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, 2004

                         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.

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

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 which financial statement item the Registrant has elected
to follow:

      Item 17 |X|               Item 18 |_|


                                      -1-
<PAGE>

TABLE OF CONTENTS

PART I                                                                     Pages
------                                                                     -----
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
            A.  History and Development of the Company
            B.  Business Overview
            C.  Property, Plants and Equipment
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


                                      -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,
                                                 ----------------------------------------------------
                                                   2004       2003       2002       2001       2000
                                                 ----------------------------------------------------
<S>                                               <C>       <C>       <C>       <C>       <C>
            Rate of Exchange -
                         1US$ = NIS                 4.308      4.379      4.737      4.416      4.041

            Consumer Price Index (points)          437.56     432.34     440.65     413.77     408.00

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

            Cash in hand and deposits with
                      Banks                        56,421     38,586     57,637     35,343     23,311

            credit to the public                  238,372    251,618    278,078    323,694    366,412

            credit to the Government of Israel     22,122     29,839     30,159     25,459     31,407

            Investment in affiliate                 1,058      1,025        969        951        914

            Bank premises and equipment               299        343        375        329        377

            Other assets                            2,192      2,118      1,629      1,505      1,305
                                                 --------   --------   --------   --------   --------
            Total assets                          320,464    323,529    368,847    387,281    423,726
                                                 ========   ========   ========   ========   ========
</TABLE>


                                      -3-
<PAGE>

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                             December 31,
                                                  ------------------------------------------------------------------
                                                     2004          2003          2002          2001          2000
                                                  ----------    ----------    ----------    ----------    ----------
                                                   Reported
                                                    amounts                Adjusted amounts
                                                  ----------    ----------------------------------------------------
<S>                                               <C>           <C>             <C>           <C>           <C>
Deposits from the public                                 880         1,022         1,077         1,834         1,519
Deposits from the Government
           of Israel                                 443,316       438,291       436,946       440,144       439,516
Other liabilities                                      7,568         7,930         7,442         7,963        27,265
         Deferred deposits from the
           Government of Israel                      991,919       895,672       799,118       743,838       681,868
Deferred capital notes
           Held by the public                             --            --        39,435        39,387        37,231
           Held by the Government                     73,835        75,052        79,602        78,792        72,436
Non-participating preference
           shares                                         11            11            11            12            11
Shareholders' deficiency                          (1,197,065)   (1,094,449)     (994,784)     (924,689)     (836,120)
                                                  ----------    ----------    ----------    ----------    ----------

Total liabilities and shareholders' equity           320,464       323,529       368,847       387,281       423,726
                                                  ==========    ==========    ==========    ==========    ==========

LOSS FROM FINANCING ACTIVITIES

     Loss from financing activities before
         allowance for doubtful debts:
                    Interest expense                (122,568)     (118,202)      (82,106)      (96,012)      (86,141)
         Interest income                              28,508        31,143        20,238        23,051        25,074
                                                  ----------    ----------    ----------    ----------    ----------

                                                     (94,060)      (87,059)      (61,868)      (72,961)      (61,067)
       Increase in allowance for doubtful debts           --        (3,500)           --        (6,269)           --
                                                  ----------    ----------    ----------    ----------    ----------
       Loss from financing activities after
        allowance for doubtful debts                 (94,060)      (90,559)      (61,868)      (79,230)      (61,067)
                                                  ==========    ==========    ==========    ==========    ==========
Net loss for the year                               (102,616)      (99,665)      (70,095)      (88,569)      (70,516)
                                                  ==========    ==========    ==========    ==========    ==========
Net loss per ordinary share

Loss per NIS 1 nominal value
      of share capital                               (490.30)      (476.20)      (334.90)      (423.20)      (337.00)
                                                  ==========    ==========    ==========    ==========    ==========
</TABLE>


                                      -4-
<PAGE>

Share Capital

Share capital of the Bank (in nominal values)

