SECURITIES AND EXCHANGE COMMISSION

                                    FORM 20-F

                 ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2005

                         Commission file number 2-41957

                         ISRAEL BANK OF AGRICULTURE LTD.
             (Exact name of registrant as specified in its charter)

                     83 Hashmonaim Street, Tel Aviv, Israel
                    (Address of principal executive offices)

           Securities registered pursuant to Section 12(b) of the Act:

                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:

                                      NONE

 Securities for which there is a reporting obligation pursuant to Section 15(d)
                                   of the Act:

7.5% Cumulative Redeemable Preference "C" shares linked to the U.S. Dollar.
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.

<TABLE>
<S>                                                                       <C>
Ordinary shares of NIS 0.0001                                             135,050,000
     8% Cumulative and Participating Preference "A" Shares of NIS 0.001   195,768,412
     7.5% Cumulative Redeemable Preference "C" Shares of NIS 0.042
     linked to the U.S. Dollar                                                250,000
</TABLE>

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|

Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

    Yes |X|                            No |_|

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

   Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer  |X|

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

    Item 17  |X|                                         Item 18  |_|

If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>

PART I                                                                                    Pages
------                                                                                   -------
<S>         <C>                                                                            <C>
Item 1      Identity of Directors, Senior Management and Advisors                           3
Item 2      Offer Statistics and Expected Timetable                                         3
Item 3      Key Information:                                                                3
            A.   Selected Financial Data
            B.   Capitalization and Indebtedness
            C.   Reasons for the Offer and Use of Proceeds D. Risk Factors
Item 4      Information on the Company:                                                     6
Item 4A     Unresolved Staff Comments                                                       9
            A.   History and Development of the Company
            B.   Business Overview
            C.   Property, Plants and Equipment
            D.   Unresolved staff comments

Item 5      Operating and Financial Review and Prospects                                   10
            A.   Business Policy
            B.   Liquidity and Capital Resources
            C.   Loss recognition of doubtful debts
            D.   Income recognition on loans
            E.   Loan restructuring gains or losses
            F.   Results of operations
            G.   Shareholders' equity
            H.   Principal Balance Sheet items
            I.   Investee companies
            J.   Critical Accounting Policies
            k.   Trend information
            L.   Off- Balance Sheet Arrangements
            M.   Aggregate Contractual Obligations
Item 6      Directors, Senior Management and Employees                                     16
            A.   Board of Directors
            B.   Bank's Management
            C.   Personnel
Item 7      Major Shareholders and Related Party Transactions                              18
Item 8      Financial Information                                                          18
Item 9      The Offer and Listing                                                          18
Item 10     Additional Information                                                         18
            A.   Share Capital
            B.   Material Contracts
            C.   Exchange Controls
            D.   Taxation
            E.   Dividend and Paying Agents
            F.   Statement by Experts
            G.   Documents on Display
            H.   Subsidiary Information
Item 11     Quantitative and Qualitative Disclosure about Market Risks                     23
Item 12     Description of Securities Other Than Equity Securities                         24

PART II
Item 13     Defaults, Dividend Arrearages and Delinquencies                                25
Item 14     Material Modifications to the Rights of Security Holders and Use of Proceeds   25
Item 15     Controls and procedures                                                        25
Item 16     Reserved                                                                       25
Item 16A    Audit Committee Financial Expert                                               25
Item 16B    Code of ethics                                                                 25
Item 16C    Principal accountant fees and services                                         25
PART III
Item 17     Financial Statements                                                           26
Item 18     Exhibits                                                                       26
Item 19     Signatures                                                                     26
            Certifications
</TABLE>


                                       -2-
<PAGE>

                                    FORM 20-F

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

            Financial data which  highlight  certain  significant  trends in the
            registrant's  financial  condition  and  results of  operations,  as
            presented on the adjusted basis (index  December 1987) and from 2004
            in reported amounts - see note 1C to the financial statements:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                 ----------------------------------------------------
                                                   2005       2004       2003       2002       2001
                                                 --------   --------   --------   --------   --------
<S>                                               <C>        <C>        <C>        <C>        <C>
            Rate of Exchange -
                         1US$ = NIS                 4.603      4.308      4.379      4.737      4.416

            Consumer Price Index (points)         448.87     437.56     432.34     440.65     413.77

<CAPTION>

                                                      Reported                    Adjusted
                                                       amounts                    amounts
                                                 -------------------   ------------------------------
<S>                                               <C>        <C>        <C>        <C>        <C>
            ASSETS

            Cash in hand and deposits with
                         Banks                     62,321     56,421     38,586     57,637     35,343

            Credit to the public                  238,590    238,372    251,618    278,078    323,694

            Credit to the Government of Israel     16,065     22,122     29,839     30,159     25,459

            Investment in affiliate                 1,032      1,058      1,025        969        951

            Bank premises and equipment               265        299        343        375        329

            Other assets                            3,309      2,192      2,118      1,629      1,505
                                                 --------   --------   --------   --------   --------

            Total assets                          321,582    320,464    323,529    368,847    387,281
                                                 ========   ========   ========   ========   ========
</TABLE>


                                      -3-
<PAGE>

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                December 31,
                                                      --------------------------------------------------------------
                                                         2005          2004          2003        2002        2001
                                                      ----------    ----------    ----------    --------    --------
                                                          Reported amounts                  Adjusted amounts
                                                      ------------------------    ----------------------------------
<S>                                                   <C>           <C>           <C>           <C>         <C>
Deposits from the public                                      50           880         1,022       1,077       1,834
Deposits from the Government
             of Israel                                   456,047       443,316       438,291     436,946     440,144
Other liabilities                                          7,419         7,568         7,930       7,442       7,963
           Deferred deposits from the
             Government of Israel                      1,110,235       991,919       895,672     799,118     743,838
Deferred capital notes
             Held by the public                               --            --            --      39,435      39,387
             Held by the Government                       78,891        73,835        75,052      79,602      78,792
Non-participating preference
             shares                                           11            11            11          11          12
Shareholders' deficiency                              (1,331,071)   (1,197,065)   (1,094,449)   (994,784)   (924,689)
                                                      ----------    ----------    ----------    --------    --------

Total liabilities and shareholders' equity               321,582       320,464       323,529     368,847     387,281
                                                      ==========    ==========    ==========    ========    ========

LOSS FROM FINANCING ACTIVITIES
      Loss from financing activities before
           allowance for doubtful debts:
                 Interest expense                       (157,230)     (122,568)     (118,202)    (82,106)    (96,012)
             Interest income                              32,039        28,508        31,143      20,238      23,051
                                                      ----------    ----------    ----------    --------    --------
                                                        (125,191)      (94,060)      (87,059)    (61,868)    (72,961)
           Increase in allowance for doubtful debts           --            --        (3,500)         --      (6,269)
                                                      ----------    ----------    ----------    --------    --------
           Loss from financing activities after
             allowance for doubtful debts               (125,191)      (94,060)      (90,559)    (61,868)    (79,230)
                                                      ==========    ==========    ==========    ========    ========
Net loss for the year                                   (134,006)     (102,616)      (99,665)    (70,095)    (88,569)
                                                      ==========    ==========    ==========    ========    ========
Net loss per ordinary share

Loss per NIS 1 nominal value
      of share capital                                   (640.20)      (490.30)      (476.20)    (334.90)    (423.20)
                                                      ==========    ==========    ==========    ========    ========
</TABLE>


                                      -4-
<PAGE>

Share Capital

Share capital of the Bank (in nominal values)

<TABLE>
<CAPTION>
                                                                December 31,
                                                         -------------------------
                                                             2005         2004
                                                         -----------   -----------
                                            Authorized    Issued and Outstanding
                                           ------------  -------------------------
                                                             NIS
                                           ---------------------------------------
<S>                                            <C>           <C>           <C>
Ordinary Shares of NIS 0.0001                   37,970        13,505        13,505

8% Cumulative and Participating
Preferred "A" Shares of NIS 0.001              201,530       195,768       195,768

7.5% Cumulative and Redeemable
Preferred "C" Shares of of NIS 0.042,
linked to the U.S. dollar (see d. below)        10,500        10,500        10,500
                                           -----------   -----------   -----------

                                               250,000       219,773       219,773
                                           ===========   ===========   ===========
</TABLE>

B.    CAPITALIZATION AND INDEBTEDNESS - Not applicable

C.    REASONS FOR THE OFFER AND USE OF PROCEEDS - Not applicable

D.    RISK FACTORS

      Since  the  Bank  is not  involved  in  granting  credit,  but  rather  in
      collecting  debts  from the  agricultural  sector in  respect to the loans
      extended in the past,  it does not have any risk in respect to new credit.
      The existing  debts are collected  according to the  arrangements  reached
      among the various banks and the  agricultural  sector.  There are concerns
      with respect to the credit, that the state of the economy will also effect
      the agricultural sector and the possibility of its meeting the payments in
      accordance with the aforesaid  arrangements.  For more with respect to the
      Bank's activities, see also Item 11.


                                      -5-
<PAGE>

            ITEM 4. INFORMATION ON THE COMPANY

                 A. HISTORY AND DEVELOPMENT OF THE COMPANY

      The Bank was incorporated on April 24, 1951. The Bank was organized and is
      owned by the Government of Israel, which supplied the original capital, to
      serve as an instrument to encourage and assist agricultural development in
      the State of Israel.

      In the mid-nineteen  eighties,  the agricultural  sector started investing
      large amounts in industrial  plants,  in the expansion of existing  plants
      and in better living conditions for its inhabitants.

      For those purposes,  loans were borrowed from banks, bearing real interest
      (interest  in excess of the change in the  Consumer  Price  Index),  which
      sometimes exceeded 10% annually.

      In addition,  the Bank of Israel's  monetary policy,  since 1985, has kept
      flat the  rate of  exchange  of  foreign  currencies,  and the rise in the
      Consumer Price Index was halted to a slow pace, thus causing  reduction in
      the selling prices  collected by the agricultural  sector,  which made the
      inhabitants' repaying ability meager.

      These   conditions   resulted  in  heavy  losses  and  insolvency  in  the
      agricultural sector, affecting banks' loan collecting ability.

      Over the years of its existence, the Bank has provided traditional banking
      services to its  agricultural  customers.  However,  due to the  financial
      crisis prevailing in the agricultural sector in recent years, as described
      in the preceding  paragraphs,  it was decided to considerably  curtail the
      activities of the Bank,  the said  decision  having been taken on December
      11, 1991.

      On  March  31,  2005 the  Governor  of the Bank of  Israel  announced  the
      cancellation  of the  license of the Bank as of April 1,  2005,  and as of
      August 1, 2005,  its name was stricken from the list of the  membership in
      the Bank of Israel clearing-house.

      According to article 9 of the Banking law (license), a banking corporation
      of which the license was  cancelled,  will remain for the  purposes of the
      Banking Order and Bank of Israel law as a banking  corporation for 3 years
      as of the cancellation of the license.

      On  September  4, 2005,  it was resolved in the  Ministers  Committee  for
      Privatization  to privatize the bank. The main details of the decision are
      as follows:

      a)    Selling or transferring  the essential  assets of the bank including
            the credit portfolio, real estate rights and shares in affiliate.

      b)    To authorize the Accountant  General and the Company's  Authority to
            act in this  matter and to  reorganize  the debts of the bank to the
            government by allocation of shares.

      c)    Preferred  shares which were  allocated  will be  transferred to the
            Accountant  General  for  redemption  of the  shares  and  until the
            transferring date the matter will be treated by the bank.

      d)    After the  completion  of the above  actions to act to liquidate the
            bank  (voluntarily).  Surplus  funds  will  be  transferred  to  the
            shareholders

B.    BUSINESS OVERVIEW
      Background Information
      Hebrew Terms:

      "Kibbutz"  -      Cooperative agricultural settlement. Plural: "Kibbutzim"

      "Moshav"   -      Village of family agricultural units. Plural: "Moshavim"

      "Balloon"  -      Any amount from the debt of Kibbutz or a Company which
                        they are unable to repay in accordance with their
                        repayment ability.

      "ILA"      -      Israel Land Administration.

      Pursuant to an agreement between the Finance Ministry, the representatives
      of the Kibbutzim  and the banks,  the  Government of Israel  instituted an
      "Arrangement  Administration"  (the  Administration)  to  solve  the  debt
      arrears of the Kibbutzim to the banks. The said Administration carried out
      a survey of the overall indebtedness of each Kibbutz to all the banks.


                                      -6-
<PAGE>

      The Administration accordingly classified the amounts of loans owed by the
      Kibbutzim into three categories:

      Category 1:

      Amounts  recoverable  according to the assessment by the Administration of
      the repayment ability of each Kibbutz. These amounts are to be rescheduled
      into new long-term loans at market terms. The Government  placed long term
      deposits with the banks at similar terms,  to be used for the financing of
      the said new long-term loans to be extended by the banks to the Kibbutzim,
      upon restructure of the impaired loans.

      Category 2:

      Amounts  to be  borne by the  Government.  These  amounts  are paid by the
      Government directly to the banks, by the way of "grants" to the respective
      Kibbutzim, in partial settlement of the impaired loans.

      Category 3:

      The remainder - to be written off and borne by the banks.  Allowances were
      recognized  by the Bank in prior years for the amounts to be written  off,
      and were carried as losses to income.

      As stated in note 3E to the financial statements,  the Law of Arrangements
      in the Family  Agricultural Sector was enacted in 1992, for the purpose of
      solving the indebtedness of the Moshavim to the various banks.

      On January 28, 1992, a Deposit  Agreement was signed  between the Bank and
      the  Government  of Israel.  The Deposit  Agreement  is a component of the
      arrangements to secure the financing of the Bank's  operations  within the
      framework of the arrangements of the agricultural sector's indebtedness to
      banks. In accordance with this agreement, the Government agreed to convert
      NIS 180  million  deposited  with  the Bank to  three  deferred  deposits,
      deferred to  December  31,  1999,  as  explained  in Note 1A and 11 to the
      financial statements.

      In  accordance  with the Deposit  Agreement,  the Bank agreed not to grant
      loans in excess of what it is obligated  to grant in the  framework of the
      arrangements  with the  agricultural  sector,  and in excess of what it is
      obligated to grant to its existing customers.  If there will be additional
      obligations in the framework of further  arrangements in the  agricultural
      sector,  these will be given only after  authorization by the ministers in
      charge, in coordination with the Bank of Israel. The Bank will concentrate
      its major  efforts in the  collection  of loans which were  granted to the
      agricultural  sector,  and will not expand the scope of deposits  from the
      public.  Any renewal of existing  deposits from the public will be done in
      coordination with the Bank of Israel.

      On January 31, 1992, the Bank of Israel  notified the Bank that further to
      the deposit  agreement with the  Government of Israel,  the Bank of Israel
      will make available to the Bank special credit facilities,  subject to the
      terms set below:

      The Bank will not expand the scope of deposits raised from the public, and
      will not renew existing deposits until determined otherwise.

      The  special  credit  facilities  which  the  Bank  of  Israel  is to make
      available to the Bank will be used only for  carrying out its  obligations
      to depositors,  and for financing  current operating  expenses  (salaries,
      maintenance, etc.). The granting of new loans to customers of the Bank, in
      the framework of further  arrangements in the agricultural sector, will be
      carried out only after  authorization  by the ministers in charge,  and in
      coordination with the Bank of Israel,  according to the guidelines set out
      above.

      The Bank is a Government-owned  company The arrangements described in Note
      1A(2) to the financial statements, are specifically intended to enable the
      Bank to  proceed  with  its  business,  namely  - its  operations  for the
      collection of the loans.  However,  in the case of  liquidation,  the Bank
      will repay these special credit  facilities  only after repaying  deposits
      from the public,  from other banks,  and any remaining  liabilities to the
      public, the employees of the Bank, and Government deposits.

      Should the Bank not carry out the above terms, all of these special credit
      facilities will then be immediately due and repayable.


                                      -7-
<PAGE>

      The credit  facilities and interest  thereon will be linked to the Israeli
      Consumer Price Index.  A guarantee of the complete and total  repayment of
      funds  granted or to be  granted by the Bank of Israel  from time to time,
      including  monetary  deposits of the Bank of Israel with the Bank, as they
      currently exist, or may exist in the future,  the Bank signed a debenture,
      on January  10,  1992,  collateralizing  its loan  portfolio  by a primary
      floating charge.

      Toward the end of 2000,  the Bank did not have a debt  balance  toward the
      Bank of Israel.  In a letter to the Bank dated  December 6, 2000, the Bank
      of Israel gave notice that it is ceasing to extend  current  credit to the
      Bank.

      In  addition,  the  Bank of  Israel  gave  notice  that it will act at the
      earliest convenience to eliminate the floating charge on the Bank's credit
      portfolio and, indeed, the floating charge was eliminated in January 2001.

      Since the Bank does not have any credit  sources as it had in the past, in
      the event it may require  short-term  bridge loans, the Bank may be forced
      to defer  payments  to the  Government  for those same  periods of time in
      accordance with the pace of its collections.

      In the  opinion of the Bank's  management,  the cash and cash  equivalents
      balance as of December 31, 2005 and the current collection  anticipated in
      2006 from the payment arrangement with the moshavim and the kibbutzim will
      allow  the Bank in  2006,  subject  to what is  stated  above,  to pay the
      ongoing operating expenses (primarily salaries) and make interest payments
      to the Government.

      Effective May 10, 1992 trading in the Bank's "A" and "C" preferred shares,
      and in its deferred  capital notes, was discontinued on the Tel-Aviv Stock
      Exchange,  and on January  31,  1993 the  aforementioned  securities  were
      unlisted.  The  discontinuance  of trading,  and later the unlisting  were
      decided upon due to the difficulties encountered in trading the securities
      and due to the Bank's deficit.

      In prior years, the Bank reduced its manpower quota in accordance with its
      requirements.  At the  present  time,  the number of  employees  currently
      employed by the Bank is appropriate for its needs.

      Nature of trading market

(a)   The following securities of the Bank were traded in the United States, and
      to the best of our knowledge,  according to the clarifications made, there
      is no trading in the Bank  shares.  Since there is no trading in the above
      shares,  the State of Israel is purchasing  the shares from the vendors at
      90% of their nominal value.

      Trade was affected through a United States Nominee:

      250,000 - 7.5% Cumulative  Redeemable  Preference "C" shares linked to the
      dollar (Nominee: Mellon Investor services LLC, New York).

(b)   The 8% Cumulative  and  Participating  Preference  "A" shares and the 7.5%
      Cumulative  Redeemable  Preference  "C" Shares were quoted on the Tel Aviv
      Stock Exchange.  On April 30, 1992, the Board of Directors of the Tel Aviv
      Stock  Exchange  resolved to cease  trading of the  securities of the Bank
      until such time when conditions  permitted  continuation  of trading.  The
      securities  were  de-listed  on January 31, 1993.  Before that date,  four
      trading days took place, from January 25 to January 28, 1993.  Appropriate
      notices were mailed to holders in Israel and abroad.

(c)   Dividend to the shareholders of Preferred A and C shares:


                                      -8-
<PAGE>

      Pursuant to the Companies Law, the prospectuses and the Banks'  Memorandum
      and Articles of  Incorporation,  a dividend may only be  distributed  from
      earnings.

      In spite of the losses which the Bank  accumulated  during recent years, a
      dividend was paid to the shareholders of Preferred A and C shares referred
      to  above,  subject  to  the  approval  of the  Board  of  Directors,  the
      Government  Companies  Authority,  and based on legal opinions obtained in
      1986 and 1987.  The  amount of the  aforementioned  dividend  paid in 1998
      amounted to NIS 7,367 thousand,  where approximately NIS 2 thousand was at
      the expense of the Bank and the  balance at the expense of the  Government
      in the context of the exchange rate  insurance,  to which it was committed
      in the issuance prospectus for the Preferred C shares.

      Over the years, the Government has become the principal shareholder (as of
      December  31,  2005:  Preferred  A shares - 99.52%,  Preferred  C shares -
      93.5%) and, in any case, it is entitled to receive the greater part of the
      dividend. For several years, there is an arrangement pursuant to which the
      Government purchases Preferred C shares from those who are willing to sell
      them.

      On July 27, 1999,  the Board of Directors  decided on the basis of a legal
      opinion  it  obtained  to cease  paying  the  dividend.  A report  on this
      development was  communicated to the Accountant  General and the Companies
      Authority.

      The Bank did not  record a  liability  with  respect  to the  accumulative
      dividend, since its distribution is dependent on:

      a.    The  existence of earnings (in other words,  the  distribution  of a
            dividend will not be contrary to the Companies Law);

      b.    According to a decision of the Board of Directors.

      The accumulative  dividend which was not paid in respect to the years 1999
      - 2005 amounted to NIS 60,524 thousand. In addition, there is a commitment
      on the part of the  Treasury  of the State of Israel to cover the  linkage
      differences  included  in the above  amount  which  amounted to NIS 60,409
      thousand.

