normal course of business

          o    Management of the risks of the Bank

          o    Certain actions in connection with the disclosure and recording
               requirements applicable to the Bank

          o    Resolutions and actions in connection with the distribution or
               non-distribution of a dividend

          o    Making insurance arrangements

          o    The repayment of the perpetual deposits of the Bank with the
               Treasury

          o    Making or furthering an arrangement between the Bank and its
               shareholders pursuant to article 350 of the Companies Law

          o    The privatization of the Bank

          The second letter of indemnification is in addition to the first
          letter of indemnification. The overall amount of the indemnification
          in respect of the aforementioned monetary indebtedness to be paid as
          part of the second letter of indemnification and the overall amount of
          the indemnification in respect of the monetary indebtedness to be paid
          as part of the first letter of indemnification shall not exceed in the
          aggregate the ceiling for indemnification set out in the first 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 - 64`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     C.   INDEMNIFICATION AND EXEMPTION LETTERS FOR SENIOR OFFICERS (CONT'D)

          In addition to the aforementioned monetary indebtedness, the second
          letter of indemnification also covers reasonable litigation costs,
          including attorney fees that officers or directors incurred or will be
          charged in certain proceedings. The second letter of indemnification
          went into effect upon submission on July 6, 2008 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 its shareholders.

     2)   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 took 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.

     3)   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 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 claims from the outside attorneys representing the
     Bank, 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. 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
          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. 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. On September 4,
          2008, the plaintiff filed an objection to the approval of the
          Arrangement Plan between the Bank and its shareholders pursuant to
          Article 350 of the Companies Law - 1999.


                                     F - 65`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

          On November 24, 2008, as part of the deliberations in the court
          regarding the approval of the Arrangement Plan, the plaintiff and the
          Bank reached an agreement whereby the objection of the plaintiff to
          the Arrangement Plan will be rejected and the aforementioned appeal
          filed by the plaintiff to the Supreme Court will be removed. The Bank
          will pay an amount of NIS 100,000 (plus VAT) to cover the plaintiff's
          legal fees. On November 30, 2008, the Supreme Court issued its
          decision to remove the appeal.

     2)   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. The hearing on the
          two originating motions was consolidated.


                                     F - 66`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

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 ruling 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 ruling. 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
          ruling rejects also the right of the Bank to accrued interest against
          the payment of the dividend in arrears on the Preference 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. 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 proper 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 shareholders of the Preference shares
          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. On
          February 24, 2008, the Bank responded to the aforementioned petition
          of the financial entities and gave notice that it does not object to
          adding the State as an additional respondent to the originating
          motion. On March 18, 2008, a "document of agreements" was signed
          between the State and the aforementioned financial entities, whereby
          the parties reached an agreement that, among other things, as part of
          the arrangement pursuant to Article 350 of the Companies Law - 1999,
          to be submitted by the Bank for court approval and which deals with
          the sale of the shares of the Bank or, alternatively, a partial
          payment of the preferred dividend to the shareholders of C, CC, and
          CC1 Preference shares, it would be stipulated that upon the approval
          of the arrangement by the court, the originating motion filed by the
          aforementioned financial entities would be rejected, as well as the
          appeal filed by the Bank regarding the decision of the Tel Aviv
          District Court in the matter of the rejection of the originating
          motion on the Bank, and that subject to receipt of the amounts due to
          the shareholders of the C, CC, and CC1 Preference shares (which also
          include the financial entities) pursuant to the Arrangement, they will
          waive their claims and suits in connection with the dividend. The
          Arrangement and Compromise Plan between the Bank and its shareholders
          (pursuant to Article 350 of the Companies Law - 1999) was submitted by
          the Bank to the court on July 6, 2008 and approved by the class
          meetings of the shareholders of the Bank on October 30, 2008 and
          November 6, 2008, and by the court on November 24, 2008. Further to
          the approval of the plan, as above, during the month of December 2008,
          both the originating motion submitted by the financial entities and
          the appeal filed by the Bank regarding the rejection of the
          originating motion filed by it were rejected.


                                     F - 67`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

     3)   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. The Bank
          counter-sued the plaintiff in respect of a debit balance with the
          Bank.

     4)   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.

     5)   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.

     6)   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
          grandchild 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 decision was issued whereby a conciliation
          agreement between the parties was approved. The agreement brought to a
          conclusion all of the disputes between the parties, without the former
          head of the Bank, who was one of the defendants, being required to
          make any payments whatsoever. To the best of the knowledge of the
          Bank, the repayment of the amount of the compromise by the parties who
          undertook to make such payment has not yet been made.


                                     F - 68`

`The Industrial Development Bank of Israel Limited

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--------------------------------------------------------------------------------

NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     D.   LEGAL ACTIONS (CONT'D)

     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 2 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
     unclaimed 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 and/or
     redemption 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 regarding securities which according to their laws
     became "abandoned" as well as payments in respect of the securities of the
     Bank which were not collected. Failure to file the required reports and the
     resultant non-transfer of the securities and/or the payments, may expose
     the bank to financial sanctions. This issue raises the question of "choice
     of law", whether the securities are indeed subject to U.S. law or to
     Israeli law, and additional questions such as 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. Based on the decision of
     the Board of Directors of the Bank, at the end of 2008, the Bank instructed
     the agent in the U.S. to take steps to execute the reporting and transfer
     to states in the U.S. of the shares of the Bank and the dividends thereon
     that became "abandoned", and concurrently, the bank would notify the
     Administrator General in Israel who, in accordance with the Administrator
     General Law - 1978, is entitled to take over management of "abandoned
     assets". The exchange of letters with the Administrator General that
     followed the aforementioned notification of the Bank indicates (to the best
     of the Bank's understanding) that the position of the Administrator General
     is that it is Israeli law that applies to the aforementioned securities and
     dividends and not U.S. law and, therefore, the Administrator General should
     take steps to obtain an order pursuant to the Administrator General Law -
     1978 to manage the aforementioned assets. In response, the Bank indicated
     that it believes that deliberating and adjudicating the issue in court will
     be helpful and are important and that the Bank will act in accordance with
     the decision of the court. At present, the Bank has been making inquiries
     with the agent in the U.S. as to the manner in which the reporting and
     transfer should be implemented but the process has not yet begun. According
     to a report furnished by the agent in the U.S. to the Bank, the par value
     of the shares that became abandoned in accordance with U.S. law is
     approximately $183,000 and the amount of the dividends that became
     abandoned is approximately $826,000. At present, the Bank has no
     information as to whether there are interest or redemption payments in
     respect of its capital notes that were held by U.S. residents and were
     redeemed on December 31, 2008 which became "abandoned" pursuant to U.S.
     law.