                                                               December 31,
                                                         -----------------------
                                                            2004         2003
                                                         ----------   ----------
                                            Authorized    Issued and Outstanding
                                            ----------   -----------------------
                                                            NIS
                                            ------------------------------------

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

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 recession  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 February 7, 2005 a letter from the Government  Companies  Authority was
      received by the Bank according to which the Government Companies Authority
      intends to bring to the Ministers  Committee for  Privatization a proposal
      about the  privatization of the Bank by selling material assets and in the
      end of the process to  liquidate  the Bank.  On May 9, 2005 the opinion of
      the  Board of  Directors  regarding  the  proposal  was  submitted  to the
      Government Companies Authority.

      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
      cancellation  of its membership in the clearing - house 60 days after this
      date. On April 14, 2005 the Bank submitted a petition to the High Court of
      Justice in order to receive an order nisi and a  temporary  order  against
      the Bank of Israel, the temporary governor,  the License Committee and the
      Supervisor of Banks. On April 19, 2005, Her Honor, the Justice Hayut ruled
      that:  "at  this  stage  there is no place  for a  temporary  order ". The
      hearing on the petition  was on May 16, 2005 and to date of the  preparing
      of the financial  statements a decision has yet to have been received.  In
      an answer  to the  Bank's  request,  an  approval  from the  Governor  was
      received on May 25, 2005 for continuation of the Bank's  membership in the
      clearing - house  until July 31,  2005 under the  condition  that the Bank
      will follow the directives of the Supervisor of Banks.

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, 2004 and the current collection  anticipated in
      2005 from the payment arrangement with the moshavim and the kibbutzim will
      allow  the Bank in  2005,  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,  2004:  Preferred  A shares - 99.52%,  Preferred  C shares -
      93.08%)  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
      - 2004 amounted to NIS 48,559 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 48,460
      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
                                                                          ======


                                      -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, 2004 and the current collection  anticipated in
      2005 from the payment arrangement with the moshavim and the kibbutzim will
      allow  the Bank in  2005,  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 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.

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.


                                      -11-
<PAGE>

Arrangements in the Agricultural Sector

Credit to the moshavim (Cont.)

This  uncertainty,  that has  persisted  since 1999,  inhibits  any  progress in
finalizing  arrangements,  even causes 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. The last date for performance of transactions  according
to resolution  737 has been extended till August 8, 2005 and in Kav-imut and Kav
Ha-Tefer  (Border  Area) and  National  "A"  Preference  area  settlements  till
February 8, 2007.

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 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  50
moshavim in respect of which recovery  judgments have not yet been granted,  and
81  settlements  that were  agreed  upon.  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 and exchange rate  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%).

-     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.


                                      -12-
<PAGE>

Arrangements in the Agricultural Sector

Credit to the moshavim (Cont.)

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  and until
December 31, 2004,  a further 41  kibbutzim  have entered into the  arrangement,
among them are peripheral  kibbutzim and "incentive"  Kibbutzim and 37 kibbutzim
which have been  classified as real estate,  and there remain 4 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 141 million and, in exchange for
the write off of the  "Balloon"  by all of the  banks,  the  kibbutzim  returned
approximately  11,699 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.

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, 2004
to about 90% of the total amounts owed by the Moshavim to the Bank.


                                      -13-
<PAGE>

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, 2004, the total amount of loans  outstanding  to Kibbutzim,  net of specific
allowances and of Government "grants",  received to that date amounted to NIS 84
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 2004 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 allowances for doubtful debts,
was nominal NIS 94.1  million in 2004 as compared to nominal NIS 67.9 million in
2003. Loss from financing  activities,  after allowance for doubtful debts,  was
nominal NIS 94.1 million, compared to nominal NIS 71.4 million in 2003.

The general allowance and the additional  allowance together represent 25.41% of
the borrowers' debt, under the Bank's responsibility, as of December 31, 2004.