C.    PROPERTY, PLANTS AND EQUIPMENT

      The  Bank's  offices  are owned by it, and are  located  at 83  Hashmonaim
      Street,  a prominent  business  center in Tel-Aviv.  These offices are too
      large for the Bank's present needs, and a portion of the building has been
      leased.

                                                               Square
                                                               Meters
                                                              --------

      Total space owned by the Bank                             2,619
                                                                =====
      Occupied by the Bank (inc. 243 sq/m of public space)      1,157

      Space for rent                                            1,462
                                                                -----
                                                                2,619
                                                                =====

            ITEM 4A. UNRESOLVED STAFF COMMENTS
            The subsidiary audit opinion will be sent subsequently.


                                      -9-
<PAGE>

            ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

            Business Policy

       In the reported period, the Bank continued to implement the prescribed
       policy (see notes 1A and 11 to the annual financial statements) whereby
       the Bank:

o     Granted loans only for  settlement  of debts,  within the framework of the
      Arrangement in the agricultural sector.

o     Collected loans, intensively using means of enforcement at its disposal.

      On April 20,  1993,  the Bank  received  notice  from the Bank of  Israel,
      limiting its banking permit to the activities described above.

      In view  of the  above  described  prescribed  policy,  whereby  the  Bank
      refrains  from  extending  loans,  except  for  those  stemming  from  its
      obligations  under the  Arrangements,  and from taking  deposits  from the
      public,  the Bank of  Israel  has  exempted  the Bank from  reporting  the
      following:

o     Rates of income and expense.

o     Exposure to fluctuations in interest rates.

o     Breakdown of assets and liabilities according to linkage basis.

o     Assets and liabilities according to linkage bases and repayment periods.

o     Fair value of financial instruments.

o     Disclosure  of the effect of the  differences  between the increase in the
      CPI according to which the  financial  statements  are  adjusted,  and the
      increase in the CPI according to which the loans are adjusted (the CPI for
      the prior month).

o     Exposure to market risks and how to manage them.

      The Bank of  Israel  has also  exempted  the Bank  from  implementing  the
      directive in respect of the setting off of those designated deposits,  the
      repayment of which to  depositors  is dependent  upon the extent of credit
      collected from the public.

      Liquidity and Capital Resources

      On January 31, 1992, the Bank of Israel  notified the Bank that further to
      the Deposit  Agreement with the  Government of Israel,  the Bank of Israel
      will make available to the Bank special credit facilities,  subject to the
      terms set out below:

      The Bank will not expand the scope of deposits raised from the public, and
      will not renew existing deposits until determined otherwise.

      The special credit facilities which the Bank of Israel will make available
      to the  Bank  will be used  only  for  carrying  out  its  obligations  to
      depositors,  and  for  financing  current  operating  expenses  (salaries,
      maintenance,  etc.). The granting of new loans to customers of the Bank in
      the framework of comprehensive  arrangements in the  agricultural  sector,
      will be carried out only after authorization by the responsible ministers,
      and in coordination with the Bank Israel.

      In  case  of  dissolution,  the  Bank  will  repay  these  special  credit
      facilities  after repaying  deposits from the public,  from banks, and the
      other remaining  liabilities to the public, the employees of the Bank, and
      Government deposits.

      Should the Bank not carry out the above terms, all of these special credit
      facilities will then be immediately repayable.


                                      -10-
<PAGE>

      The credit  facilities and interest  thereon will be linked to the Israeli
      Consumer Price Index.  As a guarantee for the complete and total repayment
      of the credit granted and/or to be granted by the Bank of Israel from time
      to time,  including monetary deposits of the Bank of Israel with the Bank,
      as they  currently  exist,  or may exist in the future,  the Bank signed a
      debenture, on January 10, 1992,  collateralizing its credit portfolio by a
      senior in priority floating charge.

      Toward the end of 2000,  the Bank did not have a debt  balance  toward the
      Bank of Israel.  In a letter to the Bank dated  December 6, 2000, the Bank
      of Israel gave notice that it is ceasing to extend  current  credit to the
      Bank.

      In addition,  the Bank of Israel  eliminated  the  floating  charge on the
      Bank's credit portfolio.

      Since the Bank does not have any credit  sources as it had in the past, in
      the event it will require  short-term bridge loans, the Bank may be forced
      to defer  payments to the Government for those same periods of time and in
      accordance with the pace of its collections.

      In the  opinion of the Bank's  management,  the cash and cash  equivalents
      balance as of December 31, 2005 and the current collection  anticipated in
      2006 the payment  arrangement  with the  moshavim and the  kibbutzim  will
      allow  the Bank in  2006,  subject  to what is  stated  above,  to pay the
      ongoing operating expenses (primarily salaries) and make interest payments
      to the Government.

Arrangements in the Agricultural Sector

Credit to Moshavim

On March 4, 1992, the Arrangements Law in the Family  Agricultural  Sector, 1992
was enacted.  The ensuing  obligating  regulations were partly determined during
1994. In December 1997, the regulation for the realization of assets,  which are
not agricultural  assets was completed,  including land and which deals with the
modus  operandi  for those  who are  recovering.  Within  the  framework  of the
regulation,  the agriculture assets, which are not realizable,  were temporarily
determined.

The  regulations  not yet amended  refer to the  distributions  of the proceeds,
realization  of  agricultural  assets and  collateral  for the settlement of the
debts. The proposal of the regulations to distribute the proceeds was considered
by several  sessions of the economic  committee  of the Knesset,  and during the
most recent  session held on March 5, 2001,  the members of the committee  voted
against the approval of the  regulations  according to the text submitted by the
ministers.

In the absence of the above regulations, the settlement of debts in this segment
can  only  be  completed  by  a  comprehensive  creditor  arrangement  which  is
acceptable to the Moshav and all the creditors.  Commencing  with the end of the
first  half of  1997,  "wraparound  plans"  which  constitute  the  basis  for a
comprehensive arrangement were formulated.  The sources for that arrangement are
the  members'  debts  and the sale of the  moshav  assets,  mainly  by  extended
appropriation  of residential  plots (in line with  Resolution 737 of the Israel
Land  Administration)  and from changes in the  designation of land initiated by
the  moshav,  according  to  Israel  Land  Administration   (hereinafter  "ILA")
decisions.

These  arrangements  are supposed to make the need to sell  agricultural  assets
superfluous, however at the beginning of 1999, the performance of Resolution 737
of the ILA was frozen,  and since then the issue of the freeing of  agricultural
land has come up for  discussion  over the years in the  committees and in other
contexts.

On August 29, 2002,  the Supreme Court ruled that  decisions  717,727 and 737 of
the ILA are void since  they do not meet the  reasonability  criteria.  However,
this  determination  did not receive immediate force since the decisions concern
numerous  transactions  for  which  the  procedure  in their  respect  and their
economic and social implications are far-reaching.  Therefore,  the Board of the
ILA should have formulated transitional provisions that would determine which of
the transactions  would be carried out. Only on October 2, 2003, the Minister of
Finance signed the  transitional  provisions which were approved by the Board of
the ILA on September 2, 2003.

This  uncertainty,  that has  persisted  since 1999,  inhibits  any  progress in
finalizing  arrangements,  even caused the collapse of arrangements agreed on in
the past and the  search  for new  resources,  among  them  the  linkage  of the
framework of agreements to individual level.


                                      -11-
<PAGE>

Credit to Moshavim (Cont.)

Settlements  which  comply  with the  transitional  provisions  conditions  make
efforts to meet the timetable allotted in the provisions and thereby promote the
repayment of the debts.

On December 19,  2005,  the Minister of Finance and the chairman of the Board of
ILA, Mr. Ehud Olmert  signed the decision of ILA according to which an extension
will be given until December 31, 2006, to execute expansion  transactions in the
Moshavim  in a way which is  designated  to cover  debts  according  to recovery
judgments  on  condition  that the  request to execute the  transaction  will be
submitted  prior to November 30,  2006.  The  condition  for giving an extension
according  to this  decision is the transfer of all the revenue from selling the
lots to the creditors after deducting development expenses.

In the current decision an extension was also granted for executing transactions
according  to  previous  decisions  (727,  717)  according  to the  transitional
provisions  until  December 31, 2006.  On condition of  submitting a request for
execution prior to April 10, 2005.

In the decision it was resolved that no additional  extensions will be given for
the transitional provisions.

On June 6, 2000, an inter-bank agreement was reached for the distribution of the
proceeds,  where until the date of the financial statements,  several additional
creditors  joined  and,  thereby  since  the end of 2001,  it is  slightly  more
possible to promote the  distribution  of the proceeds that were  accumulated at
the administration of arrangements in the agricultural sector.

As of the  date of  these  financial  statements,  there  are  approximately  48
Moshavim in respect of which their debts have not yet been  reorganized,  and 78
settlements  for which  their  debts have been  arranged  according  to recovery
judgments.  In part of them, they are already in stages of being  executed,  and
the proceeds are being  channeled to the creditors or to the Moshav account with
the  Administration  of arrangements in the agricultural  sector,  and there are
moshavim that are not complying with the arrangement and it will be necessary to
deal with alternative arrangements.

During the reported  year, the Bank continued to implement the directives of the
Supervisor  of Banks dated  October 16, 1994,  regarding  the  non-recording  of
interest income  (including  linkage  differentials)  and on that portion of the
moshavim  debt  that has not been  arranged  yet for  which  the  allowance  for
doubtful debts is made on a collective basis.

Credit to the Kibbutzim

On August 15, 1991,  the Bank signed the first  agreement for the  settlement of
the kibbutzim  debts.  On April 5, 1995,  the  Government  decided to approve in
principle   a   supplementary   agreement   to  the   kibbutzim   based  on  the
recommendations  of the Suari Commission and, on March 20, 1996, a supplementary
kibbutzim  agreement  was  reached  between  the  Government,  the  two  kibbutz
movements, Bank Hapoalim and Bank Leumi, with the remaining banks joining on May
6, 1996.

The  supplementary  agreement is intended to resolve the debts of the kibbutzim,
their  companies  and two  regional  organizations  which,  following  the  full
implementation  of the first  agreement,  there is still a debt  which  they are
unable to repay according to their annual repayment power,  ("the Balloon"),  as
well as kibbutzim  regarding which the ratio of their annual  repayment power to
their debt exceeds 10 and they do not have an abundant  amount of property.  The
latter will join the Balloon kibbutzim to receive incentives.  An incentive is a
conditional  debt  annulment  and  will be  extended  upon  the  kibbutz  having
fulfilled  the repayment of the  arrangement  debts over a period of a number of
years.

The origins of the  supplementary  agreement  (including  debts  written off) as
referred to above, are as follows:

-     From the  contribution  made by the banks and the  Government  -  Effected
      through the annulment of the debts by the banks and the Government's  cash
      transfers at a ratio of 65% (banks) and 35%  (Government)  (except for the
      peripheral  kibbutzim  and  "incentive"  kibbutzim,  regarding  which  the
      annulment  of the  debts  by  the  banks  will  be at a  rate  of 75%  and
      Government participation of 25%).


                                      -12-
<PAGE>

Credit to the Kibbutzim (Cont.)

-     From  contributions  by  kibbutzim  entering  the  arrangement  - Effected
      through a waiver of rights to alternatively  designated land which the ILA
      is  interested  in the land  being  returned  to it. The  Government  will
      provide the banks with letters of  commitment  stating the amounts for the
      repayment  of the debts  from the  proceeds  of the sale of the land.  The
      share of each bank in the proceeds will be in proportion to their share in
      the total debt of the kibbutzim to the banks.

The parties  agreed that if a transaction is carried out with respect to kibbutz
real estate, and a first priority mortgage has been imposed over the land in the
bank's favor,  or that it has in respect thereto any lawful other fixed lien, of
a nature and quality identical or similar to the aforementioned  mortgage, there
will be an increase of 20% of the bank's share in the amounts of the  Government
letters of liability and/or the amounts of the financial bank guarantees and the
share  of the  other  banks  in  the  aforementioned  amounts  will  be  reduced
accordingly pari pasu.

In the context of the  supplementary  agreement,  61  kibbutzim  entered and, in
addition, an arrangement was also implemented in the central  organizations.  In
respect to the real estate kibbutzim,  a survey was conducted  pursuant to which
the land for the ILA was  earmarked.  The survey  was  concluded,  however,  the
alternative  value of the land  cannot  be  estimated.  Therefore,  a  financial
alternative  was proposed,  following  which, on April 11, 1999, a supplementary
agreement  (amended) was reached  between the Accountant  General and the banks,
including  the  Bank,  which  became  effective  pursuant  to the  notice of the
director of the Kibbutz  Arrangement  Board on May 25,  1999.

This  alternative  relies on the  separation,  both time-wise and  financially -
between the  arrangement  regarding the "Balloon" and the  realization of land -
the financial  arrangement  regarding the "Balloon" will be executed immediately
with the entrance of the kibbutz to the  arrangement  (65% by debt  annulment by
the banks and 35% from Government  sources).  The treatment of the restored land
will  be  carried  out  after  the  financial  arrangement  is  executed,  while
distributing  the  yields  from  the  change  in  the  designation  between  the
Government and the banks, in proportion to the debt annulment.

At the stage when the kibbutz enters the arrangement, the Government and the ILA
will furnish the banks with an  unlimited  letter of  commitment  which does not
specify an amount,  pursuant to which the ILA  confirms its  agreement  that the
land will be returned to it and  undertakes to only market the land  following a
change in the designation against the receipt of a cash consideration. The banks
will be entitled to record a caveat at the Land Registry  Office with respect to
the aforementioned letter of commitment.

Lately,  the entrance of a Kibbutz to an  arrangement  is executed by individual
arrangement,  which is based on the  principal  of the  supplementary  agreement
(amended) and adjusted to each kibbutz with considering its economic position at
the time of the entrance,  the  financing  sources it has or will have while the
part  of  the  debt  which  exceeds  the  repayment  power  at the  time  of the
arrangement is recorded as a "Deferred debt" without a maturity date and will be
paid off from future property transactions, if any.

As of the signing of the amendment to the supplementary  agreement, a further 43
kibbutzim have entered into the arrangement, among them are peripheral kibbutzim
and  "incentive"  Kibbutzim and 39 kibbutzim  which have been classified as real
estate, and there remain 2 kibbutzim which have not yet joined.

The  "write-off"  in the Bank's books with respect to the "Balloon" for the real
estate kibbutzim  amounts to approximately  NIS 152 million and, in exchange for
the write off of the  "Balloon"  by all of the  banks,  the  kibbutzim  returned
approximately  12,193 sq. meters of land to the ILA and committed to comply with
the  conditions  of  the  supplementary   agreement  should  a  neighborhood  be
established on the kibbutz's section of land. In addition, approximately,  2,537
dunams were expropriated for the purpose of the cross-Israel highway,  where the
indemnification  will  be  transferred  to  the  banks  and  the  Government  in
accordance with the principles of the agreement.


                                      -13-
<PAGE>

Loss recognition of doubtful debts

Allowance for losses on loans to the Moshavim were recognized in prior years, in
accordance with management estimates,  and in concurrence with directives issued
to the banks by the "Bank's Supervisor", a department of the Bank of Israel. The
Bank's  Supervisor has the overall  information of the  indebtedness  to all the
banks in Israel. Total allowance on Moshavim loans amounted on December 31, 2005
to about 90% of the total  amounts  owed by the  Moshavim to the Bank.

Impaired loans to Kibbutzim are carried net of the aforesaid  Government  grants
(see  Category  2 above).  The  reported  net  amounts  represent  the  expected
recoverable  amounts. As explained above, these amounts are to be settled by new
long term loans, to be undertaken by the Kibbutzim (linked to the Consumer Price
Index, and bearing interest,  presently about 4%-5% p.a.).  Thus, as of December
31, 2005, the total amount of loans  outstanding  to Kibbutzim,  net of specific
allowances and of Government "grants",  received to that date amounted to NIS 82
million.

Deposits to finance the said  restructuring  of long-term  loans are financed by
the Government of Israel.

In view of the aforesaid,  loss  recognition on the impaired loans is compatible
with both Israel and U.S. GAAP in terms of "Constant  Shekels"  (Shekel  amounts
adjusted to changes in general  price  level) and from 2004 in reported  amounts
(See note 1C to the financial statements).

Income recognition on loans

Income on non-impaired  loans,  or restructured  loans, is recognized as accrued
according to the contractual respective terms.

In accordance  with the  directives of the Supervisor of Banks dated October 16,
1994, the Bank may not recognize revenues from linkage  differences and interest
with  respect to the debts of Moshavim  which have not yet settled  their debts.
Further,  in accordance with Israeli GAAP, the comparative data in the financial
statements  are presented in terms of adjustment to the Consumer  Price Index as
of balance  sheet date (a  technical  linkage of the  comparative  data was made
according  to the annual  increase  in the  Index) and from 2004 the  adjustment
ceased (See Note 1C to the financial statements).

Subsequent  to the  aforementioned,  there is an erosion in the above  mentioned
debts for the  Moshavim  which have not yet entered into an  arrangement  at the
rate of the increase in the annual Index in prior years. The loss resulting from
this erosion is included in the loss from financing  activities in the statement
of operations in prior years.

Results of Operations

Major factors affecting results of operations in 2005 were:

o     The  non-recognition of interest income (including  linkage) on portion of
      Moshavim debt, as explained above.

o       The high interest rate of the deferred deposits.

o       The high interest rate of the deferred capital notes.

The Bank's  loss from  financing  activities,  before and after  allowances  for
doubtful debts, was nominal NIS 125.2 million in 2005 as compared to nominal NIS
94.1 million in 2004.

The general allowance and the additional  allowance together represent 28.90% of
the borrowers' debt, under the Bank's responsibility, as of December 31, 2005.

In addition to the above  allowances,  the Supervisor of Banks instructed that a
special  allowance  is to be  recorded  not later than  December  31,  2001 in a
cumulative amount which will not be less than the aggregate of the following:

1. 0.5% of the balance of the risk assets as of June 30, 2001.

2. 1% of the balance of the specially supervised debts as of June 30, 2001.

3. 2.5% of the balance  for the  problematic  debts,  net of the balance for the
specially supervised debts as of June 30, 2001.

The special  allowance  amounted to NIS 6 million and will be  maintained in its
nominal amount, subject to the aforesaid.

Operating and other income totaled  nominal NIS 0.5 million in 2005, as compared
to nominal NIS 0.6 million in 2004.


                                      -14-
<PAGE>

Results of Operations (Cont.)

Operating  and net loss in 2005 were NIS 134  million in  reported  amounts,  as
compared to NIS 102.6  million in reported  amounts in 2004.  Net loss per NIS 1
par value  Ordinary and Preference "A" share was NIS 640.2 in 2005 (NIS 490.3 in
2004).

Shareholders' Equity

The  shareholders'  deficiency  increased  from NIS 1,197  million  in  reported
amounts at the end of 2004,  to a deficiency  of NIS 1,331 million at the end of
2005 in reported  amounts.  On December  31,  1991,  Government  deposits in the
amount of NIS 180 million were converted (December 31, 2005 - NIS 1,110 million)
to  deferred  deposits,  while  the  maturity  date for a  portion  thereof  was
determined for January 1, 2000.

The maturity date for the deposits has been postponed  several times pursuant to
an approval  received  from the  Accountant  General.  Pursuant to an additional
extension  which was approved by the Accountant  General on June 4, 2006,  their
maturity date was deferred until July 5, 2006,  among other  purposes,  to allow
the Bank and the  Government,  during the period  until the  maturity  date,  to
formulate  a  detailed  plan  with  respect  to the  manner  for  the  continued
operations of the Bank.

The capital notes are deferred in relation to both secured liabilities and other
liabilities of the Bank,  whose terms  guarantee that they have  preference over
the capital  notes.

Pursuant to the letter from the Treasury dated February 12, 2003,  commencing in
2004,  the Bank will file a request on a quarterly  basis to extend the time for
the payment of the deferred capital notes held by the Government.

On June 4, 2006 the  Accountant  General  approved the extension of the maturity
date to July 5, 2006.

Principal Balance Sheet Items

The  assets  and  liabilities  of the Bank at the end of 2005  and 2004  were as
follows (in thousands of NIS):

                                                       Year ended December 31,
                                                     ---------------------------
                                                       2005              2004
                                                           Reported amounts
                                                     ---------------------------
Total Balance Sheet                                     321,582         320,464
Credit to the Public                                    238,590         238,372
Credit loans to the Government of Israel                 16,065          22,122
Cash and Bank Deposits                                   62,321          56,421
Deposits from the Public                                     50             880
Deposits from the Government                            456,047         443,316
Capital Notes and Deferred Deposits                   1,189,126       1,065,754
Shareholders' Equity (deficit)                       (1,331,071)     (1,197,065)

(*)   Includes  credit for which the  Government is  responsible in an amount of
      142.8  million NIS as the deposits to cover it are included  partly in the
      deposits from the Government and partly in deferred deposits.

Investee Companies

The  Bank's  affiliated   company  -  The  Palestine   Agricultural   Settlement
Association  Ltd. (50% owned by the Bank,  49.9% of voting rights) was involved,
in the  past,  in  financing  activities,  but in  recent  years  has been  only
collecting debts.