     At this stage, the Bank is unable to assess the financial consequences of
     this matter, if at all.


                                     F - 69`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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
                                                          2008          2007
                                                        --------      --------
                                                        REPORTED      REPORTED
                                                         AMOUNTS       AMOUNTS
                                                        --------      --------
                                                      NIS MILLIONS  NIS MILLIONS
                                                        --------      --------

Credit from deposits based on rate of collection**
Unlinked Israeli currency                                  334.8         335.1
CPI linked Israeli currency                                  3.7           4.7
Foreign currency                                           169.8         171.8
                                                        --------      --------

Total                                                      508.3         511.6
                                                        ========      ========

     *    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, 2008, the activity based on the extent of collection
     includes past due balances amounting to NIS 503.9 million (December 31,
     2007 - NIS 506.9 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, 2008               DECEMBER 31, 2007
                                    --------------------------      --------------------------
                                    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                         36.4            83.8            30.4            17.0
                                    ----------      ----------      ----------      ----------

Total                                     36.4            83.8            30.4            17.0
                                    ==========      ==========      ==========      ==========

     (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, 2008
--------------------------------------------------------------------------------

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, 2008               DECEMBER 31, 2007
                                    --------------------------      --------------------------
                                    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                  0.4               -               -             0.5
Gross negative fair value                    -             1.1             0.6               -

     B.   DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
          THE CONTRACT

                                                                       DECEMBER 31, 2008
                                                            ------------------------------------------
                                                                        REPORTED AMOUNTS
                                                            ------------------------------------------
                                                                          NIS MILLIONS
                                                            ------------------------------------------
                                                              BANKS       CENTRAL BANKS        TOTAL
                                                            ----------      ----------      ----------

Gross positive fair value of derivative instruments                0.4               -             0.4
Off-balance sheet credit risk in
 respect of derivative instruments (2)                            12.0               -            12.0
                                                            ----------      ----------      ----------

Total credit risk in respect of derivative instruments            12.4               -            12.4
                                                            ==========      ==========      ==========

                                                                       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
                                                            ==========      ==========      ==========

     (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, 2008
--------------------------------------------------------------------------------

NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
           PERIODS (CONT'D)

     C.   MATURITY PERIOD - STATED AMOUNTS AT YEAR-END

                                                                       DECEMBER 31, 2008
                                                            ------------------------------------------
                                                                        REPORTED AMOUNTS
                                                            ------------------------------------------
                                                               UP TO      FROM 3 MONTHS
                                                             3 MONTHS       TO 1 YEAR          TOTAL
                                                            ----------      ----------      ----------
                                                           NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                            ----------      ----------      ----------

CPI/Shekel interest contracts                                     36.4               -            36.4
Foreign currency contracts                                        83.8               -            83.8
                                                            ----------      ----------      ----------

Total                                                            120.2               -           120.2
                                                            ==========      ==========      ==========

                                                                       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
                                                            ==========      ==========      ==========

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, 2008
--------------------------------------------------------------------------------

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 maintains large liquid reserves
     and has not recruited new deposits for a number of years. The discount rate
     of the liabilities is based on the State's cost of recruiting, plus a
     margin of 1% - 1.5%.

     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 of the 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 as of the 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 41.8 million (on December 31, 2007 - NIS 45.2
     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 based on the State's cost of recruiting, plus a
     margin of 1% - 1.5%.


                                     F - 73`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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`

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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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, 2008
                                         ----------------------------------------------------------
                                                   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                  574.1             1.2           575.3           575.3
Securities                                     37.9               -            37.9            37.9
Credit to the public                          108.2         4,998.9         5,107.1         5,145.5
Credit to governments                             -             2.8             2.8             2.8
Other financial assets                          0.6               -             0.6             0.6
Perpetual deposits with the
 Israeli Treasury                              29.9               -            29.9            29.9
                                         ----------      ----------      ----------      ----------

Total financial assets                        750.7         5,002.9         5,753.6         5,792.0
                                         ==========      ==========      ==========      ==========

FINANCIAL LIABILITIES
Deposits of the public                         17.6             9.1            26.7            27.2
Deposits of the Government
 and a perpetual deposit                        0.1         5,022.6         5,022.7         5,038.0
Other financial liabilities                    33.6               -            33.6            33.6
Non participating preference
 shares                                       335.8               -           335.8           335.8
Participating preference shares               203.6               -           203.6           203.6
                                         ----------      ----------      ----------      ----------

Total financial liabilities                   590.7         5,031.7         5,622.4         5,638.2
                                         ==========      ==========      ==========      ==========

     (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, 2008
--------------------------------------------------------------------------------

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, 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 - 76`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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 an affiliated company.

     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, 2008                                            DECEMBER 31, 2007
                                      ----------------------------------------------------------      ----------------------------------------------------------
                                           SHAREHOLDERS AND                                               SHAREHOLDERS AND
                                       A CONTROLLING SHAREHOLDER    DIRECTORS AND GENERAL MANAGER     A CONTROLLING SHAREHOLDER     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
Deposits in banks                          550.7           550.7               -               -             9.5            15.4               -               -

LIABILITIES
Other liabilities                              -               -             1.8             1.8               -               -             0.9             0.9
Credit risk in off-balance sheet
    financial instruments(2)                 2.7             2.7               -               -             1.5             2.0               -               -

          (1)  On the basis of the balances at the end of each month.

          (2)  As calculated for purposes of borrower indebtedness limits.

          (*)  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, 2008
--------------------------------------------------------------------------------

NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)

     B.   SUMMARY OF RESULTS OF OPERATIONS WITH INTERESTED AND RELATED PARTIES*

                                         2008            2007            2008              2007
                                      ----------      ----------      ----------       ----------
                                     SHAREHOLDERS AND CONTROLLING
                                              SHAREHOLDERS           DIRECTORS AND GENERAL MANAGER
                                      --------------------------      ---------------------------
                                           REPORTED AMOUNTS                REPORTED AMOUNTS
                                      --------------------------      ---------------------------
                                     NIS MILLIONS    NIS MILLIONS    NIS MILLIONS     NIS MILLIONS
                                      ----------      ----------      ----------       ----------

Profit from financing
 operations before allowance
 for doubtful debts (1)                      0.3             0.3               -                -
Operating and other expenses (2)               -               -            (3.4)            (2.9)
                                      ----------      ----------      ----------       ----------
Total                                        0.3             0.3            (3.4)            (2.9)
                                      ==========      ==========      ==========       ==========

     (1)  See details in D hereunder.

     (2)  See details in C hereunder.

     (*)  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.

     C.   BENEFITS TO INTERESTED PARTIES

                                               2008                           2007
                                    --------------------------      --------------------------
                                  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)                              2.7               2             2.3               2
Fees to directors not employed
 by the Bank                               0.7               9             0.6               9

     (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`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)

     D.   RESULTS OF FINANCING OPERATIONS (BEFORE ALLOWANCE FOR DOUBTFUL DEBTS)
          WITH INTERESTED AND RELATED PARTIES*

                                                         2008            2007            2006
                                                      ----------      ----------      ----------
                                                                   REPORTED AMOUNTS
                                                      ------------------------------------------
                                                     NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                      ----------      ----------      ----------

1. Income deriving from deposits in banks                    0.3             0.3             0.5
2. Expenses deriving from deposits of the public               -               -               -
                                                      ----------      ----------      ----------
Net results from financing operations
 before allowance for doubtful debts                         0.3             0.3             0.5
                                                      ==========      ==========      ==========

     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 CORPORATION 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 of
     December 31, 2008, the balance of the credit was NIS 4,699 million (as of
     December 31, 2007 - NIS 4,963 million). Income of NIS 249 million was
     recorded in respect of the aforementioned credit in 2008 (in 2007 - an
     expense of NIS 127 million). In 2006, a total expense was recorded in
     respect of this credit in an amount 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 2008,
     the income that was recorded constituted more than 10% of the profit from
     financing operations before the allowance for doubtful debts.

     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 of December 31, 2008, the overall balance
     of the Government deposits amounted to NIS 5,023 million compared with NIS
     5,319 million as of December 31, 2007. Financing expenses in an amount of
     NIS 272 million were recorded in 2008 in respect of the Government
     deposits, compared with income of NIS 115 million in 2007 and income of NIS
     84 million in 2006.

     F.   COMPROMISE ARRANGEMENT BETWEEN THE BANK AND ITS SHAREHOLDERS

     For information pertaining to the aforementioned arrangement, see Notes 1,
     8, and 16.


                                     F - 79`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 23 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS

                                                       2008             2007             2006
                                                    ----------       ----------       ----------
                                                                  REPORTED AMOUNTS
                                                    --------------------------------------------
                                                   NIS MILLIONS     NIS MILLIONS     NIS MILLIONS
                                                    ----------       ----------       ----------

A.     INCOME (EXPENSES) DERIVING FROM ASSETS:
Credit to the public                                     301.0            (80.7)           (39.7)
Credit to governments                                      0.2                -             (0.9)
Deposits with banks                                        1.1              0.8              0.7
                                                    ----------       ----------       ----------
                                                         302.3            (79.9)           (39.9)
                                                    ----------       ----------       ----------

B.     (EXPENSES) INCOME DERIVING FROM LIABILITIES
Deposits of the public                                    (2.2)            (3.1)            (4.4)
Deposits of the Government                              (271.6)           115.1             84.2
Deposits of Bank of Israel (1)                           (15.7)           (23.6)           (45.2)
Deposits of banks                                            -              0.1              0.9
                                                    ----------       ----------       ----------
                                                        (289.5)            88.5             35.5
                                                    ----------       ----------       ----------

C.     INCOME DERIVING FROM DERIVATIVE FINANCIAL
       INSTRUMENTS
Net income from derivative instruments ALM *              (1.4)             0.3             11.6
                                                    ----------       ----------       ----------
                                                          (1.4)             0.3             11.6
                                                    ----------       ----------       ----------

D.     OTHER INCOME AND EXPENSES
Commissions from financing operations                      8.8             11.0             12.1
Other financing income**                                  24.8             19.0             11.6
Refund of interest from Bank of Israel (1)                48.6                -                -
Other financing expenses                                  (9.6)            (9.6)           (12.7)
                                                    ----------       ----------       ----------
                                                          72.6             20.4             11.0
                                                    ----------       ----------       ----------
Total profit from financing operations before
 allowance for doubtful debts                             84.0             29.3             18.2
                                                    ==========       ==========       ==========

Including - exchange rate differences, net                 2.8             (6.1)            (9.8)
                                                    ==========       ==========       ==========

*    Derivatives financial instruments 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                         21.8            17.4             9.4
                                                    ==========      ==========      ==========

(1)  On December 31, 2008, further to the repayment of the balance of the credit
     line furnished to the Bank by the Bank of Israel, the Bank of Israel
     refunded to the Bank an amount of NIS 48.6 million in respect of charges in
     excess of the Bank of Israel interest that the Bank was charged in previous
     years. The income in respect of this refund of interest was included as
     part of "Other financing income".


                                     F - 80`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 24 - OPERATING COMMISSIONS

                                                       2008             2007            2006
                                                    ----------      ----------      ----------
                                                                  REPORTED AMOUNTS
                                                    ------------------------------------------
                                                   NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                    ----------      ----------      ----------

Ledger fees (in Israeli and foreign currency)              0.4             0.5             0.4
Payment order system services                                -               -             0.1
Customer foreign trade transactions                          -             0.1             0.2
Other                                                      0.2             0.5             0.6
                                                    ----------      ----------      ----------

Total operating commissions                                0.6             1.1             1.3
                                                    ==========      ==========      ==========

NOTE 25 - GAINS ON INVESTMENTS IN SHARES

                                                       2008             2007             2006
                                                    ----------       ----------      ----------
                                                                  REPORTED AMOUNTS
                                                    -------------------------------------------
                                                   NIS MILLIONS     NIS MILLIONS     NIS MILLIONS
                                                    ----------       ----------      ----------

Gains on sale of available-for-sale shares                   -              3.3            10.3
Dividend from available-for-sale shares                    3.4              5.4             6.1
Provision for impairment of available-for-sale
shares                                                    (2.4)               -               -
                                                    ----------       ----------      ----------

Total gains on investments in shares                       1.0              8.7            16.4
                                                    ==========       ==========      ==========

NOTE 26 - OTHER INCOME

                                                       2008            2007             2006
                                                    ----------      ----------      ----------
                                                                 REPORTED AMOUNTS
                                                    ------------------------------------------
                                                   NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                    ----------      ----------      ----------

Gains on severance pay funds                                 -             0.2             0.8
Other                                                      1.4             1.5             3.0
                                                    ----------      ----------      ----------

Total other income                                         1.4             1.7             3.8
                                                    ==========      ==========      ==========


                                     F - 81`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 27 - SALARIES AND RELATED EXPENSES

                                                       2008            2007            2006
                                                    ----------      ----------      ----------
                                                                 REPORTED AMOUNTS
                                                    ------------------------------------------
                                                   NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                    ----------      ----------      ----------

Salaries                                                  12.1            13.3            13.8
Severance pay, provident fund, pensions,
 continuing education fund, vacation pay,
 sick leave pay and long service bonuses                   4.4             2.1             3.0
National insurance and payroll tax (*)                     3.3             3.1             0.7
Other related expenses                                     0.1               -             0.1
                                                    ----------      ----------      ----------

Total salaries and related expenses                       19.9            18.5            17.6
                                                    ==========      ==========      ==========

     (*)  In 2006, payroll tax was not included in payroll expenses due to the
          existence of losses for purposes of profit tax.