The Board of Directors of the  affiliated  company  decided to close the company
and to terminate its activity.  A committee has been  established to examine all
the relevant aspects of this decision.

Critical Accounting policies

Critical  Accounting  Policies refers to the allowance for doubtful  debts.  The
Bank bases its  judgment on the above  allowance on its  experience  and various
assumptions that it believes to be reasonable under the circumstances.  Material
changes  in  the  arrangements  if  any,  are  likely  to  obligate   additional
allowances.  Please refer to Note 1I to the Bank's financial statements included
in this Annual Report on Form 20-F for the year ended December 31, 2005 for more
details.


                                      -15-
<PAGE>

Trend Information

Not Applicable

Off- Balance Sheet Arrangements

Please see Note 13 to the Bank's  financial  statements  included in this Annual
Report on Form 20-F for the year ended December 31, 2005 for more details.

Aggregate Contractual Obligations

Please  see  Item 4 and  Item 5 in this  Annual  Report  on Form  20-F  for more
details.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     A. Board of Directors

            In the course of 2005,  15 Board  meetings  were held, as well as 16
            meetings of various Board Committees.

            Board changes in 2005 and as of June 2006 were -

            Directors whose term began:

                   Name                                            Date
            -------------------------------------     --------------------------

            Helmaliah Dorit                                  March 27, 2006

            Directors whose term ended:

                   Name                                            Date
            -------------------------------------     --------------------------

            Helmaliah Dorit                                  October 8, 2005
            Lamdani Ariel                                    March 20, 2005
            Fredkin Israel                                   March 20, 2005

            Roster  of  Directors,   their   principal   occupation   and  other
            directorships held by them:

<TABLE>
<CAPTION>
                     Name                          Principal Occupation                    Other Directorship
             -----------------------        -----------------------------------  -------------------------------------
<S>                                         <C>                                  <C>
             Kulas Eliezer, Adv.            Attorney                             --

             Grinfeld Elisha, Adv.          Attorney                             The company for the Reconstruction &
                                                                                 Development of the Jewish Quarter.

             Dadon-Israeli -Bar             Education Program Manager            Internet Zahav
                                            in Microsoft

             Medleg Gamal                   Economist, Ministry of Agriculture   --

             Zibin Nehama, Adv.             Attorney                             Omnitek, Meshulam Levinstein, TTI

             Helmaliah Dorit                Partnerships Manager in the          Industrial Park Z.H.R
                                            Jewish Agency.
</TABLE>


                                      -16-
<PAGE>

      Bank's Management

<TABLE>
<CAPTION>
      Name                                      Major Responsibility
----------------------------------------    ----------------------------------------------
<S>                                             <C>
      Patalovsky Lea                            General Manager

      Sitton Moshe                              Assistant General Manager,
                                                Manager of Credit, Collection and
                                                Current Accounts

      Levi Noah, Adv.                           Chief Legal adviser of the Bank

      Cohen Yakov                               CFO,  Secretary of the Bank,  Director of
                                                Human Resources and
                                                Personnel.

      Gelem Avigdor                             Manager of information system

      Birenboim Zeev (*)                        Internal Auditor
</TABLE>

      (*)   Retired in January 31, 2006

      Remuneration

      Salaries,  benefits and  provisions  of the five  highest paid  executives
      among the Bank's officers (all amounts NIS in thousands).

<TABLE>
<CAPTION>

                                               Provisions for Severance
                                                 Pay, Provident Funds,
                                                  Pensions, Continuing     Total-Salary
                                                Education Programs, Sick     and Other
                Name              Salary           Pay, Leave Pay, etc.       Benefits   Other Payments
--------------------------------------------------------------------------------------------------------
<S>                                 <C>                    <C>                   <C>           <C>
In 2005 - Reported amounts
Patalovsky Lea                      378                     98                   476            1
Sitton Moshe                        330                     94                   424            2
Levi Noah                           286                     78                   364            2
Gelem Avigdor                       263                     81                   344            1
Cohen Yakov                         255                     73                   328            1

In 2004 - Reported amounts
Patalovsky Lea                      359                    114                   473           --
Sitton Moshe                        314                     93                   407            1
Levi Noah                           274                     79                   353            1
Gelem Avigdor                       251                     74                   325            1
Cohen Yakov                         229                     73                   302            1
Littman Amnon (*)                    70                     37                   107           --
</TABLE>

(*)   Retired in April 1, 2004

      Personnel

      At the end of 2005,  26 persons  were  employed by the Bank (24  full-time
      positions),  as compared with 27 persons (24.5 full-time positions) at the
      end of 2004.


                                      -17-
<PAGE>

      ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

      A summary of the operating results with related parties:

                                                         Year ended
                                                         December 31
                                               ------------------------------
                                                  2005                 2004
                                                       (In thousands)
                                               ------------------------------
                                                      Reported amounts
                                               ------------------------------

Participation in expenses by the affiliate         96                   95

      ITEM 8. FINANCIAL INFORMATION

      Legal Proceedings

      The Bank has not had any material  pending legal  proceedings,  other than
      ordinary litigation, incidental to the business.

      ITEM 9. THE OFFER AND LISTING

      None.

      ITEM 10. ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
               Subsidiaries                                                                 December 31,
                                                                                    ---------------------------
                                                                                      2005                2004
                                                                                    -------             -------
                                                                                         (NIS in thousands)
                                                                                          Reported amounts
                                                                                    ---------------------------
<S>                                                                                 <C>                 <C>
               (a)    Investment in shares
                      Cost of shares                                                 22,529              22,533
                      Post acquisition losses                                       (21,497)            (21,475)
                                                                                    -------             -------
                      Total investment                                                1,032               1,058
                                                                                    =======             =======

               (b)    Details of subsidiaries                                            Affiliated Company

<CAPTION>

                    Name of company:                                                 The Palestine Agricultural
                                                                                     Settlement Association Ltd.
                    Company details:                                                    Agricultural Financial
                                                                                             Institution
                                                                                    ---------------------------
                                                                                      2005                2004
                                                                                    -------             -------
<S>                                                                                  <C>                 <C>
                    Capital with rights for dividends
                      - percentage of holding                                         50.0%               50.0%
                    Capital with voting rights
                      - percentage of holding                                         49.9%               49.9%
                    Investments in shares-equity basis                               1,032               1,058
                    Contribution to net profit (loss) on ordinary activities           (26)                 33
</TABLE>


                                      -18-
<PAGE>

(c)   Affiliated  Company - The Palestine  Agricultural  Settlement  Association
      Ltd.

<TABLE>
<CAPTION>
      Balance Sheet                                                December 31,
                                                               ------------------
                                                                 2005     2004
                                                               (NIS in thousands)
                                                               ------------------
      Assets                                                    Reported amounts
                                                               ------------------
<S>                                                               <C>      <C>
      Loans out of designated deposits by the State of Israel     4,083    5,044

      Loans out of designated deposits by the Jewish Agency       1,321    1,346

      Other loans                                                    99    2,586

      Cash and deposits with banks                                2,291    2,319

      Other assets                                                    6        9
                                                                 ------   ------
                                                                  7,800   11,304
                                                                 ======   ======
      Liabilities and Shareholders' Equity

      Designated deposits from the Government of Israel           4,177    5,148

      Designated deposits from the Jewish Agency                  1,384    3,905

      Other liabilities                                             174      134

      Shareholders' Equity                                        2,065    2,117
                                                                 ------   ------
                                                                  7,800   11,304
                                                                 ======   ======
</TABLE>

The Bank's share in equity,  50% of NIS 2,065 thousand,  namely in the amount of
NIS 1,032 thousand, is shown in (a) above.

The  Jewish  Agency  holds the other 50% in  equity,  but also  holds a "casting
share".  This share entitles the Agency to a casting vote in any general meeting
and in any meeting of the board of directors.

The Board of Directors of the  affiliated  company  decided to close the company
and to terminate its activity.  A committee has been  established to examine all
the relevant aspects of this decision.

Uncertainties

See items 5 (Operating and financial  review and prospects) and 11 (Quantitative
and Quantitative  disclosure about market risks) for various uncertainties which
may affect the Bank's operations.

U.S. GAAP Reconciliation - General

See item 5 for background and various  clarifications  referring to matters that
may appear to indicate variations between Israeli and U.S. GAAP. It emerges from
the  clarifications  and the  information  submitted  that there are no material
variations between U.S. GAAP, and the GAAP applied in the financial statements.

No  U.S.  GAAP  reconciliation  is  therefore   required,   except  for  certain
disclosures and elaboration.


                                      -19-
<PAGE>

B.    MATERIAL CONTRACTS

      On January 28, 1992, a Deposit  Agreement was signed  between the Bank and
      the  Government  of  Israel.  In  accordance  with  this  agreement,   the
      Government  agreed  to  convert  NIS 180  million  (NIS of  January  1992)
      deposited with the Bank into three deferred deposits, deferred to December
      31, 1999, as explained in Note 11.

      Paragraph  4(3) to the agreement  stipulates  that:  "The principal of the
      deposits including the accrued interest and linkage  differentials thereon
      are repayable as follows:

      (1)   All the amount that were  scheduled  to be repaid  according  to the
            original  clearing  schedule by December  31, 1999 are  repayable on
            January 1, 2000; however, if it will become clear that the repayment
            of  all  such  amounts  on  January  1,  2000  may  results  in  the
            dissolution  of the Bank,  the Bank may  request the  Government  of
            Israel  to  consider  an  agreement  for  changes  in the  repayment
            schedule.  The Government will deliberate the request while applying
            pertinent considerations and subject to its policy at that time.

      (2)   All the amounts that  according to the  original  clearing  schedule
            were to be  repaid  after  December  31,  1999 will be repaid at the
            original date that was determined for their repayment."

      Due to the crisis in the agriculture sector and the restriction imposed on
      the Bank regarding its ability to exercise the pledged assets by virtue of
      the "Gal Law" and the "Kibbutz Arrangements", the Bank was unable to repay
      the deferred deposits as scheduled.

      The  maturity  date for the  deposits  has been  postponed  several  times
      pursuant to an approval received from the Accountant General.  Pursuant to
      an additional  extension  which was approved by the Accountant  General on
      June 4, 2006,  their maturity date was deferred until July 5, 2006,  among
      other purposes,  to allow the Bank and the  Government,  during the period
      until the maturity  date, to formulate a detailed plan with respect to the
      manner for the continued operations of the Bank.

      In accordance  with the Deposit  Agreement,  the Bank agreed not to extend
      credit in excess of what it is obligated  pursuant to the framework of the
      arrangements  for the  agricultural  sector,  and in  excess of what it is
      obligated to grant to its existing customers.  If there will be additional
      obligations  in  the  framework  of  comprehensive   arrangements  in  the
      agricultural  sector,  these will be only upon after  authorization of the
      accountable  ministers,  in coordination with the Bank of Israel. The Bank
      will  concentrate  its major efforts in the collection of loans which were
      granted  to the  agricultural  sector,  and will not  expand  the scope of
      deposits  from the  public.  Existing  deposits  from the  public  will be
      renewed in coordination with the Bank of Israel.

      There is an agreement  between the State of Israel and the Bank that until
      the  termination  of the  arrangements  between  the  Bank and the Bank of
      Israel and the State of Israel,  the  Government of Israel  deposits which
      were granted to the Bank in the first  agreement for the settlement of the
      Kibbutzim debts will be deferred.

      The capital notes are deferred in relation to both secured liabilities and
      other  liabilities  of the  Bank,  whose  terms  guarantee  that they have
      preference over the capital notes.

      Pursuant  to the  letter  from  the  Treasury  dated  February  12,  2003,
      commencing in 2004,  the Bank will file a request on a quarterly  basis to
      extend the time for the payment of the deferred  capital notes held by the
      Government.  On June 4, 2006 the Accountant General approved the extension
      of the maturity date to July 5, 2006.

      The 7.5%  Cumulative  Redeemable  Preference  "C"  shares of the Bank were
      traded in the United States,  and to the best of our knowledge,  according
      to the clarifications  made, there is no trading in the Bank shares.

      Since  there is no  trading  in the above  shares,  the State of Israel is
      purchasing the shares from the vendors at 90% of their nominal value.


                                      -20-
<PAGE>

      On  March  31,  2005 the  Governor  of the Bank of  Israel  announced  the
      cancellation  of the  license of the Bank as of April 1,  2005,  and as of
      August 1, 2005,  its name was stricken from the list of the  membership in
      the Bank of Israel clearing-house.

      According to article 9 of the Banking law (license), a banking corporation
      of which the license was  cancelled,  will remain for the  purposes of the
      Banking Order and Bank of Israel law as a banking  corporation for 3 years
      as of the cancellation of the license.

      On  September  4, 2005,  it was resolved in the  Ministers  Committee  for
      Privatization  to privatize the bank. The main details of the decision are
      as follows:

      a)    Selling or transferring  the essential  assets of the bank including
            the credit portfolio, real estate rights and shares in affiliate.

      b)    To authorize the Accountant  General and the Company's  Authority to
            act in this  matter and to  reorganize  the debts of the bank to the
            government by allocation of shares.

      c)    Preferred  shares which were  allocated  will be  transferred to the
            Accountant  General  for  redemption  of the  shares  and  until the
            transferring date the matter will be treated by the bank.

      d)    After the  completion  of the above  actions to act to liquidate the
            bank  (voluntarily).  ). Surplus  funds will be  transferred  to the
            shareholders

C.    EXCHANGE CONTROL

      No  exchange  control   regulations  exist  prohibiting  foreign  currency
      payments to overseas  investors of interest or principal on investments in
      the Bank's  securities,  provided that the  investment  (a) is transferred
      through an authorized dealer who confirm that the investment complies with
      the  regulations,  and (b)  transfers  of payments  are made  according to
      general permits issued by the Ministry of Finance.

D.    TAXATION

      Tax Reform in Israel

      On  January 1, 2003 a  comprehensive  tax  reform  took  effect in Israel.
      Pursuant to the reform,  resident  companies are subject to Israeli tax on
      income accrued or derived in Israel or abroad. In addition, the concept of
      "controlled  foreign  corporation"  was  introduced  according to which an
      Israeli company may become subject to Israeli taxes on certain income of a
      non-Israeli  subsidiary if the  subsidiary's  primary  source of income is
      passive income (such as interest,  dividends,  royalties, rental income or
      capital gains).  The tax reform also  substantially  changed the system of
      taxation of capital gains.

      Corporate Tax Rate

      The  regular  corporate  tax rate in Israel was 34% in 2005.  This rate is
      currently  scheduled  to  decrease  as  follows:  in  2006-31%,  2007-29%,
      2008-27%, 2009-26% and 2010 and onward-25%.

      Withholding Taxes on Dividends Distributed to Non-Israeli Residents

      Dividends  distributed by an Israeli company to non-Israeli  residents are
      generally  subject to a 20% tax to be withheld  at source,  unless a lower
      rate is provided in a treaty between Israel and the shareholder's  country
      of residence.

      Under the U.S.-Israel tax treaty,  the maximum Israeli tax and withholding
      tax on dividends paid to a holder of ordinary  shares who is a resident of
      the United States is generally 25%

      Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders

      Israeli  law  generally  imposes  a  capital  gains  tax  on the  sale  of
      securities  and any other  capital  asset.  Gains on the sale of  ordinary
      shares traded on a recognized stock exchange (including the Tel Aviv Stock
      Exchange and NASDAQ) by non-Israeli tax resident  investors will generally
      be exempt from Israeli capital gains tax.  Notwithstanding  the foregoing,
      dealers in securities in Israel are taxed at regular tax rates  applicable
      to business income.

      In addition,  the U.S.-Israeli Tax Treaty exempts U.S.  residents who hold
      an interest of less than 10% in an Israeli  company,  and who did not hold
      an interest of 10% or more in the company at any time during the 12 months
      prior  to a sale  of  their  shares  from  Israeli  capital  gains  tax in
      connection with such sale. Certain other tax treaties to which Israel is a
      party also grant exemptions from Israeli capital gains taxes.


                                      -21-
<PAGE>

E.    DIVIDEND AND PAYING AGENTS

      On July 27, 1999, the Board of Directors decided, based on a legal opinion
      which it obtained,  to  terminate  the payment of a dividend in respect to
      "A" and "C" shares.  A report  regarding this decision was communicated to
      the Accountant General and the Company's Authority.

      The Bank  did not  record  a  liability  with  respect  to the  cumulative
      dividend since its distribution is contingent upon:

      1.    The existence of income (in other words, the  distribution  will not
            be in contravention of the Company's Law).

      2.    As per a decision of the Board of Directors.

      The cumulative  dividend which was not paid with respect to the years 1999
      - 2005 amounts to NIS 60,524  thousand.  In addition,  the Treasury of the
      State of Israel has a liability to cover the linkage differences  included
      in the  aforementioned  amount which  amounts to NIS 60,409  thousand.  In
      prior  years,  a  dividend  was paid as noted in Note 12 to the  financial
      statements.

F.    STATEMENT BY EXPERTS

      None.

G.    DOCUMENTS ON DISPLAY

      We are  subject  to  the  reporting  requirements  of  the  United  States
      Securities  Exchange Act of 1934,  as amended,  as  applicable to "foreign
      private  issuers" as defined in Rule 3b-4 under the  Exchange  Act, and in
      accordance therewith, we file annual reports.

      As a foreign private issuer, we are exempt from certain  provisions of the
      Exchange Act. Accordingly,  our proxy solicitations are not subject to the
      disclosure  and  procedural  requirements  of  Regulation  14A  under  the
      Exchange Act,  transactions  in our equity  securities by our officers and
      directors are exempt from reporting and the "short-swing"  profit recovery
      provisions  contained in Section 16 of the Exchange  Act. In addition,  we
      are not  required  under the  Exchange  Act to file  periodic  reports and
      financial  statements  as  frequently  or as  promptly  as  United  States
      companies whose securities are registered under the Exchange Act.

      This annual report and the exhibits thereto and any other document we file
      pursuant to the Exchange Act may be inspected without charge and copied at
      prescribed  rates at the  following  Securities  and  Exchange  Commission
      public reference rooms. 100 F Street, N. E., Washington,  D.C. 20549;. You
      may obtain  information  on the operation of the  Securities  and Exchange
      Commission's  public  reference room in  Washington,  D. C. by calling the
      Securities and Exchange Commission at 1-800-SEC-0330.

      The SEC maintains an Internet website at http://www.sec.gov  that contains
      reports,  information statements and other material that are filed through
      the SEC's  Electronic  Data  Gathering,  Analysis and Retrieval  ("EDGAR")
      system.

      The  documents  concerning  our Bank which are  referred to in this annual
      report may also be inspected at our offices  located at 83 Hashmonaim  St.
      Tel Aviv, Israel.

H.    SUBSIDIARY INFORMATION

      None.


                                      -22-
<PAGE>

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

      The Bank is  exposed to a variety  of risks  including  changes in foreign
      currency exchange rates.

      The Bank does not use derivative instruments.

      The Bank created  specific  allowances for doubtful  debts,  which, in the
      opinion of management,  reflect  potential losses on the credit portfolio,
      in  accordance  with  existing  arrangements.   Material  changes  in  the
      arrangements  if any, are likely to obligate  additional  allowances.  The
      criteria for such allowances are as follows:

      (1)   In  the  credit   portfolio   for   kibbutzim   and  their   related
            organizations  in  consideration  of the kibbutzim  Arrangement,  as
            signed (see Note 3F.) and the guidelines of the Supervisor of Banks.

      (2)   In the credit portfolio for moshavim and their related organizations
            - of the "Law for  Arrangements  in the Family  Agricultural  Sector
            1992" and the guidelines of the  Supervisor of Banks,  is taken into
            consideration, as mentioned in Note 3E.

      (3)   In the credit  portfolio of other  customers,  with reference to the
            financial  information  available  to the Bank,  in  respect  of the
            financial status of the receivable.

      In  addition  to  the  above  mentioned  specific  allowances,  a  general
      allowance  for doubtful  debts was recorded in the past at a rate of 1% of
      the  receivables  balance as of December 31, 1991.  Beginning in 1992, the
      Supervisor of Banks directives  determine that an additional allowance for
      doubtful debts is to be recorded (in excess of the general allowances) and
      in addition to the former general allowance is to be maintained as accrued
      pursuant to prior  directives at an amount which is not greater than 1% of
      the total customer debts as of December 31, 1991,  adjusted for inflation.
      According to the directives of the Supervisor of Banks,  adjustments  will
      cease as of January 1,2005.

      The portion of the  allowance in excess of 1% may be charged on account of
      the  additional  allowance.  As of  December  31,  2005,  the  general and
      additional  allowances represent 28.90% of total credit for which the Bank
      is responsible.

      In addition to the above  allowances,  the Supervisor of Banks  instructed
      that a special  allowance  is to be recorded  not later than  December 31,
      2001 in a cumulative  amount which will not be less than the  aggregate of
      the following:

      1.    0.5% of the balance of the risk assets as of June 30, 2001.

      2.    1% of the balance of the specially  supervised  debts as of June 30,
            2001.