NOTE 28 - OTHER EXPENSES

                                                       2008            2007            2006
                                                    ----------      ----------      ----------
                                                                 REPORTED AMOUNTS
                                                    --------------------------------------------
                                                   NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                    ----------      ----------      ----------

Marketing and advertising                                  0.3             0.1             0.1
Communications (postage, telephone,
 courier fees, etc.)                                       0.2             0.3             0.4
Computer (not including salaries and
 depreciation)                                             2.8             2.8             3.3
Office expenses                                            0.1             0.2             0.2
Insurance                                                  1.3             1.5             3.2
Professional services                                      3.6             3.3             3.4
Directors' fees (not including a director
 employed as a senior executive)                           0.7             0.6             0.6
Staff training, further education, etc.                    0.1             0.1             0.1
Other                                                      0.5             0.5             3.0
                                                    ----------      ----------      ----------

Total other expenses                                       9.6             9.4            14.3
                                                    ==========      ==========      ==========


                                     F - 82`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 29 - PROVISION FOR TAXES ON ORDINARY OPERATING INCOME

     A.   COMPOSITION:

                                                       2008            2007            2006
                                                    ----------      ----------      ----------
                                                                REPORTED AMOUNTS
                                                    ------------------------------------------
                                                   NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                                    ----------      ----------      ----------

Taxes for the current year                                 9.0             1.5               -
Taxes in respect of prior years                            0.5             0.1               -
                                                    ----------      ----------      ----------

Provision for taxes on income                              9.5             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:

                                                                2008              2007              2006
                                                             ----------        ----------        ----------
                                                                           REPORTED AMOUNTS
                                                             ----------------------------------------------
                                                            NIS MILLIONS      NIS MILLIONS       NIS MILLIONS
                                                             ----------        ----------        ----------

Statutory tax rate                                                36.80%            38.53%            40.65%
                                                             ==========        ==========        ==========

Tax (tax savings) at the applicable statutory rate                 23.0               9.2              (7.0)

Tax (tax savings) in respect of:
Addition (deduction) in respect of inflation                          -               2.1              (0.2)
General and supplementary allowances for
  doubtful debts                                                   (1.3)             (2.5)             (2.4)
Other non-deductible expenses  (fines, excess expenses)             0.1               0.1               0.1
Exempt income and income with limited rates                        (0.3)                -               1.1
Timing differences in respect of
 which deferred taxes had not been recorded                       (12.3)             (4.2)              7.3
Profit tax on payroll tax on exempt income (net)                    0.2               0.2                 -
Taxes in respect of prior years                                     0.5               0.1                 -
Additional payables (receivables) in respect of
  other problematic debts                                          (0.4)             (3.4)                -
Loss for purposes of profit VAT which
  cannot be set off                                                   -                 -               1.1
                                                             ----------        ----------        ----------

Tax expense reflected in the statement of income                    9.5               1.6                 -
                                                             ==========        ==========        ==========

     C.   The Bank has been issued final tax assessments for all years through
          2003.


                                     F - 83`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 29 - TAXES ON INCOME (CONT'D)

     D.   Carryforward tax losses in respect of which deferred tax assets were
          not recorded total NIS 665 million (in 2007 - NIS 721 million).
          According to the directives of the Supervisor of Banks, a deferred tax
          receivable asset can be recorded in respect of tax loss carryforwards
          in cases in which utilization of the tax in the foreseeable future is
          certain. The Bank did not record deferred tax receivable assets in the
          financial statements in respect of these tax loss carryforwards and
          does not expect certain taxable income in the near future.

          Due to the utilization of tax loss carryforwards from prior years, the
          Bank did not have a tax liability in 2008 and 2007 since the balance
          of tax losses from prior years exceeds the profit for tax purposes in
          those years.

     E.   In 2006, the Bank recorded VAT on salaries receivable in the amount of
          NIS 2.3 million, as a result of losses for purposes of VAT on profit.

     F.   According to the Income Tax Law (Inflationary Adjustments) - 1985
          (hereinafter - the "Adjustments Law"), results of operations were
          measured for tax purposes until the end of the 2007 tax year on a real
          basis, based on changes in the Index. The Bank was taxed pursuant to
          this law. According to the Income Tax Law (Inflationary Adjustments)
          (Amendment No. 20)- 2008 (hereinafter - the "Amendment"), the
          provisions of the Adjustments Law are no longer applicable as from the
          2008 tax year and thereafter. Therefore, the results of the Bank are
          measured for tax purposes in nominal values. The Amendment set out
          transition provisions regarding the end of the applicability of the
          provisions of the Adjustments Law which were applicable until the end
          of the 2007 tax year.

     G.   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 - the "Amendment"). The Amendment provides for a
          gradual reduction in the company tax rate in the following manner: in
          2009 the tax rate will be 26% and from 2010 and thereafter, 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 entities includes profit tax in accordance with the
          VAT Law

          In addition to the corporate tax, as above, as a financial
          institution, the Bank is required to pay a profit tax, at the current
          rate of 15.5%. According to the provisions of Amendment No. 15 of the
          VAT Law - 1975, commencing in 2008, payroll tax is deductible from the
          profit which serves as the basis for the calculation of profit tax (in
          2008 - half of the payroll tax paid and in 2009 and thereafter - the
          full payroll tax that was paid). The reduction in corporate tax, as
          above (as well as the reduction in the rate of profit tax and payroll
          tax from 17% to 15.5% commencing on July 1, 2006) results in a
          reduction in the overall tax rate (corporate tax and profit tax)
          applicable to the Bank, as follows:36.80% in 2008, 35.93% in 2009 and
          35.06% in 2010.


                                     F - 84`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 30 - DESIGNATED DEPOSITS AND CREDIT AND DEPOSITS GRANTED THEREFROM

                                                    DECEMBER 31     DECEMBER 31
                                                       2008             2007
                                                    ----------      ----------
                                                     REPORTED        REPORTED
                                                     AMOUNTS          AMOUNTS
                                                    ----------      ----------
                                                   NIS MILLIONS    NIS MILLIONS
                                                    ----------      ----------

CREDIT AND DEPOSITS OUT OF DESIGNATED DEPOSITS
Credit to the public                                   4,789.7         5,095.4
                                                    ----------      ----------

Total                                                  4,789.7         5,095.4
                                                    ==========      ==========

DESIGNATED DEPOSITS
Deposits of the Government                             4,925.3         5,219.8
                                                    ----------      ----------

Total                                                  4,925.3         5,219.8
                                                    ==========      ==========

     Credit out of designated deposits includes NIS 4,699.5 million, which is
     secured by a State guarantee. The annual interest margin in respect of this
     credit amounts to NIS 0.2 million (on December 31, 2007 the balance of the
     credit secured by a State guarantee was NIS 4,963.2 million).

NOTE 31 - INFORMATION ON NOMINAL DATA BASIS

                                DECEMBER 31     DECEMBER 31
                                   2008            2007
                                ----------      ----------
                               NIS MILLIONS    NIS MILLIONS
                                ----------      ----------

Total assets                       5,756.8         6,482.6
Total liabilities                  5,652.7         6,372.6
                                ----------      ----------

Total shareholders' equity           104.1           110.0
                                ==========      ==========

                                    2008            2007           2006
                                 ----------      ----------      ----------
                                NIS MILLIONS    NIS MILLIONS    NIS MILLIONS
                                 ----------      ----------      ----------

Nominal net earnings (loss)            53.0            22.2           (17.1)


                                     F - 85`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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.

          The financial statements have been prepared under the going concern
          assumption since there is no substantial doubt as to the ability of
          the Bank to continue operating as a going concern and since its
          liquidation is not deemed imminent.

          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, 2008
--------------------------------------------------------------------------------

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.See also note 1G.

          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 through December 31, 2007, the Bank considered the
          application of FAS 114 to all its borrowers without recording a
          general provision.

          However, due to the global economic downturn the Bank recorded a
          general provision for loan losses of NIS 29.2 million in accordance
          with FAS 5. This provision is based on risk characteristic of each
          customer sector and past losses as experienced with each sector based
          on data pertaining to specific allowances for doubtful accounts made
          over the six years of the Run-Off Plan.


                                     F - 87`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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, unless in the event of a sale of the
          shares of the Bank under which the Bank is committed to redeem the
          shares held by the public.

          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 and as from
          2008 with the accumulated dividends (see also note 16E).

          In accordance with U.S. GAAP:

          Since the Bank controls the decision on the redemption or it is
          committed to redeem the shares held by the public in the event of the
          sale of the Bank's shares and since as of the date of these financial
          statements the redemption of these shares is not deemed probable (see
          also note 16E); Thus they are not presented as a liability. However,
          the preferred shares held by the public, in event of a sale scenario,
          are presented as mezzanine, due to the redemption feature,

          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 and as from 2008 with the
          accumulated dividends (see also note 16E).

          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, 2008
--------------------------------------------------------------------------------

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:

          In 2002, upon the implementation of the Run-Off Plan, 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 accordance with U.S. GAAP:

          Since the employees were required to render services through the
          Run-Off period until they are terminated in order to receive
          termination benefits, the liability and the loss were recognized
          ratably over the expected future service period.

          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 income (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.

          Furthermore, it is not required to take into account in the
          calculation of the income (loss) per 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) per ordinary A shares.


                                     F - 89`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          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 represented a commitment of the Bank's principal
          shareholder to provide funds to the Bank in consideration for the
          issuance of B1 shares (i.e benefit to be provided by the principal
          shareholder), neither an increase in the Bank's shareholder's equity
          nor an increase in the deposit were recorded to the Bank's
          shareholders' equity due to the said agreement. In 2008, upon the
          repayment of the perpetual deposit, an increase in the shareholder's
          equity was carried out.

          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.

          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.


                                     F - 90`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     A.   (CONT'D)

          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

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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
                                                 --------------------------------------------
                                                    2008             2007             2006
                                                 ----------       ----------       ----------
                                    NOTE        NIS MILLIONS     NIS MILLIONS     NIS MILLIONS
                                 ----------      ----------       ----------       ----------

(A)
Net income (loss) as
 reported, according to
 Israeli GAAP                                          53.0             22.2            (17.1)
                                                 ----------       ----------       ----------

Specific provision for loan
 Losses                              32.A.2             7.1              8.7              3.9
General provision for loan
 Losses                              32.A.3           (32.6)            (6.5)            (5.9)
Liability for termination
 benefits                            32.A.6            (2.8)            (2.8)            (2.0)
Linkage differences on
 perpetual deposits with
 the Israeli Treasury                32.A.9            (5.1)           (44.0)           (43.8)
                                                 ----------       ----------       ----------
                                                      (33.4)           (44.6)           (47.8)
                                                 ----------       ----------       ----------

Net income (loss)
 according to U.S. GAAP                                19.6            (22.4)           (64.9)
                                                 ==========       ==========       ==========

                                                     YEAR ENDED DECEMBER 31
                                           ------------------------------------------
                                              2008            2007             2006
                                           ----------      ----------      ----------
                                               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         3,509.9         1,470.2        (1,132.4)
As reported according to U.S. GAAP             *226.5           293.2        (2,936.4)
Number of shares                               15,100          15,100          15,100

* Adjustments to the income (loss) for the year for the purpose of the EPS
calculations consist of dividends for the preferred shares and exchange
differences in respect thereof (2006 and 2007-100% of the dividend for all
shares; 2008- for shares held by the state and the participating shares 50% of
the accrued dividends for the period January 1 to July 31, 2008 and 100% of
accrued dividends for the period August 1 to December 31, 2008. For the shares
held by the public 100% of the dividend.)


                                     F - 92`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
          THE FINANCIAL STATEMENTS (CONT'D)