      3.    2.5% of the balance for the  problematic  debts,  net of the balance
            for the specially supervised debts as of June 30, 2001.

      The special allowance will be maintained in its nominal amount, subject to
      the aforesaid.

      Foreign currency exchange risk

      The Bank has liabilities in U.S. dollars. The maturity of the primary item
      is up to 1 year.

      A -10%  movement in the level of the exchange  rate of the Israeli  shekel
      against  the  U.S.  dollar,   with  all  other  variables  held  constant,
      liabilities would be effected by about adjusted NIS 7.9 million.


                                      -23-
<PAGE>

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

      (a)   The  following  securities  of the Bank were  traded  in the  United
            States,  and  to  the  best  of  our  knowledge,  according  to  the
            clarifications  made, there is no trading in the Bank shares.  Since
            there is no  trading  in the  above  shares,  the State of Israel is
            purchasing  the  shares  from the  vendors  at 90% of their  nominal
            value.

            Trade was affected through a United State Nominee:

            250,000 - 7.5% Cumulative Redeemable Preference "C" shares linked to
            the  dollar  (Nominee:   Mellon  Investor   Services  LLC  Manhattan
            Shareholders Service, New York).

      (b)   The  capital   notes  are  deferred  in  relation  to  both  secured
            liabilities and other liabilities of the Bank, whose terms guarantee
            that they have  preference  over the capital notes.  Pursuant to the
            letter from the Treasury  dated  February 12,  2003,  commencing  in
            2004,  the Bank will file a request on a  quarterly  basis to extend
            the time for the payment of the deferred  capital  notes held by the
            Government.  On June 4, 2006 the  Accountant  General  approved  the
            extension of the maturity date to July 5, 2006.

      (c)   The 8% Cumulative  and  Participating  Preference "A" shares and the
            7.5% Cumulative  Redeemable Preference "C" Shares were quoted on the
            Tel Aviv Stock  Exchange.  On April 30, 1992, the Board of directors
            of the Tel Aviv  Stock  Exchange  resolved  to cease  trading of the
            securities  of the Bank  until such time when  conditions  permitted
            continuation  of trading.  The securities  were de-listed on January
            31,  1993.  Before that date,  four  trading  days took place,  from
            January 25 to January 28, 1993.


                                      -24-
<PAGE>

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

         None.

ITEM 14. MATERIAL  MODIFICATIONS  TO THE RIGHTS OF SECURITY  HOLDERS AND USE OF
         PROCEEDS

         None

ITEM 15. CONTROLS AND PROCEDURES

         (A)      Disclosure controls and procedures. The Bank's General Manager
                  and Chief financial  Officer have evaluated the  effectiveness
                  of its disclosure controls and procedures as of the end of the
                  period covered by this Annual Report on Form 20-F.  Based upon
                  such review,  the General Manager and Chief financial  Officer
                  concluded that the Bank has in place appropriate  controls and
                  procedures designed to ensure that information  required to be
                  disclosed by the Bank in the reports it files or submits under
                  the  Securities  Exchange Act of 1934,  as amended,  and rules
                  hereunder,  is recorded,  processed,  summarized  and reported
                  within  the time  periods  specified  in the  SEC's  rules and
                  forms.

         (B)      Internal controls.  Since the date of the evaluation described
                  above,  there have not been any changes in the Bank's internal
                  control over financial reporting or in other factors that have
                  materially  affected,  or are reasonably  likely to materially
                  affect, the Bank's internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

          In a Board  meeting on January 16, 2005,  it was resolved  that due to
          the  limited  activity  of the  Bank,  focused  on  restructuring  and
          collection of debts of the agricultural sector, the appropriate number
          of directors with financial  expertise is one. Mr. G. Medleg, MBA, who
          in the last five years was employed as an economist in the Ministry of
          Agriculture  and since 1999 serves as a member of the audit  committee
          of the Institute of Wine in Israel and also as a management  member of
          the  Institute.  Mr. G. Medleg is a civil  servant (the  Government of
          Israel is the main  shareholder  of the Bank).  In a Board  meeting on
          April 4,  2006  Dorit  Almaliah  was  approved  as an Audit  Committee
          Financial Expert.

ITEM 16B. CODE OF ETHICS

          The Israel Securities Authority executed a draft directive regarding a
          Code of Ethics.  The draft has been sent to the Finance  Committee  of
          the  Knesset  but has yet to be  discussed.  The Bank of  Israel  also
          intends to adopt the above  draft  directives  which will take  effect
          after  being  approved  by the  Knesset.  The Bank is in a process  of
          instituting a Code of Ethics.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

          On  September  28, 2005,  the Board of Directors of the Bank  approved
          audit fees to the independent auditors for the year ended December 31,
          2005 in an amount  not to  exceed  NIS  165,000  (plus  VAT).  All the
          members of the Audit  Committee are members of the Board of Directors.
          After finishing all the audit work for the year 2005, a final approval
          will be given by the Government Companies Authority.


                                      -25-
<PAGE>

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES (Cont.)

          On May 27, 2004,  the Board of Directors  of the Bank  approved  audit
          fees to the independent  auditors for the year ended December 31, 2004
          in an amount not to exceed NIS 165,000 (plus VAT).

          On January 25, 2005 the Government Companies  Authorities approved the
          above amount for the year 2004.

          The fees for professional  services for the 2 years ended December 31,
          2005 were as follows

      ========================================================================
                                           2005                       2004
                                  -------------------------        -----------
                                  Amount         Percentage          Amount
                                  ------         ----------          ------
                                    NIS                                NIS
                                    ---                                ---
      Audit fees                  165,000            82%             165,000
      Audit - related fees         35,939            18%                  --
                                  -------           ---              -------
      Total                       200,939           100%             165,000
                                  =======           ===              =======

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

In a Board meeting of the Bank on April 4, 2006 the related fees were  approved.
PART III

ITEM 17. FINANCIAL STATEMENTS

         See pages F-1 to F-46 incorporated herein by reference

ITEM 18. EXHIBITS

         12.1     Certification  of the General Manager pursuant to Section 302,
                  of the Sarbanes - Oxley Act of 2002.

         12.2     Certification  of the  Chief  Financial  Officer  pursuant  to
                  Section 302, of the Sarbanes - Oxley Act of 2002.

         13.1     Certification  of the General  Manager and the Chief Financial
                  Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
                  to Section 906 to the Sarbanes - Oxley Act of 2002.

ITEM 19. SIGNATURES

         Pursuant  to the  requirements  of  Section  12 of the  Securities  and
         Exchange  Act of 1934,  the  Bank  certifies  that it meets  all of the
         requirements  for filing on From 20-F and has duly  caused  this annual
         report to be signed on its  behalf  by the  undersign,  thereunto  duly
         authorized.

                                                 Israel Bank of Agriculture Ltd.

                                      /s/ Lea Patalovsky
                                ----------------------------------
                                        Lea Patalovsky
                                        General Manager

Date: June 27, 2006.


                                      -26-
<PAGE>

                         ISRAEL BANK OF AGRICULTURE LTD.

                              FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2005

<PAGE>

                         ISRAEL BANK OF AGRICULTURE LTD.

                              FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2005

                                      INDEX

                                                                         Page
                                                                      ---------

Report of Independent Auditors                                            2

Balance Sheets                                                          4 - 5

Statements of Operations                                                  6

Statements of Changes in Shareholders' Deficiency                         7

Statements of Cash Flows                                                  8

Notes to the Financial Statements                                         9


                                      -1-
<PAGE>

                         [ROSENBLUM-HOLZMAN LETTERHEAD]

             Report of Independent Registered Public Accounting Firm
                               To the Shareholders

                                       of

                         ISRAEL BANK OF AGRICULTURE LTD.

We have audited the  accompanying  balance  sheets of Israel Bank of Agriculture
Ltd. ("the Bank") as of December 31, 2005 and 2004,  and the related  statements
of  operations,  changes in equity  (deficiency)  and cash flows for each of the
three years in the period ended December 31, 2005.  These  financial  statements
are the  responsibility  of the  Bank's  management.  Our  responsibility  is to
express an opinion on these financial statements based on our audits.

We did not audit the financial  statements of an  affiliate,  the  investment in
which,  on the equity  basis of  accounting  totaled NIS 1,032  thousand and NIS
1,058  thousand as of December 31, 2005 and 2004,  respectively,  and the Bank's
share  in the net loss of  which  totaled  NIS 26  thousand  for the year  ended
December 31, 2005,  and the Bank's share in the net income of which  totaled NIS
33 thousand  and NIS 56 thousand  for each of the two years in the period  ended
December 31, 2004, respectively. These statements were audited by other auditors
whose reports have been furnished to us, and our opinion,  insofar as it relates
to data included for the affiliate,  is based solely on the reports of the other
auditors.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting  Oversight  Board (United  States) and in accordance  with  generally
accepted auditing standards in Israel, including those prescribed by the Israeli
Auditors' Regulations (Mode of Performance),  1973. Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements are free of material  misstatement.We  were not engaged to
perform audits of the Bank's internal control over financial reporting. An audit
includes  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  cicrumstances,  but
not for the purpose of expressing an opinion on the  effectiveness of the Bank's
internal  control  over  financial  reporting.  Accordingly,  we express no such
opinion. An audit also includes examining,  on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We  believe  that our audits and the  reports  of the other  auditors  provide a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of the Bank as of December 31,
2005 and 2004 and, the results of its operations, and its cash flows for each of
the three  years in the period  ended  December  31 ,2005,  in  conformity  with
generally  accepted  accounting  principles  in Israel  which  differ in certain
respects from Accounting Principles Generally Accepted in the United States (See
Note 20).

                                                                          [LOGO]


                                      -2-
<PAGE>

As  explained  in Note 1C,  the  financial  statements  for dates and  reporting
periods  subsequent  to December  31, 2003 are stated in  reported  amounts,  in
accordance  with the  accounting  standards of the Israel  Accounting  Standards
Board and in  accordance  with the  instructions  of the  supervisor of banks in
Israel. The financial statements for dates and reporting priods that ended up to
the  aforementioned  date are stated in values  that were  adjusted to that date
according  to the  changes  in  the  general  purchasing  power  of the  Israeli
currency,  in  accordance  with  opinions of the  Institute of Certified  Public
Accountants in Israel,  except the items in the statements of operations in 2003
upto and  including  the item  operating  profit  before tax which are stated in
reported amounts (as detailed in Note 1C) in accordance with the instructions of
the Supervisor of banks in Israel and to his provisions.

The accompanying  financial statements have been prepared assuming that the Bank
will  continue to operate as a going  concern.  As  discussed  in Note 1A to the
financial statements the Bank's operations, upon which restrictions were imposed
by the Bank of Israel as stated in Note 1A(2)(b) are stipulated on the fact that
the  Government  will defer the maturity date of its deferred  deposits with the
Bank as  stated in Note  1A(2) and the  maturity  date of the  principal  of the
capital notes held by the government as stated in Note 11, and on the basis that
current cash  collections  of the Bank will enable it to pay operating  expenses
(mainly salaries) and interest to the Government as stated in Note 1A(2)(c). The
Bank  has a  shareholder's  deficiency  amounting  to NIS  1,331  million  as of
December 31, 2005. Further, the maturity date of the Government deposits and the
principal of the capital notes held by the  Government was postponed to February
28, 2006. The Government  intends,  during the period until the maturity date of
the Government deposits, to formulate a detailed plan with the Bank with respect
to  the  manner  of  the  Bank's  continued  operations.   These  factors  raise
substantial  doubt with respect to Bank's  ability to continue a going  concern.
The management's plans with respect to these issues are described in Note 1A(2).
These  financial  statements  do not include  any  adjustments  to reflect  that
possible future effects on the  recoverability  and classification of assets and
the amount  and  classification  of  liabilities  that they may result  from the
outcome of this uncertainty.

Allowances related to the agricaltural  sector were made as explained in Note 1I
and in accordance with the arrangements,  as explained in Note 3. Changes in the
arrangements may require changes in the allowances. The announcement of the Bank
of  Israel,  regarding  the  cancellation  of the  license  of the  bank and the
decision of the Ministers  Committee for Privatization to sell the bank's assets
and subsequently voluntary liquidation of the bank is explained in Note 1A(3), .

Theses  financial  statements  do not include any  adjustments  to reflect  that
possible future effects on the  recoverability  and classification of assets and
the amount  and  classification  of  liabilities  that they may result  from the
outcome of pravitazation and voluntary liquidation of the bank.

                                                       Rosenblum-Holtzman
                                             Certified Public Accountants (Isr.)
Tel Aviv, Israel
February 26, 2006
Except for Note 21, as to which the date is June 4, 2006.


                                      -3-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

BALANCE SHEETS
--------------------------------------------------------------------------------
In thousands of NIS

                                                         As of December 31
                                                        --------------------
                                                           2005      2004
                                                 Note   Reported amounts (*)
                                                ------  --------------------

ASSETS

     Cash on hand and deposits with banks         2      62,321    56,421

     Credit to the public                         3     238,590   238,372

     Credit to the Government of Israel           4      16,065    22,122

     Investment in affiliate                      5       1,032     1,058

     Bank building and equipment                  6         265       299

     Other assets                                 7       3,309     2,192
                                                        -------   -------

TOTAL ASSETS                                            321,582   320,464
                                                        =======   =======

(*)   As for the cessation of the adjustment for the effect of inflation,  based
      on December 2003, CPI, see Note 1C.

        (s) Mr. E. Kulas, Adv.   (s) Ms. L. Patalovsky     (s) Mr. Y. Cohen
      -------------------------  ----------------------  -----------------------
          Mr. E. Kulas, Adv.       Ms. L. Patalovsky          Mr. Y. Cohen
       Chairman of the Board of     General Manager      Chief Financial Officer
              Directors

Date of approval of the financial statements: February 26, 2006

     The accompanying notes are an integral part of the financial statements


                                      -4-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

BALANCE SHEETS
--------------------------------------------------------------------------------
In thousands of NIS

<TABLE>
<CAPTION>
                                                               As of December 31
                                                            ------------------------
                                                               2005          2004
                                                      Note      Reported amounts (*)
                                                     ------ -------------------------
<S>                                                    <C>   <C>          <C>
LIABILITIES AND SHAREHOLDERS'
 DEFICIENCY

Deposits from the public                                8           50           880
Government of Israel deposit                            9      456,047       443,316
Other liabilities                                      10        7,419         7,568
                                                            ----------    ----------
                                                               463,516       451,764

Deferred deposits from the Government of Israel        11    1,110,235       991,919

Deferred capital notes:
     Held by the Government                            11       78,891        73,835
                                                            ----------    ----------

Total liabilities                                            1,652,642     1,517,518

Non-participating Preferred Shares                                  11            11

Shareholders' deficiency                                    (1,331,071)   (1,197,065)
                                                            ----------    ----------

Total liabilities and shareholders' equity                     321,582       320,464
                                                            ==========    ==========
</TABLE>

(*)   As for the cessation of the adjustment  for the effect of inflation  based
      on December 2003, CPI, see Note 1C.

     The accompanying notes are an integral part of the financial statements


                                      -5-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
In thousands of NIS

<TABLE>
<CAPTION>

                                                                                  For the year ended
                                                                                      December 31
                                                                          ------------------------------------
                                                                            2005         2004           2003
                                                                          ---------    --------       --------
                                                                    Note          Reported amounts (1)
                                                                   ------ ------------------------------------
<S>                                                                   <C>  <C>          <C>            <C>
Loss from financing activities
Loss from financing activities before allowance for
  doubtful debts (4)                                                  15   (125,191)    (94,060)       (67,918)
Increase in allowance for doubtful debts                              3c         --          --         (3,500)
                                                                           --------     -------     ----------
Loss from financing activities after allowance for doubtful debts          (125,191)    (94,060)       (71,418)

Operating and other income
Rental income                                                                   389         426            542
Other income                                                          16         85         129            113
                                                                           --------     -------     ----------
Total operating and other income                                                474         555            655
                                                                           --------     -------     ----------

Operating and other expenses
Salaries and related expenses                                         17      6,603       6,508          7,019
Depreciation on bank building and equipment                                      45          44             43
Building and equipment maintenance                                              974       1,152          1,117
Other expenses                                                        18      1,641       1,440          1,629
                                                                           --------     -------     ----------
Total operating and other expenses                                           (9,263)     (9,144)        (9,808)
                                                                           --------     -------     ----------

Operating loss in reported amounts                                         (133,980)   (102,649)       (80,571)
Erosions and adjustments (2)                                                     --          --        (19,150)
                                                                           --------     -------     ----------

Operating loss                                                             (133,980)   (102,649)    (3)(99,721)
Equity in (loss) profits of an affiliate                                        (26)         33     (3)     56
                                                                           --------     -------     ----------

Net loss for the year                                                      (134,006)   (102,616)    (3)(99,665)
                                                                           ========    ========     ==========

Loss per share NIS 1 nominal value (in NIS)
   of Ordinary Share capital and Preferred "A" Share capital
   (Note 1(k)

Operating loss for the year per Ordinary Share and
  Preferred "A" share                                                       (640.20)    (490.30)    (3)(476.20)
                                                                           --------     -------     ----------
Weighted average shares outstanding                                         209.273     209.273        209.273

(Loss) income from financing activities before allowance for
  doubtful debts, interest on Government deposits                              (987)      7,861         21,598

Interest on Government deposits and deferred capital notes                 (124,204)   (101,921)       (89,516)
                                                                           --------     -------     ----------
(4) Loss from financing activities before expense before
      allowance for doubtful debts                                         (125,191)    (94,060)       (67,918)
                                                                           ========    ========     ==========
</TABLE>

(1)   For the years  2004-2005 - Cessation of the  adjustment  for the effect of
      inflation  based on Dec 2003  CPI.  For the year 2003 -  Cessation  of the
      adjustment for the effect of inflation based on Dec 2002 CPI.

(2)   Erosions and adjustments for inflation  effects  according to the December
      2003 CPI of income and expenses  included in operating  loss,  in reported
      amounts.

(3)   Amounts adjusted for the effect of inflation based on December 2003 CPI.

     The accompanying notes are an integral part of the financial statements


                                      -6-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
--------------------------------------------------------------------------------
In thousands of NIS

<TABLE>
<CAPTION>
                                                                   Total
                                                                outstanding
                                                                   share
                                  Outstanding    Receipts on    capital and                       Total
                                     share        account of      capital      Accumulated     shareholders'
                                    capital         shares        reserves       deficit        deficiency
                                  ------------   ------------   ------------   ------------    ------------
                                   Amounts adjusted for the effect of inflation based on December 2003 CPI
                                  -------------------------------------------------------------------------
<S>                                    <C>            <C>          <C>           <C>               <C>
Balance at January 1, 2003             864,568        308,479      1,173,047     (2,167,831)       (994,784)

Loss for the year                           --             --             --        (99,665)        (99,665)
                                  ------------   ------------   ------------   ------------    ------------

                                                            Reported amounts (*)
                                  -------------------------------------------------------------------------
Balance at January 1, 2004             864,568        308,479      1,173,047     (2,267,496)     (1,094,449)

Loss for the year                           --             --             --       (102,616)       (102,616)
                                  ------------   ------------   ------------   ------------    ------------

Balance at January 1, 2005             864,568        308,479      1,173,047     (2,370,112)     (1,197,065)
                                  ------------   ------------   ------------   ------------    ------------

Loss for the year                           --             --             --       (134,006)       (134,006)

Balance at December 31, 2005           864,568        308,479      1,173,047     (2,504,118)     (1,331,071)
                                  ============   ============   ============   ============    ============
</TABLE>

(*)   As for the cessation of the adjustment for the effect of inflation,  based
      on December 2003, CPI, see Note 1C.

     The accompanying notes are an integral part of the financial statements


                                      -7-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
In thousands of NIS

<TABLE>
<CAPTION>
                                                                               For the year ended
                                                                                  December 31
                                                                       -----------------------------------
                                                                          2005        2004        2003
                                                                        Reported                Adjusted
                                                                       amounts (1)             amounts (2)
                                                                       ----------------------  -----------
<S>                                                                     <C>         <C>          <C>
Cash flows from operating activities:
Loss for the year                                                       (134,006)   (102,616)    (99,665)

Adjustments to reconcile the cash flows used in operating activities:
 Equity in the loss (profits) of an affiliate                                 26         (33)        (56)
 Depreciation on the bank's building and equipment                            45          44          43
                                                                        --------    --------    --------
Net cash used in operating activities                                   (133,935)   (102,605)    (99,678)

Cash flows from investing activities
Credit to the public                                                        (218)     13,246      26,460
Credit to the Government of Israel                                         6,057       7,717         320
Purchase of equipment                                                        (11)         --         (11)
Other assets                                                              (1,117)        (74)       (489)
                                                                        --------    --------    --------
Net cash provided by investing activities                                  4,711      20,889      26,280

Cash flows from financing activities:
Deposits from the public, net                                               (830)       (142)        (55)
Deposits from the Government, net                                         12,731       5,025       1,345
Other liabilities, net                                                      (149)       (362)        488
Deferred Government deposits                                             118,316      96,247      96,554
Deferred capital notes, net                                                5,056      (1,217)    (43,985)
                                                                        --------    --------    --------
Net cash provided by financing activities                                135,124      99,551      54,347
                                                                        --------    --------    --------

Increase (Decrease) in cash on hand and deposits with banks                5,900      17,835     (19,051)
Balance of cash on hand and deposits with banks
  at the beginning of the year                                            56,421      38,586      57,637
                                                                        --------    --------    --------
Balance of cash on hand and deposits with banks
  at the end of the year                                                  62,321      56,421      38,586
                                                                        ========    ========    ========
</TABLE>

(1)   As for the Cessation of the adjustment  for the effect of inflation  based
      on December 2003 CPI, see Note 1C.

(2)   Amounts adjusted for the effect of inflation based on December 2003 CPI.

     The accompanying notes are an integral part of the financial statements


                                      -8-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

                                 INDEX TO NOTES

<TABLE>
<CAPTION>
  Note                                                                                  Page
-------                                                                              ----------s
<S>                                                                                   <C>
 1.    The Bank, Its Main Activities and Significant Accounting Policies              10  -  20

 2.    Cash on Hand and Deposits with Banks                                              20

 3.    Credit to the Public (Less Allowances for Doubtful Debts)                      21  -  29

 4.    Credit to the Government of Israel                                                29

 5.    Investment in an Affiliate                                                        30

 6.    Building and Equipment                                                            31

 7.    Other Assets                                                                      32

 8.    Deposits from the Public                                                          32

 9.    Deposits from the Government                                                      32

10.    Other Liabilities                                                                 33

11.    Deferred Government Deposits and Deferred Capital Notes                           34

12.    Share Capital                                                                  35  -  36

13.    Contingent Liabilities, Claims and Commitments                                    37

14.    Related Parties                                                                37  -  38

15.    Loss from Financing Activities Before Allowance for Doubtful Debts                39

16.    Commissions and Other Income                                                      40

17.    Salaries and Related Expenses                                                     40

18.    Other Expenses                                                                    40

19.    Income Taxes                                                                      41

20.    Reconciliation Between Israel GAAP and U.S. GAAP                               41  -  44

21.    Subsequent events                                                                 44

22.    Information on the basis of Nominal Historical Data for tax purposes           44  -  46

23.    Other Information in Nominal Values                                               46
</TABLE>


                                      -9-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main Activities and Significant Accounting Policies

            A.    General

                  1.    The   financial   statements   have  been   prepared  in
                        accordance  with the  directives  of the  Supervisor  of
                        Banks,  regarding the  preparation  of annual  financial
                        statements  by banking  corporations  and in  accordance
                        with accounting  principles generally accepted in Israel
                        ("Israel GAAP") and accounting  principles of the Israel
                        Accounting  Standards  Board.  The accounting  policies,
                        according  to  which  the  financial   statements   were
                        prepared,  have been applied consistently except for the
                        required  changes from the transition in 2004 to nominal
                        accounting  reporting  (See Note 1C).  Israeli  GAAP and
                        accounting  principles  generally accepted in the United
                        States  ("U.S.  GAAP") as  applicable  to the  financial
                        statements of the Bank,  differ in certain respects (see
                        note 20).

                  2.    (a)   On  January  28,  1992,  a Deposit  Agreement  was
                              signed by the Bank and the  Government  of Israel.
                              In accordance with this agreement,  the Government
                              agreed to convert NIS 180 million  (NIS of January
                              1992)  deposited with the Bank into three deferred
                              deposits,   deferred  to  December  31,  1999,  as
                              explained  in  Note  11.  Paragraph  4(3)  to  the
                              agreement  stipulates  that: "The principal of the
                              deposits   including  the  accrued   interest  and
                              linkage  differentials  thereon are  repayable  as
                              follows:

                              1.    All the amounts  that were  scheduled  to be
                                    repaid  according to the  original  clearing
                                    schedule by December 31, 1999 are  repayable
                                    on  January  1,  2000;  however  if it  will
                                    become clear that the  repayment of all such
                                    amounts on January 1, 2000 may result in the
                                    dissolution   of  the  Bank,  the  Bank  may
                                    request the Government of Israel to consider
                                    an  agreement  for changes in the  repayment
                                    schedule. The Government will deliberate the
                                    request     while     applying     pertinent
                                    considerations  and subject to its policy at
                                    that time.

                              2.    All  the  amounts  that   according  to  the
                                    original clearing schedule were to be repaid
                                    after  December  31,  1999 will be repaid at
                                    the original  date that was  determined  for
                                    their repayment;"

                              Due to the  crisis in the  agriculture  sector and
                              the restriction  imposed on the Bank regarding its
                              ability to exercise  the pledged  assets by virtue
                              of the "Gal Law" and the  "Kibbutz  Arrangements",
                              the Bank was unable to repay the deferred deposits
                              as scheduled.


                                      -10-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main  Activities and Significant  Accounting  Policies
            (Cont.)

            A.    General (Cont.)

                  2.    (Cont.)

                        (a)   (Cont.)

                              The  maturity  date  for  the  deposits  has  been
                              extended   several  times  pursuant  to  approvals
                              received from the  Accountant  General.  Under the
                              last   extension,   which  was   approved  by  the
                              Accountant  General on December  21,  2005,  their
                              maturity  date was  deferred  until  February  28,
                              2006.  The  approval  was  granted,   among  other
                              purposes,  to allow  the Bank and the  Government,
                              during  the period  until the  maturity  date,  to
                              formulate  a  detailed  plan with  respect  to the
                              manner for the continued operations of the Bank.

                        (b)   In accordance with the Deposit Agreement, the Bank
                              agreed  not to extend  credit in excess of what it
                              is  obligated  pursuant  to the  framework  of the
                              arrangements for the agricultural  sector,  and in
                              excess  of what it is  obligated  to  grant to its
                              existing  customers.  If there will be  additional
                              obligations  in  the  framework  of  comprehensive
                              arrangements  in the  agricultural  sector,  these
                              will be only upon authorization of the accountable
                              ministers,   in  coordination  with  the  Bank  of
                              Israel.   The  Bank  will  concentrate  its  major
                              efforts  in the  collection  of loans,  which were
                              granted to the agricultural  sector,  and will not
                              expand  the  scope of  deposits  from the  public.
                              Existing  deposits from the public will be renewed
                              in coordination with the Bank of Israel.

                        (c)   Toward  the end of  2000,  the Bank did not have a
                              debt  balance  toward  the  Bank of  Israel.  In a
                              letter to the Bank dated  December  6,  2000,  the
                              Bank of Israel  gave  notice that it is ceasing to
                              extend current credit to the Bank.

                              In  addition,  the Bank of Israel  eliminated  the
                              floating charge on the Bank's credit portfolio.

                              Since the Bank does not have any credit sources as
                              it had in the past,  in the event it will  require
                              short-term bridge loans, the Bank may be forced to
                              defer  payments to the  Government  for those same
                              periods of time and in accordance with the pace of
                              its collections.

                              In the opinion of the Bank's management,  the cash
                              and cash  equivalents  balance as of December  31,
                              2005,  and the current  collection  anticipated in
                              2006  from  the  payment   arrangement   with  the
                              moshavim and the kibbutzim  will allow the Bank in
                              2006,  subject to what is stated above, to pay the
                              ongoing operating  expenses  (primarily  salaries)
                              and make interest payments to the Government.


                                      -11-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main  Activities and Significant  Accounting  Policies
            (Cont.)

            A.    General (Cont.)

                  3.    On March  31,  2005 the  Governor  of the Bank of Israel
                        announced the cancellation of the license of the Bank as
                        of April 1, 2005, and as of August 1, 2005, his name was
                        stricken from the list of the  membership in the Bank of
                        Israel clearing-house.

                        According to article 9 of the Banking law  (license),  a
                        banking  corporation of which the license was cancelled,
                        will remain for the  purposes  of the Banking  Order and
                        Bank of Israel law as a banking  corporation for 3 years
                        as of the cancellation of the license.

                        On September 4, 2005,  it was resolved in the  Ministers
                        Committee for  Privatization  to privatize the bank. The
                        main details of the decision are as follows:

                        a)    Selling or  transferring  the essential  assets of
                              the bank  including  the  credit  portfolio,  real
                              estate rights and shares in affiliate.

                        b)    To  authorize  the  Accountant   General  and  the
                              Company's  Authority  to act in this matter and to
                              reorganize the debts of the bank to the government
                              by allocation of shares.

                        c)    Preferred  shares  which  were  allocated  will be
                              transferred   to  the   Accountant   General   for
                              redemption   of   the   shares   and   until   the
                              transferring  date the  matter  will be treated by
                              the bank.

                        d)    After the completion of the above actions - to act
                              to liquidate the bank (voluntarily).

                  B.    Definitions

                        In these financial statements:

                        The Bank/Bank       -   Israel Bank of Agriculture Ltd.

                        Affiliate           -   A company  in which the  Company
                                                has  significant  influence  and
                                                which is not a  subsidiary,  and
                                                where the  Company's  investment
                                                in that  company is  included in
                                                the     financial     statements
                                                according to the equity method.

                        Interested parties  -   As  defined  in  the  Securities
                                                Regulations    (Preparation   of
                                                Annual  Financial   Statements),
                                                1993 of Israel.

                        Related parties     -   As defined in  Statement  No. 29
                                                of the  Institute  of  Certified
                                                Public Accountants in Israel.


                                      -12-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main  Activities and Significant  Accounting  Policies
            (Cont.)

            C.    Financial Statements Presentation Basis

                  (1)   General

                        The Bank prepares and presents its financial  statements
                        in Israeli currency (NIS).  Commencing in 2004, the Bank
                        applies the  directives  of  Accounting  Standard No. 12
                        with  regard  to  "Cessation  of  Adjustments  Financial
                        Statements  for  Inflation"  of the  Israeli  Accounting
                        Standards Board (hereinafter: "the IASB"). In accordance
                        with this  standard and in  accordance  with  Accounting
                        Standard No. 17 from December 2002, the Bank ceased from
                        the  above  date  the   adjustments   of  the  financial
                        statements to inflation and uses transitional directives
                        for nominal  accounting  reporting as  described  below.
                        However, the comparative figures which were presented in
                        2004 in  these  financial  statements  are  based on the
                        financial   data  as  adjusted   that  were   previously
                        reported,  except income and expenses that were included
                        in the operating loss in 2003 as follows.

                  (2)   The  starting   point  for   preparing   the   financial
                        statements:

                        (a)   Until  December  31, 2003,  the Bank  prepared its
                              financial  statements  on the  accepted  basis  of
                              historical  cost  adjusted to the  Consumer  Price
                              Index ("CPI"). The adjusted amounts, as aforesaid,
                              that were included in the financial  statements as
                              of December  31, 2003  (transition  date) were the
                              starting   point   for  the   nominal   accounting
                              reporting  from  January 1, 2004.  Additions  that
                              were made after the transition  date were included
                              in nominal values.

                              Accordingly, the amounts reported in 2005 and 2004
                              are composed as follows:

                              Amounts before the  transition  date, are composed
                              of the amounts  adjusted  to NIS of  December  31,
                              2003  with the  addition  of  amounts  in  nominal
                              values added  subsequent to the  transition  date,
                              and subtracting amounts deducted subsequent to the
                              transition  date  (the  subtraction  of the  above
                              amounts is in adjusted  amounts to the  transition
                              date, in nominal  values or in combination of both
                              respectively).  All the  amounts  from the  period
                              after  the  transition  date are  included  in the
                              financial statements in nominal values.

                        (b)   The  values  of  the  non-monetary  items  do  not
                              necessarily  represent their economic  value,  but
                              rather the balance of their reported cost.

                        (c)   In the financial statements,  the terms "cost" and
                              "equity"   means  cost  and  equity  in   reported
                              amounts, unless expressly stated otherwise.

                        (d)   The  comparative  figures which were  presented in
                              2004,  included in these financial  statements are
                              adjusted for the effects of inflation in Israel as
                              of the  end of  previous  reporting  dates  (i.e.,
                              effects of  inflation as of the  transition  date)
                              except   income  and  expenses   included  in  the
                              operating loss as follows:


                                      -13-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main  Activities and Significant  Accounting  Policies
            (Cont.)

            C.    Financial Statements Presentation Basis(Cont.)

                  (3)   Financial statements in reported amounts

                        a.    Definitions

<TABLE>
<S>                                                          <C>
                              Adjusted amount              - Historical  nominal amount adjusted
                                                             in  accordance  with  Statements 23
                                                             and   36  of   the   Institute   of
                                                             Certified  Public   Accountants  in
                                                             Israel.

                              Reported amount              - Adjusted    amount    as   of   the
                                                             transition  date with the  addition
                                                             of amounts in nominal  values  that
                                                             were  added  after  the  transition
                                                             date,  and net of amounts that were
                                                             deducted after the transition date.

                              Adjusted financial reporting - Financial    reporting   based   on
                                                             Statements  23,  36  and  50 of the
                                                             Institute   of   Certified   Public
                                                             Accountants in Israel.

                              Nominal financial statements - financial    reporting   based   on
                                                             reported amounts.
</TABLE>

                        b.    Balance Sheet

                              (1)   Non-monetary  items are  stated in  reported
                                    amounts.

                              (2)   Monetary   items  are   stated  in   nominal
                                    historical  values as of the  balance  sheet
                                    date.

                              (3)   Equity in an  investment  in an affiliate is
                                    determined  on the  basis  of the  financial
                                    statements  in  reported   amounts  of  this
                                    company.

                        c.    Statements of operations

                              (1)   Income   and    expenses    deriving    from
                                    non-monetary   items   or  from   provisions
                                    included  in the  balance  sheet are derived
                                    from the changes between  reported amount in
                                    the  beginning  of the year and the reported
                                    amounts in the end of the year.

                              (2)   Other items in the  statements of operations
                                    are stated in nominal values.


                                      -14-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main  Activities and Significant  Accounting  Policies
            (Cont.)

            C.    Financial Statements Presentation Basis(Cont.)

                  (3)   Financial statements in reported amounts (Cont.)

                        c.    Statements of operations (Cont.)

                              (3)   In order to have a comparative  basis of the
                                    financial  data  of  2005  and  2004  to the
                                    financial  data of 2003  and in the  view of
                                    the  significance  that  the  Supervisor  of
                                    Banks  ascribes to the incomes and  expenses
                                    in the  financial  results  of  the  banking
                                    institutions,   the   Supervisor   of  Banks
                                    determined that the comparative  figures for
                                    2003 will be  presented  as follows:  Profit
                                    and loss items, up to and including the item
                                    operating  loss are  presented  in  reported
                                    amounts with the  adjustment for the effects
                                    of   inflation   ceased   according  to  the
                                    December 2002 CPI.

                                    Erosions and  adjustments  for the effect of
                                    inflation  according to the  December  2003,
                                    CPI  of  income  and  expenses  included  in
                                    operating   profit  are   presented  in  the
                                    statement  of  profit  and  loss as a single
                                    amount,   in  a  separate   line   preceding
                                    operating  profit and were not  allocated to
                                    the relevant items.

                                    Other items of the  statements of operations
                                    in 2003 are presented as adjusted for effect
                                    of inflation  according to the December 2003
                                    CPI.

                              (4)   Profit and loss items for 2002 and the years
                                    preceding 2002 are presented as adjusted for
                                    the  effect of  inflation  according  to the
                                    December 2003 CPI.

                              (5)   The Banks' equity in the  operating  results
                                    of the affiliate has been  determined on the
                                    basis  of the  financial  statements  of the
                                    affiliate   in  reported   amounts  of  this
                                    company.

                        (4)   Comparative figures which were presented in 2004 -
                              Adjusted amounts for the end of 2003

                              (a)   General

                                    Through December 31, 2003, the Bank prepared
                                    its financial statements on the basis of the
                                    historical  cost adjusted for the changes in
                                    the general  purchasing power of the Israeli
                                    currency  (NIS)  based  upon  changes in the
                                    Consumer  Price  Index  (CPI) in  accordance
                                    with  pronouncements  of  the  Institute  of
                                    Certified   Public   Accountants  in  Israel
                                    (hereinafter: "The Institute").

                                    The  comparative  figures  included  in  the
                                    financial  statements  of 2004 are  based on
                                    the  adjusted  financial  statements  to the
                                    prior  reported  periods as adjusted for the
                                    changes in the General  Purchasing  Power of
                                    the Israeli  currency of December  2003 (the
                                    index of the transition date)


                                      -15-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main  Activities and Significant  Accounting  Policies
            (Cont.)

            C.    Financial Statements presentation basis (Cont.)

                  (4)   Comparative  figures  which  were  presented  in  2004 -
                        Adjusted amounts for the end of 2003 (Cont.)

                        (b)   Balance sheet

                              Monetary  assets  and  liabilities  are  stated in
                              nominal values.  Non-monetary  assets (investments
                              in  an   affiliate,   the  Bank's   building   and
                              equipment,  share  capital)  have been adjusted on
                              the basis of the changes in the CPI from the month
                              in which the transaction  occurred through the CPI
                              for December 2003.

                              Equity  in  an   investment  in  an  affiliate  is
                              determined on the basis of the adjusted  financial
                              statements of that company.

                              The adjusted values of the  non-monetary  items do
                              not  necessarily  represent  their economic value,
                              but rather the balance of their  historical  cost,
                              adjusted  for the effect of changes in the general
                              purchasing  power of the NIS.

                              The terms  "cost" and "equity" as used herein mean
                              "adjusted  cost"  and  "adjusted  equity",  unless
                              expressly stated otherwise.

                        (C)   Statement of operations

                              1.    Income and expenses (excluding  depreciation
                                    and interest income or expenses),  have been
                                    adjusted on a monthly basis for the increase
                                    in the Index,  from the month of transaction
                                    up to the balance  sheet  month,  net of the
                                    adjustments  of  the  opening   balances  of
                                    monetary assets and liabilities.  Income and
                                    expenses in the unlinked shekel segment were
                                    adjusted  according to the average  balances
                                    (on a daily  basis) of the  previous  month,
                                    instead  of on  the  basis  of  the  opening
                                    monthly   balances.   The  net   differences
                                    between  the  adjustments  based on  average
                                    balances  and  adjustments  based on opening
                                    monthly   balances  were  carried  to  other
                                    interest income (expense).

                              2.    Depreciation  has been  adjusted on the same
                                    basis used for the adjustment of the related
                                    balance sheet fixed assets.

                              3.    The specific  allowance  for doubtful  debts
                                    has been  adjusted to the changes in the CPI
                                    from  the  date on  which  the debt has been
                                    determined  as  doubtful,  up to the balance
                                    date.  See Note 1I.  concerning  the general
                                    allowance.

                              4.    The Bank's equity in the  operating  results
                                    of the affiliate has been  determined on the
                                    basis  of the  financial  statements  of the
                                    affiliate,  as  adjusted  for the  effect of
                                    inflation on this company.


                                      -16-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main  Activities and Significant  Accounting  Policies
            (Cont.)

            C.    Financial Statements presentation basis (Cont.)

                  (4)   Comparative  figures  which  were  presented  in  2004 -
                        Adjusted amounts for the end of 2003 (Cont.)

                        (C)   Statement of operations (Cont.)

                              5.    Items of income and expenses included in the
                                    operating  loss were presented in 2003 where
                                    the   cessation  of  the   adjustments   for
                                    inflation   is   according  to  the  CPI  of
                                    December  2002.  The  Summary of the nominal
                                    data for tax  purposes is  presented in Note
                                    22.

            D.    Foreign Currency and Linkage

                  (1)   Assets and liabilities in or linked to foreign currency,
                        are stated  according  to the  effective  representative
                        rates of exchange as of balance  sheet date as published
                        by the Bank of Israel. Exchange rate differences arising
                        from the adjustment of assets and liabilities in foreign
                        currency,   due  to  exchange  rate  fluctuations,   are
                        included in the statement of operations.

                  (2)   Monetary  balances,  which are  linked  to the CPI,  are
                        stated  in the  balance  sheet on the basis of the known
                        CPI  as  of  balance  sheet  date,  according  to  their
                        contractual terms.

                  (3)   Assets  and  liabilities  subject to  optional  linkage,
                        i.e.,  either to the CPI or to the rate of  exchange  of
                        the U.S. dollar/NIS, are stated at the higher option.

                  (4)   Data on rates of exchange and the Consumer Price Index:

<TABLE>
<CAPTION>
                                                                                                Rate of change
                                                                  December 31,                   for the year
                                                           ------------------------       --------------------------
                                                           2005       2004     2003       2005       2004       2003
                                                                                            %          %          %
                                                           ----       ----     ----       ----       ----       ----
<S>                                                       <C>        <C>      <C>         <C>        <C>        <C>
                        Rate of exchange of the
                         U.S. dollar                       4.603      4.308    4.379       6.85      (1.6)      (7.56)
                        Rate of exchange of the
                         Euro                             5.4465     5.8768   5.5331      (7.32)     6.21       11.34
                        Consumer Price Index (in
                         Points) for the month of
                          November                        103.20     100.50     99.6       2.69      0.88       (1.91)
                          December                        103.00     100.60     99.4       2.39      1.21       (1.87)
</TABLE>


                                      -17-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main Activities and Significant Accounting Policies
            (Cont.)