     2.   BALANCE SHEET:

                                            DECEMBER 31, 2008                         DECEMBER 31, 2007
                                  -------------------------------------      -------------------------------------
                                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         575.3             -          575.3          33.8             -           33.8
Securities (1)(2)                     37.9         (36.8)           1.1          46.3         (44.8)           1.5
Credit to the public (2)
(3)(4)(5)                          5,107.1         (20.9)       5,086.2       5,521.1          (1.4)       5,519.7
Credit to governments (3)
(12)                                   2.8         508.3          511.1          24.7         511.1          535.8
Fixed assets                           0.5             -            0.5           0.8             -            0.8
Other assets (1)(3)(6)                 3.3         103.4          106.7           7.2         115.7          122.9
Perpetual deposits with the
 Israeli Treasury (11)                29.9             -           29.9         848.8        (402.3)         446.5
                                  --------      --------       --------      --------      --------       --------
Total assets                       5,756.8         554.0        6,310.8       6,482.7         178.3        6,661.0
                                  ========      ========       ========      ========      ========       ========
Deposits of the public (7)            26.7          (0.2)          26.5          54.6          (0.5)          54.1
Deposits of banks (7)                    -             -              -         481.2          (5.2)         476.0
Deposits of the
 government (7)(12)                5,022.6         435.5        5,458.1       5,319.2         434.1        5,753.3
Perpetual deposits                     0.1             -            0.1           0.1             -            0.1
Capital notes                            -             -              -          20.2             -           20.2
Other liabilities (6)(7)(8)           63.9          92.5          156.4          50.7         102.1          152.8
Non-participating
 shares (10)                         335.8        (305.9)          29.9         276.0        (276.0)             -
Participating preference
shares (9)                           203.6        (203.6)             -         170.6        (170.6)             -
Shareholders' equity
(see 3 below)
(2)(4)(5)(8)(9)(10)(11)              104.1         535.7          639.8         110.1          94.4          204.5
                                  --------      --------       --------      --------      --------       --------
Total liabilities and
 shareholders' equity              5,756.8         554.0        6,310.8       6,482.7         178.3        6,661.0
                                  ========      ========       ========      ========      ========       ========

(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, 2008
--------------------------------------------------------------------------------

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
                                                        -------------------------------------------
                                                           2008            2007              2006
                                                        ----------      ----------       ----------
                                                       NIS MILLIONS    NIS MILLIONS     NIS MILLIONS
                                                        ----------      ----------       ----------

Net income (loss) according to U.S. GAAP                      19.6           (22.4)           (64.9)

Unrealized losses on available-for-sale securities               -            (0.4)            (2.0)
                                                        ----------      ----------       ----------

Net comprehensive income (loss) according to U.S.
GAAP                                                          19.6           (22.8)           (66.9)
                                                        ==========      ==========       ==========

     4.   SHAREHOLDERS' EQUITY:

                                                                    DECEMBER 31    DECEMBER 31
                                                                       2008            2007
                                                                    ----------      ----------
                                                       NOTE       NIS MILLIONS      NIS MILLIONS
                                                    ----------      ----------      ----------

Shareholders' equity as reported according to
 Israeli GAAP                                                            104.1           110.1

A customer debt in respect of which shares
 were pledged in favor of the Bank                      32.A.7               -            (9.4)

Specific provision for loan losses                      32.A.2            13.6            11.5

General provision for loan losses                       32.A.3            12.6            45.2

Liability for termination benefits                      32.A.6               -             2.8

Perpetual deposits with the State of Israel             32.A.9               -          (402.3)

Classification of non-participating preference
 shares to  shareholders' equity item                   32.A.4           305.9           276.0

Classification of participating preference
shares to shareholders' equity item                     32.A.5           203.6           170.6
                                                                    ----------      ----------

Shareholders' equity according to U.S. GAAP                              639.8           204.5
                                                                    ==========      ==========

     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

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

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 December 2007, the FASB issued Statement of Financial Accounting
          Standards No. 141 (revised 2007), "Business Combinations" ("SFAS
          141(R)". SFAS 141(R) changes the accounting for business combinations,
          including the measurement of acquirer shares issued in consideration
          for a business combination, the recognition of contingent
          consideration, the accounting for contingencies, the recognition of
          capitalized in-process research and development, the accounting for
          acquisition-related restructuring cost accruals, the treatment of
          acquisition related transaction costs and the recognition of changes
          in the acquirer's income tax valuation allowance and income tax
          uncertainties. SFAS 141(R) applies prospectively to business
          combinations for which the acquisition date is on or after the
          beginning of the first annual reporting period beginning on or after
          December 15, 2008 . Early application is prohibited. The Bank will be
          required to adopt SFAS 141(R) on January 1, 2009.

     2.   In December 2007, the FASB issued Statement of Financial Accounting
          Standards No. 160, "Noncontrolling Interests in Consolidated Financial
          Statements, an Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends
          ARB 51 to establish accounting and reporting standards for the
          noncontrolling interest in a subsidiary and for the deconsolidation of
          a subsidiary. An ownership interest in subsidiaries held by parties
          other than the parent should be presented in the consolidated
          statement of financial position within equity, but separate from the
          parent's equity. SFAS 160 requires that changes in a parent's
          ownership interest while the parent retains its controlling financial
          interest in its subsidiary should be accounted for similarly as equity
          transactions. When a subsidiary is deconsolidated, any retained
          noncontrolling equity investment in the former subsidiary should be
          initially measured at fair value, with any gain or loss recognized in
          earnings.

          SFAS 160 requires consolidated net income to be reported at amounts
          that include the amounts attributable to both the parent and the
          noncontrolling interest. It also requires disclosure, on the face of
          the consolidated income statement, of the amounts of consolidated net
          income attributable to the parent and to the noncontrolling interests.

          SFAS 160 is effective for fiscal years (including interim periods
          within those fiscal years) beginning on or after December 15, 2008.
          Earlier adoption is prohibited. The statement shall be applied
          prospectively as of the beginning of the fiscal year in which it is
          initially applied, except for the presentation and disclosure
          requirement which shall be applied retrospectively for all periods
          presented. The Bank will be required to adopt SFAS 160 on January 1,
          2009. The Bank is currently assessing the impact that SFAS 160 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 the Bank'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
          Bank). SFAS 161 also improves transparency regarding the location and
          amounts of derivative instruments in a Bank'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 the Bank's financial position, financial performance and cash
          flows. The Bank is currently assessing the impact that SFAS 161 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, 2008
--------------------------------------------------------------------------------

     4.   In May 2009, the FASB issued SFAS No. 165, "Subsequent Events"("SFAS
          165"). SFAS 165 sets forth the period after the balance sheet date
          during which management of a reporting entity should evaluate events
          or transactions that may occur for potential recognition or disclosure
          in the financial statements, the circumstances under which an entity
          should recognize events or transactions occurring after the balance
          sheet date in its financial statements, and the disclosures that an
          entity should make about events or transactions that occurred after
          the balance sheet date. SFAS 165 will be effective for interim or
          annual periods ending after June 15, 2009 and will be applied
          prospectively.