            E.    Investments in an affiliate

                  The investment in an affiliate is stated by the equity method.

            F.    Bank building and equipment

                  Assets acquired after April 1, 1984, are stated at cost net of
                  accumulated  depreciation.  Depreciation  is calculated by the
                  straight-line method over the useful lives of the assets.

                  Up to March 31, 1984,  the assets were written down in full in
                  the year they were  acquired,  in  accordance  with the policy
                  then applied.

            G.    Deferred taxes

                  As it is uncertain whether there will be taxable income in the
                  future,  the Bank did not record a deferred tax benefit in its
                  books.

            H.    Basis of recognition of revenues and expenses

                  (1)   Revenues  and  expenses  are  recognized  on an  accrued
                        basis.

                  (2)   The Bank  implemented  a directive of the Bank of Israel
                        regarding not  recognizing  income from interest for the
                        debts related to the Moshav  sector,  for those Moshavim
                        which have not yet joined the  arrangement  for settling
                        their debts.

            I.    Allowance for doubtful debts

                  The  financial  statements  include  specific  allowances  for
                  doubtful debts,  which, in the opinion of management,  reflect
                  potential losses on the credit  portfolio,  in accordance with
                  existing arrangements. Material changes in the arrangements if
                  any, are likely to require additional allowances. The criteria
                  for such allowances are as follows:

                  1.    In the credit  portfolio for kibbutzim and their related
                        organizations   in   consideration   of  the   kibbutzim
                        arrangement, as signed (see Note 3F.) and the guidelines
                        of the Supervisor of Banks.

                  2.    In the credit  portfolio  for moshavim and their related
                        organizations  - of the  "Law  for  Arrangements  in the
                        Family  Agricultural  Sector 1992" and the guidelines of
                        the Supervisor of Banks, is taken into consideration, as
                        mentioned in Note 3E.

                  3.    In  the  credit  portfolio  of  other  customers,   with
                        reference to the financial  information available to the
                        Bank,  in  respect  of  the  financial   status  of  the
                        receivable.


                                      -18-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main Activities and Significant Accounting Policies
            (Cont.)

            I.    Allowance for doubtful debts (Cont.)

                  In  addition to the above  mentioned  specific  allowances,  a
                  general  allowance for doubtful debts was recorded in the past
                  at a rate of 1% of the receivables  balance as of December 31,
                  1991.  Beginning in 1992, the  Supervisor of Banks  directives
                  determine  that an additional  allowance for doubtful debts is
                  to be recorded  (in excess of the general  allowances)  and in
                  addition to the former  general  allowance is to be maintained
                  as accrued  pursuant to prior directives at an amount which is
                  not greater than 1% of the total customer debts as of December
                  31, 1991, adjusted for inflation.

                  According  to the  directives  of  the  Supervisor  of  Banks,
                  adjustments will cease as of January 1, 2005.

                  The portion of the allowance in excess of 1% may be charged on
                  account of the additional allowance.  As of December 31, 2005,
                  the general and additional allowances represent 28.9% of total
                  credit for which the Bank is responsible.

                  In addition to the above  allowances,  the Supervisor of Banks
                  instructed  that a special  allowance  is to be  recorded  not
                  later than  December  31, 2001 in a cumulative  amount,  which
                  will not be less than the aggregate of the following:

                  1.    0.15% of the  balance of the risk  assets as of June 30,
                        2001.

                  2.    1% of the balance of the specially  supervised  debts as
                        of June 30, 2001.

                  3.    2.5% of the balance for the  problematic  debts,  net of
                        the balance  for the  specially  supervised  debts as of
                        June 30, 2001.

                  The  special  allowance  will  be  maintained  in its  nominal
                  amount, subject to the aforesaid.

            J.    Severance pay and pension and accruals for wage costs

                  The  liabilities  for severance pay and pension are covered by
                  appropriate  accruals,  which  are  deposited  with  reputable
                  pension funds,  and by the appropriate  liabilities  (see Note
                  10(3)).

            K.    Loss per share

                  Loss Per Share was computed in accordance with Statement 55 of
                  the Institute of Certified Public Accountants in Israel.

            L.    Statement of cash flows

                  The  Bank  reports  on  cash  flows  in  accordance  with  the
                  Statements of the Institute of Certified Public Accountants in
                  Israel and  subject to the  directives  of the  Supervisor  of
                  Banks.


                                      -19-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 1 -    The Bank, Its Main Activities and Significant Accounting Policies
            (Cont.)

            L.    Statement of cash flows (Cont.)

                  In  the   statement  of  cash  flows,   the  cash  flows  from
                  transactions in assets and liabilities,  excluding investments
                  in the Bank's  building and equipment,  are presented in their
                  offset amounts.

                  The cash item  includes  unrestricted  cash and bank  deposits
                  held with  banks for which the  original  term of  deposit  is
                  short-term  and does not exceed  three months from the date of
                  the investment therein.

            M.    Financial instruments

                  The Bank's financial  instruments  include mainly cash, credit
                  and  financial  liabilities,  which  include  mainly  deferred
                  promissory  notes and deposits by the  Government  and others.
                  Most  of  the  credit   extended   by  the  Bank  is  for  the
                  agricultural  settlements - kibbutzim  and moshavim.  The Bank
                  has recorded an allowance for doubtful  debts on a prudent and
                  conservative basis. The Bank does not use derivatives.

            N.    Use of estimates

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

Note 2  -   Cash on Hand and Deposits with Banks

<TABLE>
<CAPTION>
                                                                            December 31
                                                                      ------------------------
                                                                         2005            2004
                                                                           In thousands NIS
                                                                      ------------------------
<S>                                                                      <C>            <C>
            Cash on hand and deposits with the Bank of Israel                --         56,404
            Deposits with banks                                          62,231             17
                                                                      ---------      ---------
            Total                                                        62,231         56,421
                                                                      =========      =========
            Cash and deposits for an original period of up to
             three months in the Bank of Israel and banks                62,321         56,421
                                                                      =========      =========
</TABLE>


                                      -20-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts)

            A.    Composition:

<TABLE>
<CAPTION>
                                                                              December 31
                                                                        -----------------------
                                                                          2005            2004
                                                                             In thousands NIS
                                                                        -----------------------
<S>                                                                      <C>            <C>
                  Credit(*)                                             125,222        124,149
                  Credit from designated deposits (**)                    80,188         83,606
                                                                        --------       --------
                  Total credit to the public for which the Bank is
                   responsible                                           205,410        207,755

                  Less - general and additional allowances for
                   doubtful debts                                        (24,844)       (24,844)
                  Special allowance                                       (6,000)        (6,000)
                                                                        --------       --------

                  Total                                                  174,566        176,911
                                                                        --------       --------
                  Credit from designated deposits, repayment of
                  which to the depositor is conditional upon the
                  collection of the loan and includes a margin            64,024         61,461
                                                                        --------       --------
                  Total credit to the public                             238,590        238,372
                                                                        ========       ========
</TABLE>

                  The specific  allowance  for doubtful  debts was deducted from
                  the appropriate credit items.

                  (*)   An  amount of NIS  78,088  thousand  (2004 - NIS  68,975
                        thousand)  for  which the Bank is not  responsible,  but
                        which is  included  as credit  extended  from the Bank's
                        resources  since the deposits are  presented as deferred
                        deposits and not as designated deposits.

                  (**)  With  respect to  kibbutzim  which have not yet arranged
                        their credit  balances (net of specific  allowances) and
                        were financed by Government deposits, part of which were
                        included  under  designated   deposits  and  part  under
                        deferred deposits.


                                      -21-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts) (Cont.)

            B.    Credit to the public for which the Bank is responsible
                  includes (*)

<TABLE>
<CAPTION>
                                                                                  December 31
                                                                           ------------------------
                                                                              2005           2004
                                                                                In thousands NIS
                                                                           ------------------------
<S>                                                                          <C>            <C>
                  Credit to the agricultural sector

                  (a)   For which the Bank is responsible (*):

                         Kibbutzim (including factories and regional
                           and national organizations)                        80,478         83,285

                         Moshavim (including factories and regional
                           and national organizations)                       124,932        124,470
                                                                           ---------      ---------
                        Total credit to the Agricultural Sector for
                        which the Bank is responsible (**)                   205,410        207,755

                  (b)   Credit for which the Bank is not
                        responsible (*):

                        Balance as of balance sheet date                      49,642         45,127
                                                                           ---------      ---------
                        Total credit to the Agricultural Sector              255,052        252,882
                                                                           =========      =========
</TABLE>

                  (*)   Credit  for  which  the  Bank is  responsible  excluding
                        designated deposits.  The repayment of these deposits is
                        subject to collection of the respective credit.

                  (**)  An  amount of NIS  78,088  thousand  (2004 - NIS  68,975
                        thousand) is not under the Bank's responsibility, but is
                        included in the Bank's responsibility since the deposits
                        are shown as deferred rather than designated.


                                      -22-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts) (Cont.)

            B.    Credit  to the  public  for  which  the  Bank  is  responsible
                  includes (*) (Cont.)

                  Credit  to the  Agricultural  Sector  for  which  the  Bank is
                  responsible includes (*):

<TABLE>
<CAPTION>
                                                                                   December 31
                                                                            ------------------------
                                                                                2005           2004
                                                                                  In thousands NIS
                                                                            ------------------------
<S>                                                                             <C>            <C>
            (a)   Credit to borrowers which has been rescheduled:

                  (1)   Credit which was  rescheduled  in prior years,
                        with waiver of income -
                        Balance as of balance sheet date                        2,134          3,818

                  (2)   Credit  which  was   rescheduled   during  the
                        current year without waiver of income -
                        Balance as of balance sheet date                           --          7,037

            (b)   Credit to borrowers which is to be  rescheduled,  as
                  per the Bank management's  decision, but has not yet
                  been rescheduled:
                  Balance as balance sheet date                                88,544         87,871

            (c)   Credit in  temporary  arrears,  balance  at  balance
                  sheet date                                                       41             38

            (d)   Credit under special supervision:
                  Balance as of balance sheet date                             74,861         68,043

            (e)   Credit to the agricultural sector for which the Bank
                  is responsible  (*), and is not included  within the
                  framework  of  loans  to  problematic  borrowers  as
                  above:

                  Balance as of balance  sheet date (income in respect
                  of  these  loans   included  in  the   statement  of
                  operations  -NIS  2,917  thousand  (2004 - NIS 2,260
                  thousand)                                                    39,830         40,948
                                                                            ---------      ---------
            Total                                                             205,410        207,755
                                                                            =========      =========
</TABLE>

            (*)   Credit for which the Bank is  responsible  excluding
                  credit extended from designated deposits.

                  The  repayment  of these  deposits is subject to the
                  collection of the respective loans.


                                 -23-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts)
            (Cont.)

            C.    Allowances for doubtful debts

<TABLE>
<CAPTION>
                                                    December 31, 2005                            December 31, 2004
                                                       Allowance                                     Allowance
                                      Specific(*)     Additional(**)      Total       Specific(*)  Additional(**)     Total
                                      -----------     --------------    --------      -----------  --------------   --------
<S>                                     <C>               <C>            <C>            <C>            <C>           <C>
Balance at the beginning
  of the year                           100,432           30,844         131,276        109,011        30,869        139,880
                                       --------           ------        --------       --------       -------       --------

Allowance during the current year            --               --              --
Decrease in allowances                       --               --              --             --            --             --
                                       --------           ------        --------       --------       -------       --------

Amount charged to statement of
operations                                   --               --              --             --            --             --
                                       --------           ------        --------       --------       -------       --------

Write offs                                  (41)              --             (41)        (8,579)           --         (8,579)

Erosion and adjustment
  of balances                                --               --              --             --           (25)           (25)
                                       --------           ------        --------       --------       -------       --------

Balance at the end of the year          100,391           30,844         131,235        100,432        30,844        131,276
                                       ========           ======        ========       ========       =======       ========

<CAPTION>
                                                      December 31, 2003
                                                           Allowance
                                           Specific (*)   Additional(**)     Total
                                           ------------   --------------   --------
<S>                                          <C>             <C>            <C>
Balance at the beginning
  of the year                                118,373         30,756         149,129
                                            --------         ------        --------

Allowance during the current year              3,500             --           3,500
Decrease in allowances                            --             --              --
                                            --------         ------        --------

Amount charged to statement of
operations                                     3,500             --           3,500
                                            --------         ------        --------

Write offs                                   (14,425)            --         (14,425)

Erosion and adjustment
  of balances                                  1,563            113           1,676
                                            --------         ------        --------

Balance at the end of the year               109,011         30,869         139,880
                                            ========         ======        ========
</TABLE>

(*)   Does not include an allowance for interest on doubtful debts for
      the period after the debts had been determined as doubtful.

(**)  Including  an  additional  and general  allowance  for  doubtful
      debts.


                                 -24-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts)
            (Cont.)

            D.    Classification  of credit balances (*) to the public under the
                  Bank's  responsibility(**)  according  to  size of  credit  to
                  individual borrower

<TABLE>
<CAPTION>
              December 31 2005                                          December 31 2004
-----------------------------------------------------    ------------------------------------------------
   Credit to borrowers          No. of      Credit          Credit to borrowers      No. of      Credit
----------------------------  borrowers    Reported      ------------------------   borrowers   Adjusted
   From              To         (***)       amounts        From             To       (***)      amounts
-----------      -----------              -----------    --------        --------              ----------
              In                              In                   In                              In
           thousands                      thousands             thousands                      thousands
            Of NIS                          of NIS               Of NIS                          Of NIS
----------------------------              -----------    ------------------------              ----------
<S>                <C>              <C>     <C>          <C>             <C>           <C>      <C>
                       10            13          64                          10         15           76
     10                20            13         183          10              20         14          220
     20                40            15         412          20              40         19          563
     40                80            19       1,030          40              80         20        1,160
     80               150            19       2,106          80             150         17        1,960
    150               300            20       4,448         150             300         21        4,710
    300               600            16       7,133         300             600         21        9,395
    600             1,200            22      19,159         600           1,200         28       23,861
  1,200             2,000            15      22,987       1,200           2,000         16       24,191
  2,000             4,000            23      61,288       2,000           4,000         24       61,419
  4,000             8,000            10      59,335       4,000           8,000          7       39,305
  8,000            20,000             2      27,265       8,000          20,000          3       40,895
 20,000            40,000            --          --      20,000          40,000         --           --
                                -------    --------                                -------     --------

  Total                             187     205,410       Total                        205      207,755
                                =======    ========                                =======     ========
</TABLE>

                  (*)   Net of specific allowances for doubtful debts.

                  (**)  Credit,  excluding designated deposits, the repayment of
                        which is subject to the collection of the credit.

                  (***) Number  of  borrowers,  according  to total  credit  and
                        credit risk.

            E.    Credit to the moshavim

                  On  March  4,  1992,  the   Arrangements  Law  in  the  Family
                  Agricultural  Sector, 1992 was enacted. The ensuing obligating
                  regulations  were partly  determined  during 1994. In December
                  1997, the regulation for the realization of assets,  which are
                  not  agricultural  assets was  completed,  including  land and
                  which  deals  with  the  modus  operandi  for  those  who  are
                  recovering.  Within  the  framework  of  the  regulation,  the
                  agriculture assets, which are not realizable, were temporarily
                  determined.  The  regulations  not yet  amended  refer  to the
                  distributions  of the proceeds,  realization  of  agricultural
                  assets and  collateral  for the  settlement of the debts.  The
                  proposal of the  regulations  to  distribute  the proceeds was
                  considered  by several  sessions of the economic  committee of
                  the Knesset,  and during the most recent session held on March
                  5,  2001,  the  members of the  committee  voted  against  the
                  approval of the regulations according to the text submitted by
                  the ministers.


                                      -25-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts) (Cont.)

            E.    Credit to the moshavim (Cont.)

                  In the absence of the above  regulations,  the  settlement  of
                  debts in this segment can only be completed by a comprehensive
                  creditor arrangement which is acceptable to the Moshav and all
                  the  creditors.  Commencing  with the end of the first half of
                  1997,  "wraparound  plans"  which  constitute  the basis for a
                  comprehensive  arrangement  were  formulated.  The sources for
                  that  arrangement  are the members'  debts and the sale of the
                  moshav assets, mainly by extended appropriation of residential
                  plots  (in  line  with  Resolution  737  of  the  Israel  Land
                  Administration)  and from changes in the  designation  of land
                  initiated   by  the   moshav,   according   to   Israel   Land
                  Administration (hereinafter "ILA") decisions.

                  These  arrangements  are  supposed  to make  the  need to sell
                  agricultural assets  superfluous,  however at the beginning of
                  1999, the performance of Resolution 737 of the ILA was frozen,
                  and since then the issue of the freeing of  agricultural  land
                  has come up for  discussion  over the years in the  committees
                  and in other contexts.

                  On August 29,  2002,  the Supreme  Court ruled that  decisions
                  717,727 and 737 of the ILA are void since they do not meet the
                  reasonability  criteria.  However,  this determination did not
                  receive  immediate force since the decisions  concern numerous
                  transactions  for which the  procedure  in their  respect  and
                  their  economic  and  social  implications  are  far-reaching.
                  Therefore,  the  Board  of  the  ILA  should  have  formulated
                  transitional  provisions  that  would  determine  which of the
                  transactions  would be carried  out.  Only on October 2, 2003,
                  the  Minister of Finance  signed the  transitional  provisions
                  which were  approved by the Board of the ILA on  September  2,
                  2003.

                  This uncertainty,  that has persisted since 1999, inhibits any
                  progress in finalizing arrangements,  even caused the collapse
                  of  arrangements  agreed on in the past and the search for new
                  resources,   among  them  the  linkage  of  the  framework  of
                  agreements to individual level.

                  Settlements  which  comply  with the  transitional  provisions
                  conditions make efforts to meet the timetable  allotted in the
                  provisions and thereby promote the repayment of the debts.

                  On December 19, 2005, the Minister of Finance and the chairman
                  of the Board of ILA,  Mr. Ehud Olmert  signed the  decision of
                  ILA  according  to which  an  extension  will be  given  until
                  December 31, 2006, to execute  expansion  transactions  in the
                  Moshavim in a way which is designated to cover debts according
                  to recovery judgments on condition that the request to execute
                  the transaction  will be submitted prior to November 30, 2006.
                  The  condition  for  giving  an  extension  according  to this
                  decision is the  transfer of all the revenue  from selling the
                  lots to the creditors after deducting development expenses.


                                      -26-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts) (Cont.)

            E.    Credit to the moshavim (Cont.)

                  In the current  decision  an  extension  was also  granted for
                  executing  transactions  according to previous decisions (727,
                  717) according to the  transitional  provisions until December
                  31, 2006.  On condition of  submitting a request for execution
                  prior to April 10, 2005.

                  In the decision it was resolved that no additional  extensions
                  will be given for the transitional provisions.

                  On June 6, 2000, an  inter-bank  agreement was reached for the
                  distribution  of the  proceeds,  where  until  the date of the
                  financial statements, several additional creditors joined and,
                  thereby since the end of 2001, it is slightly more possible to
                  promote the distribution of the proceeds that were accumulated
                  at the  administration  of  arrangements  in the  agricultural
                  sector.

                  As of the  date  of  these  financial  statements,  there  are
                  approximately 48 Moshavim in respect of which their debts have
                  not yet been  reorganized,  and 78 settlements for which their
                  debts have been arranged according to recovery  judgments.  In
                  part of them,  they are  already in stages of being  executed,
                  and the  proceeds are being  channeled to the  creditors or to
                  the Moshav account with the  Administration of arrangements in
                  the agricultural  sector,  and there are moshavim that are not
                  complying  with the  arrangement  and it will be  necessary to
                  deal with alternative arrangements.

                  During the reported  year, the Bank continued to implement the
                  directives of the  Supervisor of Banks dated October 16, 1994,
                  regarding  the  non-recording  of interest  income  (including
                  linkage  differentials)  and on that  portion of the  moshavim
                  debt that has not been  arranged  yet for which the  allowance
                  for doubtful debts is made on a collective basis.

            F.    Credit to the Kibbutzim

                  On August 15, 1991,  the Bank signed the first  agreement  for
                  the settlement of the kibbutzim debts.

                  On April  5,  1995,  the  Government  decided  to  approve  in
                  principle a supplementary  agreement to the kibbutzim based on
                  the  recommendations of the Suari Commission and, on March 20,
                  1996, a supplementary  kibbutzim agreement was reached between
                  the Government,  the two kibbutz movements,  Bank Hapoalim and
                  Bank Leumi, with the remaining banks joining on May 6, 1996.