     5.   In June 2009, the FASB issued SFAS No. 168 "The FASB Accounting
          Standards Codification and the Hierarchy of Generally Accepted
          Accounting Principles -- A Replacement of FASB Statement No. 162"
          ("SFAS 168"). Statement 168 establishes the FASB Accounting Standards
          CodificationTM (Codification) as the single source of authoritative
          U.S. generally accepted accounting principles (U.S. GAAP) recognized
          by the FASB to be applied by nongovernmental entities. Rules and
          interpretive releases of the SEC under authority of federal securities
          laws are also sources of authoritative U.S. GAAP for SEC registrants.
          SFAS 168 and the Codification are effective for financial statements
          issued for interim and annual periods ending after September 15, 2009.
          When effective, the Codification will supersede all existing non-SEC
          accounting and reporting standards. All other nongrandfathered non-SEC
          accounting literature not included in the Codification will become
          nonauthoritative. Following SFAS 168, the FASB will not issue new
          standards in the form of Statements, FASB Staff Positions, or Emerging
          Issues Task Force Abstracts. Instead, the FASB will issue Accounting
          Standards Updates, which will serve only to: (a) update the
          Codification; (b) provide background information about the guidance;
          and (c) provide the bases for conclusions on the change(s) in the
          Codification. The Bank does not expect that the adoption of SFAS 168
          to have a material impact on the Bank's financial statements.

     6.   In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value
          When the Volume and Level of Activity for the Asset or Liability Have
          Significantly Decreased and Identifying Transactions That Are Not
          Orderly" ("FSP FAS 157-4"). FSP FAS 157-4 provides additional guidance
          for estimating fair value measurements in accordance with FASB
          Statement No. 157 when there is not an active market or where the
          price inputs being used represent distressed sales. FSP FAS 157-4
          provides additional guidance on the major categories for which equity
          and debt securities disclosures are to be presented and amends the
          disclosure requirements of FASB Statement No. 157 to require
          disclosure in interim and annual periods of the inputs and valuation
          technique(s) used to measure fair value and a discussion of changes in
          valuation techniques and related inputs, if any, during the period.
          FSP FAS 157-4 shall be applied prospectively and is effective for
          interim and annual reporting periods ending after June 15, 2009, with
          early adoption permitted for periods ending after March 15, 2009. An
          entity early adopting this FSP must also early adopt FSP No. FAS 115-2
          and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
          Impairment ("FSP FAS 115-2 and FAS 124-2"). The Bank believes that the
          adoption of FSP FAS 157-4 will not have a material impact on the
          Bank's financial position, results of operations and cash flows.

     7.   In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP
          amends SFAS 115, "Accounting for Certain Investments in Debt and
          Equity Securities," SFAS 124, "Accounting for Certain Investments Held
          by Not-for-Profit Organizations," and EITF Issue No. 99-20,
          "Recognition of Interest Income and Impairment on Purchased Beneficial
          Interests and Beneficial Interests That Continue to Be Held by a
          Transferor in Securitized Financial Assets," to make the
          other-than-temporary impairments guidance more operational and to
          improve the presentation of other-than-temporary impairments in the
          financial statements. This FSP will replace the existing requirement
          that the entity's management assert it has both the intent and ability
          to hold an impaired debt security until recovery with a requirement
          that management assert it does not have the intent to sell the
          security, and it is more likely than not it will not have to sell the
          security before recovery of its cost basis. This FSP provides
          increased disclosure about the credit and noncredit components of
          impaired debt securities that are not expected to be sold and also
          requires increased and more frequent disclosures regarding expected
          cash flows, credit losses, and an aging of securities with unrealized
          losses. Although this FSP does not result in a change in the carrying
          amount of debt securities, it does require that the portion of an
          other-than-temporary impairment not related to a credit loss for a
          held-to-maturity security be recognized in a new category of other
          comprehensive income and be amortized over the remaining life of the
          debt security as an increase in the carrying value of the security.
          This FSP shall be effective for interim and annual periods ending
          after June 15, 2009, with early adoption permitted for periods ending
          after March 15, 2009. An entity may early adopt this FSP only if it
          also elects to early adopt FSP FAS 157-4. Also, if an entity elects to
          early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1, the
          entity also is required to early adopt this FSP. The Bank believes
          that the adoption of FSP FAS 115-2 and FAS 124-2 will not have a
          material impact on the Bank's financial statements.


                                     F - 96`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 33 - SUBSEQUENT EVENTS

     A.   THE COMPROMISE AND ARRANGEMENT PLAN PURSUANT TO ARTICLE 350 OF THE
          COMPANIES LAW - 1999 BETWEEN THE BANK AND ITS SHAREHOLDERS ("THE
          ARRANGEMENT PLAN")

          Further to the court's approval of the Arrangement Plan, on April 6,
          2009 the Government Companies Authority issued a notice on behalf of
          the Israeli Government whereby those parties interested in purchasing
          the entire issued share capital of the Bank were invited to apply to
          the Government Companies Authority in accordance with the stipulations
          of the notice and the sale procedure that had also been issued by the
          Authority at the same time. The date set in the notice for submission
          of applications by interested parties was May 21, 2009. According to
          the notification sent to the Bank by the Authority on May 21, 2009,
          applications were received by the Authority from five parties that
          expressed an interest in participating in the sale process of the
          shares of the Bank. According to the sale procedure that was issued by
          the Authority, the Data Room - where those parties who were invited to
          participate in the second phase of the sale process may review the
          Bank's documents - was opened on July 12, 2009.

     B.   LOANS OF THE BANK TO THE ISRAEL ELECTRIC COMPANY LTD.

          During 1990's the Bank granted loans to the Israel Electric Company
          Ltd. ("the Electric Company") in a total amount of 1.5 billion Dollars
          guaranteed by the State of Israel and from deposits in said amount
          deposited by the State with the Bank. The loans and deposits carry
          identical terms (except for the Bank's margin) back-to-back. The
          balance of these loans and deposits as of March 31, 2009 was
          approximately 1.2 billion Dollars (approximately NIS 5.12 billion).
          Within the framework of the above Arrangement Plan between the Bank
          and its shareholders, it was established that if the sale of the
          Bank's shares according to the Plan was consummated, these loans and
          deposits would be assigned to the State or to a party as the State
          instructs. The State approached the Bank requesting to modify the
          manner in which the loans of the Electric Company are secured to the
          Bank, so that instead of their being secured by a State guarantee it
          would be agreed between the State and the Bank that the loans would
          become loans "at the risk" of the deposits that were the source for
          providing the loans, in such a manner that the Bank would be obliged
          to pay the deposits to the State only if the Electric Company will pay
          its loans to the Bank. The State falls under the definition of "a
          controlling shareholder" of the Bank according to Section 268 of the
          Companies Law - 1999. On June 14, 2009 the Bank's Board of Directors
          deliberated the approval of the requested modification, after it was
          presented with a legal opinion stating that the modification should
          not be deemed an "extraordinary transaction" which also requires the
          approval of the Audit Committee and the General Meeting. In light of
          the opinion and after the Board was satisfied that this is a technical
          modification which is not detrimental to the Bank and that essentially
          the loans remain loans not within the risk of the Bank but rather at
          or within the full risk of the State, as they were to date, the Board
          of Directors approved the requested modification and a document to
          that effect was signed between the Bank and the State. Following the
          above modification there may be a change in the accounting
          presentation of the loans and the deposits that were the source for
          the loans. Pursuant to the public reporting directives published by
          the Supervisor of the Banks and which are still applicable to the
          Bank, if the payment of deposits to a depositor is conditioned on the
          extent of the collection of credit and the banking entity has no risk
          of loss from the credit, they should be set-off against each other and
          presented in a net amount in the balance sheet. The Bank still needs
          to receive the position of the Supervisor of the Banks regarding the
          applicability of this directive. If in fact the directive will be
          applicable, this will mean that the loans to the Electric Company and
          the deposits which were the source of the loans will not be included
          in the Bank's balance sheet, and the reference to them will be given
          within the framework of the Note for Contingent Liabilities and
          Special Commitments.