                  The  supplementary  agreement is intended to resolve the debts
                  of  the   kibbutzim,   their   companies   and  two   regional
                  organizations which,  following the full implementation of the
                  first  agreement,  there is still a debt which they are unable
                  to repay  according to their  annual  repayment  power,  ("the
                  Balloon"),  as well as kibbutzim  regarding which the ratio of
                  their annual repayment power to their debt exceeds 10 and they
                  do not have an abundant  amount of  property.  The latter will
                  join the Balloon kibbutzim to receive incentives. An incentive
                  is a conditional  debt annulment and will be extended upon the
                  kibbutz  having  fulfilled  the  repayment of the  arrangement
                  debts over a period of a number of years.


                                      -27-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts) (Cont.)

            F.    Credit to the Kibbutzim (Cont.)

                  The origins of the  supplementary  agreement  (including debts
                  written off) as referred to above, are as follows:

                  -     From  the  contribution   made  by  the  banks  and  the
                        Government - Effected through the annulment of the debts
                        by the banks and the  Government's  cash  transfers at a
                        ratio of 65%  (banks) and 35%  (Government)  (except for
                        the  peripheral  kibbutzim  and  "incentive"  kibbutzim,
                        regarding  which the annulment of the debts by the banks
                        will be at a rate of 75% and Government participation of
                        25%).

                  -     From contributions by kibbutzim entering the arrangement
                        - Effected  through a waiver of rights to  alternatively
                        designated  land which the ILA is interested in the land
                        being  returned to it. The  Government  will provide the
                        banks with letters of commitment stating the amounts for
                        the repayment of the debts from the proceeds of the sale
                        of the land. The share of each bank in the proceeds will
                        be in proportion to their share in the total debt of the
                        kibbutzim to the banks.

                  The parties  agreed that if a transaction  is carried out with
                  respect to kibbutz real estate,  and a first priority mortgage
                  has been imposed over the land in the bank's favor, or that it
                  has in respect  thereto  any lawful  other  fixed  lien,  of a
                  nature and quality identical or similar to the  aforementioned
                  mortgage, there will be an increase of 20% of the bank's share
                  in the amounts of the Government  letters of liability  and/or
                  the amounts of the financial bank  guarantees and the share of
                  the other banks in the aforementioned  amounts will be reduced
                  accordingly pari pasu.

                  In the context of the  supplementary  agreement,  61 kibbutzim
                  entered and, in addition,  an arrangement was also implemented
                  in the  central  organizations.  In respect to the real estate
                  kibbutzim,  a survey was conducted  pursuant to which the land
                  for the ILA was earmarked. The survey was concluded,  however,
                  the  alternative  value  of  the  land  cannot  be  estimated.
                  Therefore,  a financial  alternative  was proposed,  following
                  which, on April 11, 1999, a supplementary  agreement (amended)
                  was  reached  between  the  Accountant  General and the banks,
                  including  the Bank,  which became  effective  pursuant to the
                  notice of the director of the Kibbutz Arrangement Board on May
                  25, 1999.

                  This alternative relies on the separation,  both time-wise and
                  financially - between the arrangement  regarding the "Balloon"
                  and  the  realization  of  land  - the  financial  arrangement
                  regarding the "Balloon" will be executed  immediately with the
                  entrance  of the  kibbutz  to the  arrangement  (65%  by  debt
                  annulment by the banks and 35% from Government  sources).  The
                  treatment of the  restored  land will be carried out after the
                  financial  arrangement  is executed,  while  distributing  the
                  yields  from  the  change  in  the  designation   between  the
                  Government and the banks, in proportion to the debt annulment.


                                      -28-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 3 -    Credit to the Public (Less - Allowance for Doubtful Debts) (Cont.)

            F.    Credit to the Kibbutzim (Cont.)

                  At the stage  when the  kibbutz  enters the  arrangement,  the
                  Government  and  the  ILA  will  furnish  the  banks  with  an
                  unlimited  letter of  commitment  which  does not  specify  an
                  amount,  pursuant to which the ILA confirms its agreement that
                  the land will be returned to it and  undertakes to only market
                  the land  following  a change in the  designation  against the
                  receipt of a cash consideration. The banks will be entitled to
                  record a caveat at the Land  Registry  Office with  respect to
                  the aforementioned letter of commitment.

                  Lately,  the  entrance  of a  Kibbutz  to  an  arrangement  is
                  executed  by  individual  arrangement,  which  is based on the
                  principal  of  the  supplementary   agreement   (amended)  and
                  adjusted  to  each  kibbutz  with   considering  its  economic
                  position at the time of the entrance, the financing sources it
                  has or will have while the part of the debt which  exceeds the
                  repayment  power at the time of the arrangement is recorded as
                  a "Deferred debt" without a maturity date and will be paid off
                  from future property transactions, if any.

                  As of the  signing  of  the  amendment  to  the  supplementary
                  agreement,  a  further  43  kibbutzim  have  entered  into the
                  arrangement,   among  them  are   peripheral   kibbutzim   and
                  "incentive"   Kibbutzim  and  39  kibbutzim  which  have  been
                  classified as real estate,  and there remain 2 kibbutzim which
                  have not yet joined.

                  The  "write-off"  in the  Bank's  books  with  respect  to the
                  "Balloon"   for  the  real   estate   kibbutzim   amounts   to
                  approximately  NIS 152 million  and, in exchange for the write
                  off of the  "Balloon"  by all  of  the  banks,  the  kibbutzim
                  returned  approximately  12,193 sq.  meters of land to the ILA
                  and   committed   to  comply  with  the   conditions   of  the
                  supplementary  agreement  should a neighborhood be established
                  on the kibbutz's section of land. In addition,  approximately,
                  2,537  dunams  were   expropriated  for  the  purpose  of  the
                  cross-Israel  highway,   where  the  indemnification  will  be
                  transferred to the banks and the Government in accordance with
                  the principles of the agreement.

Note 4 -    Credit to the Government of Israel (including deposits)

<TABLE>
<CAPTION>
                                                                                   December 31
                                                                            ------------------------
                                                                               2005           2004
                                                                               In thousands of NIS
                                                                            ------------------------
<S>                                                                            <C>            <C>
            Credit in respect of participation in write-off of Balloon
             and incentive                                                      9,956         16,385
            Write-offs against deferred deposits                                6,109          5,737
                                                                            ---------      ---------
            Total credit to the Government (including deposits)                16,065         22,122
                                                                            =========      =========
</TABLE>


                                      -29-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 5 -    Investment in an Affiliate

<TABLE>
<CAPTION>
                                                                                  December 31
                                                                            -----------------------
                                                                               2005          2004
                                                                              In thousands of NIS
                                                                            -----------------------
<S>                                                                            <C>          <C>
            (a)   Composition:
                  Cost of shares                                                22,529       22,533
                  Post acquisition losses                                      (21,497)     (21,475)
                                                                            ----------   ----------
                  Total investment                                               1,032        1,058
                                                                            ==========   ==========
</TABLE>

            (b)   Details of the Company:
                  Name of company:  The Palestine Agricultural Settlement
                                    Association Ltd. Agricultural financial
                                    institution

<TABLE>
<CAPTION>
                                                                                  2005        2004
                                                                              ----------    ---------
<S>                                                                              <C>          <C>
                    Details about the company:
                    Equity in capital providing rights for dividends -
                    percentage of holdings                                        50.0%        50.0%

                    Equity in capital providing voting rights -
                    percentage holdings                                           49.9%        49.9%

                    Investments in shares - equity basis (NIS in
                    thousand)                                                    1,032        1,058

                    Contribution to net operating profit (loss)
                    (NIS in thousand)                                              (26)          33
</TABLE>


                                      -30-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 6 -    Building and Equipment

<TABLE>
<CAPTION>
                                                     Cost                                         Depreciation
                                 ------------------------------------------   ------------------------------------------------
                                                                               In thousands of NIS
                                 ---------------------------------------------------------------------------------------------
                      Rate of    Beginning   Additions   Disposals             Accumulated  Allowance  Disposals   Accumulated
                   depreciation     of       during the   during     End of   at beginning    during     during      at end
                        %          year         year     the year     year       of year       year       year       of year
                   ------------  ---------   ----------  --------    ------   ------------  ---------  ---------   -----------
<S>                   <C>           <C>             <C>         <C>    <C>        <C>             <C>       <C>        <C>
Building (*)            4%            367           --          --       367        198           12         --          210

Equipment and
   Furniture          6-20%         1,454           11          --     1,465      1,324           33         --        1,357
                                  -------      -------     -------   -------    -------      -------    -------      -------
Total building and
   Equipment                        1,821           11          --     1,832      1,522           45         --        1,567
                                  =======      =======     =======   =======    =======      =======    =======      =======

<CAPTION>
                                        Depreciated Balance
                                    ----------------------------
                                        In thousands of NIS
                                    ----------------------------
                      Rate of        Beginning
                   depreciation          of           End of
                        %               Year           year
                   ------------      ---------        -------
<S>                   <C>                  <C>            <C>
Building (*)            4%                 169            157

Equipment and
   Furniture          6-20%                130            108
                                       -------        -------
Total building and
   Equipment                               299            265
                                       =======        =======
</TABLE>

(*)   The Bank is in a process to change  the  municipal  Building  Plan for the
      building where it is located.  Currently,  an economic estimation is being
      executed of the building's value.


                                      -31-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 7 -    Other Assets

<TABLE>
<CAPTION>
                                                                                     December 31
                                                                             ---------------------------
                                                                                2005             2004
                                                                                 In thousands of NIS
                                                                             ---------------------------
<S>                                                                               <C>              <C>
            Refund of payroll tax                                                 3,018            1,942
            Other accounts receivable                                               291              250
                                                                             ----------       ----------
                     Total other assets                                           3,309            2,192
                                                                             ==========       ==========
</TABLE>

Note 8 -    Deposits from the Public

<TABLE>
<CAPTION>
                                                                                     December 31
                                                                             ---------------------------
                                                                                2005             2004
                                                                                 In thousands of NIS
                                                                             ---------------------------
<S>                                                                                  <C>             <C>
            Demand deposits                                                          --              831
            Time deposits                                                            17               17
            Designated deposits                                                      33               32
                                                                             ----------       ----------
                                                                                     50              880
                                                                             ==========       ==========
            Includes deposits the repayment of which to the
             depositor is dependent on collection of the related
             credit with margin                                                      33               32
                                                                             ==========       ==========
</TABLE>

Note 9 -    Deposits from the Government

<TABLE>
<CAPTION>
                                                                                     December 31
                                                                             ---------------------------
                                                                                2005             2004
                                                                                 In thousands of NIS
                                                                             ---------------------------
<S>                                                                             <C>              <C>
             Designated and other deposits **                                   456,047          443,316
                                                                             ----------       ----------
            (**) Includes deposits for which the repayment to the
                 depositor is stipulated on the collection of the
                 credit (without any margin)                                     67,616           64,718
                                                                             ==========       ==========
</TABLE>


                                      -32-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 10 -   Other Liabilities

<TABLE>
<CAPTION>
                                                                         December 31
                                                                ----------------------------
                                                                   2005              2004
                                                                     In thousands of NIS
                                                                ----------------------------
<S>                                                                  <C>               <C>
            Accrued severance pay (1)                                1,279             1,279
            Accrued vacation pay and sick leave (2)                  5,473             5,399
            Accrued payroll differences                                180               180
            Other accounts payable credit balances                     487               710
                                                                ----------        ----------
            Total other liabilities                                  7,419             7,568
                                                                ==========        ==========
</TABLE>

            1.    The Banks' liabilities for the payment of severance or pension
                  pay to the  employees  are  calculated  on  the  basis  of the
                  employees'  most  recent  salary as of balance  sheet date and
                  pursuant to the  Severance  Pay Law, and are fully  covered by
                  deposits with a pension fund and a severance pay fund, as well
                  as the balance for the liability for severance pay.

                  The  amounts  that  were  accrued  in the  pension  fund and a
                  severance  pay  fund  on  behalf  of  the  employees  and  the
                  liability  in their  respect are not  presented in the balance
                  sheet since they are not under the  control or the  management
                  of the Bank.

            2.    Employees who retire are entitled to a partial compensation in
                  respect of unutilized  sick leave.  A full  provision for this
                  compensation  was recorded  only for those  employees who have
                  reached the age of 55. As for those employees who have not yet
                  reached the age of 55, a partial  provision  has been recorded
                  taking into  consideration  the uncertainty as to the scope of
                  the entitlement to this compensation.

                  The Bank's  employees are entitled to special  vacations  upon
                  the  completion of 15 years of  employment.  This  entitlement
                  increases  at the end of every five years  until the  employee
                  has  been  employed  for  35  years.  These  vacations  can be
                  utilized in addition to the annual vacation. In addition, such
                  vacation  can be redeemed  or,  alternatively,  accrued  until
                  retirement, at the employee's discretion. The Banks' liability
                  to cover this entitlement amounts to NIS 1,620 thousand, on an
                  actuarial  basis  at an  annual  interest  rate  of 4%.  As of
                  balance  sheet  date,  there  is  a  provision  to  cover  the
                  entitlement that can be utilized at that date.

            3.    In the  framework of the  decision to  privatize  the Bank and
                  cease its  activities  negotiations  are  being  held with the
                  employees of the bank for additional payments to the employees
                  beyond the current agreement.  The negotiations have yet to be
                  completed.


                                      -33-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 11 -   Deferred Government Deposits and Deferred Capital Notes

            (a)   Secondary capital

                  The  Supervisor of Banks agreed to recognize the entire amount
                  of the capital notes held by the  Government  (as owner of the
                  Bank) as "Secondary  Capital" for the purpose of computing the
                  ratio of capital to risk components.

            (b)   Deferred Government deposits

<TABLE>
<CAPTION>
                                                       Weighted
                                                     interest rate                  December 31
                                                     December 31,             -------------------------
                                                         2005                   2005              2004
                                                           %                       (In thousands NIS)
                                                     --------------           -------------------------
<S>                                                    <C>                    <C>               <C>
                  In Israeli currency:
                  Not linked                           10.5-28.5                588,181         501,830
                  Linked to the Index                    3.66                   520,078         488,350
                  Linked to foreign currency             6.22                     1,976           1,739
                                                                              ---------        --------
                                                                              1,110,235         991,919
                                                                              =========        ========
</TABLE>

                  In accordance with the Deposit Agreement, as described in Note
                  1A, the  interest  on each of the three  deposits  will be the
                  average weighted interest rate of all the Government  deposits
                  which became deferred deposits,  computed quarterly,  and will
                  be added to the principal.

                  In the case of  dissolution  of the Bank prior to February 28,
                  2006, the deferred deposits will be repaid only after the Bank
                  has repaid all its liabilities,  including  liabilities to the
                  Government of Israel,  except for Government deferred deposits
                  and  prior  to  liabilities  to  shareholders  at the  time of
                  dissolution, in accordance with the Articles of Association of
                  the Bank (excluding  liabilities for  distribution of earnings
                  to foreign shareholders). As to the repayment date, see Note 1
                  A (2) a.

            (c)   Deferred capital notes

                  U.S. dollar denominated  capital notes,  repayable on December
                  31, 2003, bear interest at 7.5%.

                  The capital  notes are  deferred  in relation to both  secured
                  liabilities  and other  liabilities  of the Bank,  whose terms
                  guarantee  that they have  preference  over the capital notes.

                  Pursuant to the letter from the  Treasury  dated  February 12,
                  2003,  commencing  in 2004,  the Bank will file a request on a
                  quarterly  basis to  extend  the time for the  payment  of the
                  deferred capital notes held by the Government.

                  On December  21, 2005,  the  Accountant  General  approved the
                  extension of the maturity date to February 28, 2006.


                                      -34-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 12 -   Share Capital

            a)    Share capital of the Bank (in nominal values)

<TABLE>
<CAPTION>
                                                                                             Reported amounts
                                                                                           In thousands of NIS
                                                                                        --------------------------
                                                                                            2005            2004
                                                                        Authorized        Issued and Outstanding
                                                                        ----------      --------------------------
<S>                                                                        <C>             <C>             <C>
                  Ordinary Shares of NIS 0.0001                             37,970          13,505          13,505

                  8%   Cumulative and Participating
                       Preferred "A" Shares of NIS 0.001                   201,530         195,768         195,768

                  7.5% Cumulative and Redeemable
                       Preferred "C" Shares of of
                       NIS 0,042, linked to the U.S. dollar
                       (see d. below)                                       10,500          10,500          10,500
                                                                        ----------      ----------      ----------
                                                                           250,000         219,773         219,773
                                                                        ==========      ==========      ==========
</TABLE>

            b)    Ordinary Shares

                  In case of a resolution  to  distribute  dividends on Ordinary
                  Shares,  the Preferred "A" Shares and the Preferred "C" Shares
                  will first be  entitled  to their  dividends  (see (c) and (d)
                  below).  The  Ordinary  Shares  will  then  be  entitled  to a
                  dividend  of  3%  on  outstanding  capital.   Thereafter,  the
                  Ordinary  Shares will rank pari passu in the  distribution  of
                  the  balance  of the  earnings  in  respect  of  which  it was
                  resolved to distribute dividends,  together with the Preferred
                  "A" Shares.

            c)    8% "A" Cumulative and Participating Shares

                  These shares entitle their holders to the following:

                  1)    The right to  receive a fixed and  cumulative  preferred
                        dividend for each financial year, at a rate of 8% of the
                        outstanding, or deemed to be outstanding capital.

                  2)    The right to receive,  out of profits to be  distributed
                        as  dividends,  after a  dividend  at the rate of 3% was
                        distributed  to  the  holders  of  Ordinary   Shares,  a
                        supplemental non cumulative dividend,  at the rate of 2%
                        of outstanding, or deemed to be outstanding capital.

                  3)    The right to  participate,  pari passu with the Ordinary
                        Shares,  in the distribution of earnings  resolved to be
                        distributed  as  dividends  after  distribution  of  the
                        dividend as mentioned in paragraph (2) above.

                  4)    In the event of  dissolution,  the excess of assets,  if
                        any,   is  to  be   distributed   equally   between  the
                        shareholders,  except for holders of 7.5%  Preferred "C"
                        Shares,  according to the  outstanding,  or deemed to be
                        outstanding capital.


                                      -35-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 12 -   Share Capital (Cont.)

            (d)   7.5%  "C"  Cumulative  Preferred  shares,  linked  to the U.S.
                  dollar

                  7.5% "C" Cumulative  Preferred Shares,  linked to the exchange
                  rate of the U.S. dollar,  redeemable,  nominal value NIS 0.042
                  (issued at $ 1 = NIS 0.00042).

                  The  shares  are  redeemable  at dates as to be elected by the
                  Bank,  with  additional  premium of 5.625%  and an  additional
                  dividend,  accrued to redemption  date of 7.5% per annum.  The
                  redemption   is  subject  to  the   advance   consent  of  the
                  Comptroller  of Foreign  Currency at the  Ministry of Finance.
                  The shares do not  provide  their  holders  with the rights to
                  receive  notification of general meetings of the Company,  and
                  to attend or vote at such meetings.

                  The amount  payable upon  redemption of these shares  (without
                  premium - see  above),  at the U.S.  dollar  exchange  rate on
                  balance   sheet  date,   exceeds   their   nominal   value  by
                  approximately NIS 115 million. Such excess is not reflected in
                  the  financial  statements,  as the  Ministry  of Finance  had
                  undertaken to cover any liabilities which may accrue, or shall
                  accrue, as a result of changes in the rate of the U.S. dollar.

            (e)   Dividend to holders of Preferred "A" and "C" Shares

                  On July 27, 1999, the Board of Directors  decided,  based on a
                  legal opinion which it obtained, to terminate the payment of a
                  dividend in respect to "A" and "C" shares.  A report regarding
                  this decision was  communicated to the Accountant  General and
                  the Company's Authority.

                  The  Bank did not  record  a  liability  with  respect  to the
                  cumulative dividend since its distribution is contingent upon:

                  1.    The   existence   of  income   (in  other   words,   the
                        distribution   will  not  be  in  contravention  of  the
                        Company's Law).

                  2.    As per a decision of the Board of Directors.

                  The cumulative dividend which was not paid with respect to the
                  years  1999 -  2005,  amounted  to  NIS  60,524  thousand.  In
                  addition,  the Treasury of the State of Israel has a liability
                  to   cover   the   linkage   differences   included   in   the
                  aforementioned  amount which amount to NIS 60,409 thousand. In
                  years preceding 1999 a dividend was paid.