                                     F - 97`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

NOTE 33 - SUBSEQUENT EVENTS (CONT'D)

     C.   UNDERSTANDINGS WITH THE MINISTRY OF FINANCE REGARDING THE ASSIGNMENT
          OF THE LOANS OF THE BANK TO THE ISRAEL ELECTRIC COMPANY, THE EARLY
          REPAYMENT OF THE STATE'S DEPOSITS WITH THE BANK AND THE SETTLING OF
          RECIPROCAL FINANCIAL CLAIMS BETWEEN THE BANK AND THE STATE OF ISRAEL

          In light of the possible privatization of the Bank, the Bank and the
          Ministry of Finance held discussions regarding the payment of the
          deposits of the State of Israel with the Bank and regarding settling
          reciprocal financial claims between the Bank and the State. As a
          result of these discussions, on June 29, 2009 a protocol was signed,
          summarizing the discussions between the Bank and the Ministry of
          Finance (the Office of the Accountant-General) according to which: 1)
          Loans of the Bank to the Israel Electric Company (whose balance as of
          March 31, 2009 was approximately NIS 5.12 billion, equal to approx.
          $1.2 billion) and the deposits of the State with the Bank that were
          the source for these loans shall be assigned to the State while paying
          compensation to the Bank in the amount of NIS 500,000 (approx.
          $125,000) for loss of margin; 2) The Bank will make an early-repayment
          of the deposits that the State deposited with the Bank in connection
          with arrangements in the agricultural sector (as of March 31, 2009,
          approximately NIS 214 million, equal to approx. $53 million) and of
          the deposits that the State deposited with the Bank from monies that
          it raised with the guarantee of the American government (as of March
          31, 2009, approximately NIS 105 million, equal to approx. $26
          million), while paying an early-payment fee by the Bank of NIS 5
          million (approx. $1.2 million); 3) The bank shall pay to the State NIS
          12.5 million (approx. $3.1 million) to settle reciprocal claims
          between the Bank and the State in connection with credits that the
          Bank granted in the past "at the risk", in full or in part, of the
          State and for the assignment to the Bank of the right to the balance
          of the collection of these credits; 4) The State shall pay to the Bank
          NIS 8.1 million (approx. $2 million) for the handling of credits that
          it granted in the past "at the risk" of the State and for the share of
          the State in the expenses of the handling of securities of the Bank
          whose consideration was deposited with the Ministry of Finance; 5) The
          Bank shall return to the State the sum of NIS 8.6 million (approx.
          $2.1 million) for tax advances that were returned to the Bank and
          which the Bank paid, with financing from the State, for interest on
          its perpetual deposits with the Ministry of Finance.

          According to the above, in addition to the return to the State of the
          balance of its deposits with the Bank (at their value on the date of
          return), the Bank shall pay to the State for the above reciprocal
          calculations (including the early-payment fee and including for the
          right to the balance of the collections of the credits presently "at
          the risk" of the Ministry of Finance), the sum of NIS 17.5 million
          (approx. $4.3 million).

          The purpose of the above understandings is to settle the reciprocal
          claims and to close the accounting between the Bank and the State for
          various items, and thus also simplify and clarify the relationship
          between the Bank and the State prior to the expected privatization of
          the Bank.

          The summary of the discussions points out that the understandings are
          subject to the approval of all of the required parties in the Office
          of the Accountant-General and the approval of the organs of the Bank,
          including its General Meeting.


                                     F - 98`

`The Industrial Development Bank of Israel Limited

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------------------------

          The State is a "controlling party" of the Bank, as this term is
          defined in Article 268 of the Companies Law - 1999, and therefore the
          content of the summary of the discussions requires as far as the Bank
          is concerned the approval of the Audit Committee, the Board of
          Directors and the General Meeting of the Bank, in this order. On
          September 8, 2009, the Audit Committee and the Board of Directors gave
          their approval of the above understandings. The General Meeting of the
          Bank approved the understandings on October 14, 2009.

          The summary of the discussions stipulates that after the receipt of
          the required approvals, an agreement shall be signed between the Bank
          and the State based upon and in accordance with the summary and then
          it will be implemented.

     D.   A CUSTOMER OF THE BANK FILED A SUIT AGAINST THE BANK FOR AN AMOUNT OF
          NIS 10 MILLION

          On August 24, 2009, a customer of the Bank filed a suit in the Haifa
          District Court for an amount of NIS 10 million. The plaintiff
          purchased, along with another individual, part of a building project
          that the Bank financed. The purchase was from the receiver of the
          project, who was appointed pursuant to the Bank's application to the
          court. The Bank granted a loan to the plaintiff and the other
          purchaser to finance the purchase from the receiver. The plaintiff and
          the other purchaser did not make timely payments of the loan and the
          Bank demanded immediate re-payment of the loan. In response, the
          plaintiff rescinded the purchase agreement between him and the
          receiver regarding the parts of the project purchased by him and the
          other purchaser. The suit was filed against the Bank and the receiver
          and against the other purchaser (borrower). In the suit, the plaintiff
          claims, among other things, that he was not provided with tax
          certificates required in order to transfer the rights in the parts of
          the project purchased by him and the additional purchaser with the
          Land Registrar, that this is a material breach of the purchase
          agreement between him and the receiver and therefore his rescission of
          the agreement was lawfully proper. In his suit, the plaintiff
          estimates his damages at approximately NIS 40 million, sets them off
          against the balance of his debt to the Bank - according to his claim,
          in the amount of approximately NIS 7 million - and fixes his claim,
          after the set-off and for the purpose of the court fee, at NIS 10
          million. The Bank rejects the claim and has transferred the handling
          of the suit to its attorneys.


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