                                      -36-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 13 -   Contingent Liabilities, Claims and Commitments

<TABLE>
<CAPTION>
                                                                             December 31
                                                                       ------------------------
                                                                          2005          2004
                                                                          In thousands of NIS
                                                                       ------------------------
<S>                                                                           <C>           <C>
            Off balance sheet financial instruments
             Transactions for which the amount stated constitutes
             a credit risk:
                 Unutilized lines of credit                                   --            197
                                                                       =========      =========
</TABLE>

Note 14 -   Related Parties

            (a)   Balance sheet balances:

<TABLE>
<CAPTION>
                                                  Affiliate                               General manager
                                   ------------------------------------       -------------------------------------
                                    Balance as of       Highest balance        Balance as of        Highest balance
                                     December 31,            during             December 31,             during
                                   ---------------      ---------------       ----------------      ---------------
                                                              In thousands of NIS
                                   --------------------------------------------------------------------------------
                                   2005       2004      2005        2004      2005        2004       2005      2004
<S>                                <C>        <C>       <C>         <C>       <C>         <C>        <C>       <C>
The following include
 balances of the affiliate:
    Assets - credit to the
      public                        --         --         15         --         --         --         --         --
    Liabilities - deposits
      from the public               --          2         20         25         --         43         54         66
</TABLE>

            (b)   A summary of the operating results with related parties:

<TABLE>
<CAPTION>
                                                                                   Year ended December 31
                                                                           ---------------------------------------
                                                                           2005              2004             2003
                                                                                     In thousands of NIS
                                                                           ---------------------------------------
<S>                                                                         <C>               <C>               <C>
                  Participation in expenses by the affiliate                96                95                95
</TABLE>

            (c)   The Bank is a Government  Company as defined in the Government
                  Companies Law - 1975.

                  Balances of the Government of Israel are stated  separately in
                  the  balance  sheet.  The Bank has  dealings  in the  ordinary
                  course of business,  and at customary  commercial  terms, with
                  entities that may be considered related parties.


                                      -37-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 14 - Related Parties (Cont.)

            (c)   (Cont.)

                  The following  balance  sheet items include  balances of these
                  entities:

<TABLE>
<CAPTION>
                                                                       December 31
                                                                   -------------------
                                                                   2005          2004
                                                                   In thousands of NIS
                                                                   -------------------
<S>                                                               <C>            <C>
                  Assets:
                    Credit to the public                          14,382         16,334
</TABLE>

                  The  State of Israel  is the main  related  party to the Bank.
                  Adjustments  including  rotation  of  discrepancies  with  the
                  Ministry of Finance  with  respect to the  liabilities  of the
                  Bank to the  State of  Israel  are done in  writing  once in a
                  period.  Liabilities  of the  state of  Israel to the Bank are
                  based  on  the  supplementary   agreement  (amended)  for  the
                  Kibbutzim.

            (d)   Benefits to related parties:

<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                        ------------------------------------------------------------------
                                                                     2005                                2004
                                                        -----------------------------        -----------------------------
                                                          Total           Number of           Total            Number of
                                                         Benefits       beneficiaries        Benefits        beneficiaries
                                                        ---------       -------------        --------        -------------
                                                            In                                  In
                                                        thousands                            thousands
                                                          of NIS                              of NIS
                                                        ---------                            ---------
<S>                                                         <C>               <C>               <C>               <C>
            Related party employed by the Bank              477               1                 473               1
            Directors not employed by the Bank               89               6                  58               8
                                                        -------                             -------
                                                            566                                 531
                                                        =======                             =======
</TABLE>


                                      -38-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 15 -   Loss from Financing  Activities  Before Allowance for Doubtful Debts
            (expenses are shows in negative numbers).

<TABLE>
<CAPTION>
                                                                                 Year ended December 31
                                                                    --------------------------------------------
                                                                        2005             2004            2003
                                                                                  In thousands of NIS
                                                                    --------------------------------------------
<S>                                                                   <C>               <C>              <C>
            In respect to assets
             From credit to the public                                  29,035           24,543           21,711
             From credit to the Government of Israel                       722              538              349
             From deposits with the Bank of Israel                       1,381            2,132            2,501
             From deposits with banks                                      901                1              422

            In respect to liabilities
            On deposits from the:
              Public                                                        (8)             (15)             (37)
              Government                                               (27,969)         (20,632)         (10,097)

            On respect to deferred deposits and capital notes:
              On deferred Government deposits                         (118,316)         (96,247)         (81,190)
              On deferred capital notes:
              Held by the Government                                    (5,888)          (5,674)          (8,326)

            Other
             Other financing (expenses) income                          (5,049)           1,294            6,749
                                                                    ----------       ----------       ----------
            Total loss from financing activities before
             allowance for doubtful debts                             (125,191)         (94,060)         (67,918)
                                                                    ==========       ==========       ==========
</TABLE>

                  The cases where the financing income or expenses on non-linked
                  NIS or  foreign  currency  balances  was lower than the annual
                  increase in the Index are included as expenses with respect to
                  assets, or income for liabilities.


                                      -39-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 16 -   Commissions and Other Income

<TABLE>
<CAPTION>
                                                                            Year ended December 31
                                                                  ---------------------------------------
                                                                      2005           2004          2003
                                                                            In thousands of NIS
                                                                  ---------------------------------------
<S>                                                                      <C>            <C>            <C>
            Bookkeeping                                                  17             35             42
            Collections and transfers                                    11             22             17
            Other                                                        57             72             54
                                                                  ---------      ---------      ---------
                                                                         85            129            113
                                                                  =========      =========      =========

</TABLE>

Note 17 -   Salaries and Related Expenses

<TABLE>
<CAPTION>
                                                                            Year ended December 31
                                                                  ---------------------------------------
                                                                      2005           2004          2003
                                                                            In thousands of NIS
                                                                  ---------------------------------------
<S>                                                                   <C>            <C>            <C>
            Salaries                                                  5,220          5,053          5,585
            Severance pay, pension, provident fund
             contributions and sick pay                               1,082          1,136          1,126
            National Insurance, employees tax and salary tax            301            319            308
                                                                  ---------      ---------      ---------
                                                                      6,603          6,508          7,019
                                                                  =========      =========      =========
</TABLE>

Note 18 -   Other Expenses

<TABLE>
<CAPTION>
                                                                            Year ended December 31
                                                                  ---------------------------------------
                                                                      2005           2004          2003
                                                                            In thousands of NIS
                                                                  ---------------------------------------
<S>                                                                   <C>            <C>            <C>
            Professional services                                       738            345            338
            Communications                                              100            116            115
            Computer services                                            79             77             81
            Office expenses                                              56             64             54
            Promotion and advertising                                    13             16             10
            Insurance                                                   290            289            269
            Director fees                                                89             58             20
            Commissions                                                   4             11             30
            Trustee commissions due to shares and
             capital notes                                               --             57            229
            Taxes and toll fees                                          37             81             81
            Participation in the budget of kibbutzim
             management                                                  73            105            160
            Participation in the budget of Moshavim
             management                                                 107            112            115
            Others                                                       55            109            127
                                                                  ---------      ---------      ---------
                                                                      1,641          1,440          1,629
                                                                  =========      =========      =========
</TABLE>


                                      -40-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 19 -   Income Taxes

            (a)   The  Bank  has  received  final  tax  assessments  up  to  and
                  including the year ended December 31, 2000.

            (b)   The  Bank's tax loss carry  forwards  amount to NIS  1,567,166
                  thousand  (2004 - NIS  1,395,748  thousand).  A  deferred  tax
                  benefit  in the net  amount of NIS  532,836  thousand  was not
                  included  in the balance  sheet (2004 - NIS 488,512  thousand)
                  since the Bank does not expect that it will be able to utilize
                  it  in  the  foreseeable  future.  The  adjusted  amounts  for
                  buildings,  for which the  depreciation  in their respect will
                  not be allowed in the future, are immaterial.

Note 20 -   Reconciliation Between Israel GAAP and U.S. GAAP

            The financial  statements of Israel Bank of Agriculture are prepared
            in  accordance  with  accounting  principles  generally  accepted in
            Israel ("Israel GAAP"),  which differ in certain respects from those
            generally  accepted in the United States ("U.S.  GAAP") as described
            below:

            (a)   Effect of inflation:

                  In accordance with Israeli GAAP:

                  The financial  statements of Israel Bank of  Agriculture  were
                  expressed  in terms of uniform  monetary  unit- the  inflation
                  adjusted Israel Shekel - which is after  adjustment in respect
                  of the changes in the Consumer  Price Index until December 31,
                  2003.  From January 1, 2004,  the  adjustment of the financial
                  statements   for  the  effect  of   inflation  in  Israel  was
                  discontinued.  In view of the  inflation  in Israel,  this was
                  considered  a  more  meaningful  presentation  than  financial
                  reporting  based on  historical  cost until  December 31, 2003
                  (See Note 1C for principles of the adjustment).

                  In accordance with US GAAP:

                  The  financial  statements  are  expressed in current  nominal
                  historical monetary terms.

                  Measurement on the basis of reported  amounts,  which reflects
                  the  effect  of  changes  in the  general  price  level in the
                  Israeli economy (mainly in prior years), provides a very valid
                  picture of the financial  position,  results of operations and
                  the cash  flows of the  Israel  Bank of  Agriculture  for both
                  Israel and US accounting purposes.

                  In view of the above, no data on the effect of the differences
                  between  measurements on the basis of cost adjusted to the CPI
                  or on the basis of historical cost, were included.

                  As  permitted  by the United  States  Securities  and Exchange
                  Commission  rules for foreign  private issuers whose financial
                  statements  comprehensively  include the effects of inflation,
                  price  level   adjustments  have  not  been  reversed  in  the
                  accompanying  reconciliation of Israeli accounting  principles
                  to U.S. accounting principles.


                                      -41-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 20 -   Reconciliation Between Israel GAAP and U.S. GAAP (Cont.)

            (b)   Depreciation method:

                  In accordance with the banking  regulations in Israel prior to
                  April 1, 1984,  the Bank  wrote-off all of its  investments in
                  the building  and  equipment  to the  statement of  operations
                  immediately   upon  making  the  investment.   The  matter  is
                  contradictory to the directives of both Israeli and U.S. GAAP.

                  Commencing  with 1984,  the Bank  records its  investments  in
                  assets and  depreciates  those  investments  over their useful
                  lives.

                  Since all of the  equipment  purchased  until  1984 is, in any
                  event, fully depreciated,  the aforementioned equipment has no
                  effect on the financial statements.

                  With respect to the  building in which the Bank's  offices are
                  located,   the  aforementioned  was  purchased  in  1956  and,
                  therefore,   in  effect  it  would  have  been   substantially
                  depreciated,  if they would have  depreciated it commencing at
                  that time.

                  With  respect to land on which the  building is  located,  its
                  adjusted  historical cost amounts to  approximately  NIS 2,408
                  thousand.

                  The  reconciliation  to U.S. GAAP requires the addition of the
                  amount to fixed  assets on the one hand,  and to equity on the
                  other  hand.  Otherwise,  there  is no  effect  on  U.S.  GAAP
                  reconciliation.  The change in equity as described  above does
                  not effect loss per share.

            (c)   Accrued severance pay

                  According to U.S. GAAP,  accrued  severance pay is included in
                  the  balance  sheet at the total  obligation  amount and total
                  amounts funded through  provident funds and through  insurance
                  policies.

                  According to Israeli  GAAP,  the net accrued  severance pay is
                  included in the balance sheets.

                  The  difference  between  the two methods  described  above is
                  immaterial  with respect to the  financial  statements  of the
                  Bank.

            (d)   Statement of cash flows

                  The  Bank  reports  on  cash  flows  in  accordance  with  the
                  Statements of the Institute of Certified Public Accountants in
                  Israel and  subject to the  directives  of the  Supervisor  of
                  Banks.

                  In  the  statements  of  cash  flows,   the  cash  flows  from
                  transactions in assets and liabilities,  excluding investments
                  in the Bank's  building and equipment,  are presented in their
                  net amounts.


                                      -42-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 20.   Reconciliation Between Israel GAAP and U.S. GAAP (Cont.)

            (d)   Statement of cash flows (Cont.)

                  The cash item  includes  unrestricted  cash and bank  deposits
                  held with banks and the Bank of Israel for which the  original
                  term of deposit is short-term and does not exceed three months
                  from the date of the  investment  therein.

                  Under U.S. GAAP, items that qualify for net reporting (because
                  their  turnover is quick,  their amounts are large,  and their
                  maturities   are  short)  are  cash   receipts   and  payments
                  pertaining to (a) investments  (other than cash  equivalents),
                  (b)  loans  receivable,  and  (c)  debt,  providing  that  the
                  original maturity of the asset or liability is three months or
                  less.

                  Cash flows from collection of accounts  receivable (credit) is
                  reported in cash flow from operating activities.

                  Below  is a  summary  of the Cash  Flow  showing  the  amounts
                  described  in Note 1L that are  presented in their net amount,
                  and herein is disclosed as gross amounts:

<TABLE>
<CAPTION>
                                                                                             Year ended December 31
                                                                                   -----------------------------------------
                                                                                      2005            2004           2003
                                                                                   ---------       ---------       ---------
                                                                                            Reported               Adjusted
                                                                                             amounts               amounts
                                                                                   --------------------------     ----------
                                                                                              (In thousands of NIS)
                                                                                   -----------------------------------------
<S>                                                                                 <C>             <C>              <C>
                  Cash flows from operating activities:
                  Loss for the year                                                 (134,006)       (102,616)        (99,665)
                  Adjustments to reconcile the cash flows
                   used in operating activities:
                  Equity in the profits of an affiliate                                   26             (33)            (56)
                  Depreciation on the bank's building and
                    equipment                                                             45              44              43
                                                                                   ---------       ---------       ---------
                  Net cash used in operating activities                             (133,935)       (102,605)        (99,678)
                                                                                   ---------       ---------       ---------
                  Cash flows from investing activities
                  Decrease (increase) in credit to the public                        (27,791)        (20,842)         (7,580)
                  Collection from the public                                          27,573          34,088          34,040
                  Decrease (increase) in credit to the
                   Government of Israel                                               (2,187)         (3,964)        (14,205)
                  Collection from the Government of Israel                             8,244          11,681          14,525
                  Purchase of equipment                                                  (11)             --             (11)
                  Other assets                                                        (1,117)            (74)           (489)
                                                                                   ---------       ---------       ---------
                  Net cash provided by investing activities                            4,711          20,889          26,280
                                                                                   ---------       ---------       ---------

                  Net cash provided by financing activities                          135,124          99,551          54,347
                                                                                   ---------       ---------       ---------

                  (Decrease) increase in cash on hand and deposits with banks          5,900          17,835         (19,051)
                  Balance of cash on hand and deposits
                   with banks at the beginning of the year                            56,421          38,586          57,637
                                                                                   ---------       ---------       ---------
                  Balance of cash on hand and deposits
                   with banks at the end of the year                                  62,321          56,421          38,586
                                                                                   =========       =========       =========
</TABLE>


                                      -43-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 20.    Reconciliation Between Israel GAAP and U.S. GAAP (Cont.)

            (e)   Earnings per share

                  The  computation  of earnings per share,  as it relates to the
                  Company, is not different than that under US GAAP.

Note 21 -   Subsequent events

                  On June 4, 2006,  the  Accountant  General at the  Ministry of
                  Finance  approved  the defer the  redemption  of the  deferred
                  deposits and the  principal  of the capital  notes held by the
                  government until July 5, 2006 (see note 1A(2) and Note 11(c)).

Note 22 -   Information on the basis of Nominal Historical Data for tax purposes

            (a)   Balance sheets:

<TABLE>
<CAPTION>
                                                                               December 31
                                                                       ---------------------------
                                                                           2005            2004
                                                                               (In thousands)
                                                                       ---------------------------
<S>                                                                      <C>            <C>
                  ASSETS

                  Cash on hand and deposits with banks                       62,321         56,421
                  Credit to the public                                      238,590        238,372
                  Credit to the Government of Israel                         16,065         22,122
                  Investment in an affiliate                                  1,032          1,058
                  Bank building and equipment                                   154            173
                  Other assets                                                3,309          2,192
                                                                       ------------   ------------

                  Total assets                                              321,471        320,338
                                                                       ============   ============

                  LIABILITIES AND SHAREHOLDERS' DEFICIENCY

                  Deposits from the public                                       50            880
                  Government of Israeli deposits                            456,047        443,316
                  Other liabilities                                           7,419          7,568
                                                                       ------------   ------------

                  Deferred deposits from the Government of Israel         1,110,235        991,919

                  Deferred capital notes:
                    Held by the Government                                   78,891         73,835
                                                                       ------------   ------------

                  Total liabilities                                       1,652,642      1,517,518
                  Shareholders' deficiency                               (1,331,171)    (1,197,180)
                                                                       ------------   ------------

                  Total liabilities and shareholders' deficiency            321,471        320,338
                                                                       ============   ============
</TABLE>


                                      -44-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 22 -   Information on the basis of Nominal Historical Data for tax purposes
            (Cont.)

            (b)   Statements of operations:

<TABLE>
<CAPTION>
                                                                                         Year ended December 31
                                                                            -----------------------------------------------
                                                                                 2005             2004              2003
                                                                                             (In thousands)
                                                                            -----------------------------------------------
<S>                                                                            <C>               <C>                <C>
                  Loss from financing activities
                  Loss from financing activities before
                   allowance for doubtful debts*                               (125,191)          (94,060)          (67,918)
                  Allowance for doubtful debts                                       --                --            (3,500)
                                                                            -----------       -----------       -----------
                  Loss from financing activities after
                   allowance for doubtful debts                                (125,191)          (94,060)          (71,418)
                                                                            -----------       -----------       -----------
                  Operating and other income
                   Rental income                                                    389               426               542
                   Commissions and other income                                      85               129               113
                                                                            -----------       -----------       -----------

                   Total operating and other income                                 474               555               655
                                                                            -----------       -----------       -----------

                  Operating and other expenses
                   Salaries and related expenses                                  6,603             6,508             7,019
                   Depreciation for building and equipment                           30                29                28
                   Maintenance of building and equipment                            974             1,152             1,117
                   Other expenses                                                 1,641             1,440             1,629
                                                                            -----------       -----------       -----------

                  Total operating and other expenses                             (9,248)           (9,129)           (9,793)
                                                                            -----------       -----------       -----------

                  Operating loss                                               (133,965)         (102,634)          (80,556)
                  Share in (losses) profits of an affiliate                         (26)               33                37
                                                                            -----------       -----------       -----------

                  Net loss for the year                                        (133,991)         (102,601)          (80,519)
                                                                            ===========       ===========       ===========

                  Loss per NIS 1 nominal value of share
                   capital - operating loss                                     (640.20)          (490.27)          (384.80)
                                                                            ===========       ===========       ===========

                  (*) Income (loss) from financing activities before
                  allowance for doubtful debts, interest on Government
                  deposits and deferred capital notes                              (987)            7,861            21,598
                   Interest on Government deposits and
                  deferred capital notes                                       (124,204)         (101,921)          (89,516)
                                                                            -----------       -----------       -----------
                  Loss from financing activities before
                  allowance for doubtful debts                                 (125,191)          (94,060)          (67,918)
                                                                            ===========       ===========       ===========
</TABLE>


                                      -45-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2005 (Cont.)
--------------------------------------------------------------------------------

Note 22 -   Information on the basis of Nominal Historical Data for tax purposes
            (Cont.)

            (c)   Statements of Changes in Shareholders' Deficiency

<TABLE>
<CAPTION>
                                                                   Receipts
                                                    Share          account        Accumulated
                                                   capital        of shares         deficit           Total
                                                  ----------      ----------      -----------       ----------
                                                                       (In thousands)
                                                  ------------------------------------------------------------
<S>                                                      <C>          <C>          <C>              <C>
                  Balance at January 1, 2003
                    Loss for the year                    220          91,893       (1,106,173)      (1,014,060)
                                                          --              --          (80,519)         (80,519)
                                                  ----------      ----------       ----------       ----------
                  Balance at January 1, 2004
                    Loss for the year                    220          91,893       (1,186,692)      (1,094,579)
                                                          --              --         (102,601)        (102,601)
                                                  ----------      ----------       ----------       ----------
                  Balance at January 1, 2005             220          91,893       (1,289,293)      (1,197,180)
                    Loss for the year                     --              --         (133,991)        (133,991)

                  Balance at
                    December 31, 2005                    220          91,893       (1,423,284)      (1,331,171)
                                                  ==========      ==========       ==========       ==========
</TABLE>

                  Comments:

                  The above  nominal  data  provide the basis for the  company's
                  Adjustments Report for Tax Purposes,  and are presented within
                  these  statements for that reason alone.  These data are based
                  on the  company's  accounting  records that are  maintained in
                  nominal-historical  shekels.  The accounting policies that are
                  applied in drawing-up  and  presenting  the above nominal data
                  are  identical  to  those  that  serve  as the  basis  for the
                  drawing-up of the financial statements.

Note 23 -   Other Information in Nominal Values

<TABLE>
<CAPTION>
                                                                                    Issued and Outstanding
                                                                                   -----------------------
                                                                                      2005          2004
                                                                                   ----------   ----------
<S>                                                                                   <C>          <C>
                  Ordinary shares NIS 0.0001 par value                                 13,505       13,505

                  8% "A" Cumulative and Participating shares                          195,768      195,768
                  7.5% "C" Cumulative Preferred shares linked to the exchange
                    Of the U.S. Dollar convertible to NIS 0.042 par
                     value (see Note 12)                                               10,500       10,500
                                                                                   ----------   ----------
                                                                                      219,773      219,773
                                                                                   ==========   ==========
</TABLE>


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