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 0.6 million in 2004, as compared
to nominal NIS 0.7 million in 2003.

Operating  and net loss in 2004 were NIS 102.6 million in reported  amounts,  as
compared to NIS 99.7  million in adjusted  amounts in 2003,  (includes  NIS 19.1
million of erosions and adjustments).  Net loss per NIS 1 par value Ordinary and
Preference "A" share was NIS 490.3 in 2004 (NIS 476.2 in 2003).


                                      -14-
<PAGE>

Shareholders' Equity

The  shareholders'  deficiency  increased  from NIS 1,094.4  million in adjusted
amounts at the end of 2003, to a deficiency of NIS 1,197.1 million at the end of
2004 in reported amounts.

On December 31, 1991,  Government deposits in the amount of NIS 180 million were
converted  (December 31, 2004 - NIS 991.9 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 26, 2005,  their
maturity date was deferred until July 31, 2005,  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 26, 2005 the Accountant  General  approved the extension of the maturity
date to July 31, 2005.

The ratio of  capital  to credit  risk  components,  computed  according  to the
provisions of the  Supervisor of Banks,  is negative and, at the end of December
2004, amounted to (108.44%).

Principal Balance Sheet Items

The  assets  and  liabilities  of the Bank at the end of 2004  and 2003  were as
follows (in thousands of NIS):

                                                       Year ended December 31,
                                                      -------------------------
                                                         2004           2003
                                                       Reported       Adjusted
                                                        amounts        amounts
                                                      ----------     ----------

Total Balance Sheet                                      320,464        323,529
Credit to the Public                                     238,372        251,618
Credit loans to the Government of Israel                  22,122         29,839
Cash and Bank Deposits                                    56,421         38,586
Deposits from the Public                                     880          1,022
Deposits from the Government                             443,316        438,291
Capital Notes and Deferred Deposits                    1,065,754        970,724
Shareholders' Equity (deficit)                        (1,197,065)    (1,094,449)

(*)   Includes  credit for which the  Government is  responsible in an amount of
      130.4  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, 2004 for more
details.

Trend Information

Not Applicable


                                      -15-
<PAGE>

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, 2004 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 2004, 10 Board meetings were held, as well as 12 meetings
      of various Board Committees.

      Board changes in 2004 and as of June 2005 were -
      Directors whose term began:

              Name                       Beginning Date
      ------------------------      ----------------------------

      Kulas Eliezer, Adv.                May 30, 2004
      Zibin Nehama, Adv.                 November 18, 2004
      Medleg Gamal                       May 30, 2004
      Grinfeld Elisha, Adv.              February 18, 2004
      Dadon-Israeli-Bar                  February 3, 2004

      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                            --

      Helmaliah Dorit              General  manager of  business       --
                                   development  center in Kiryat
                                   Shmone and Ezba Hagalil

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

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

      Lamdani Ariel                Economist, Ministry of              --
                                   Agriculture

      Fredkin Israel               Self employed - agriculturist       Tagmulim in the Moshavim Ltd.

      Medleg Gamal                 Economist, Ministry of              --
                                   Agriculture

      Zibin Nehama, Adv.           Attorney                            Omnitek, Meshulam Levinstein,
                                                                       TTI
</TABLE>


                                      -16-
<PAGE>

      Bank's Management

      Name                             Major Responsibility
      -----------------------      ------------------------------------------

      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

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

      Gelem Avigdor                    Manager of information system

      Birenboim Zeev                   Internal Auditor

      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       Other
              Name                Salary      Pay, Leave Pay, etc.        Benefits       Payments
-------------------------------------------------------------------------------------------------
<S>                                 <C>               <C>                    <C>            <C>
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 Yacov                         229                73                    302             1
Littman Amnon (*)                    70                37                    107            --

(*) Retired in April 1, 2004

In 2003 - Adjusted amounts
Patalovsky Lea                      381               105                    486            --
Sitton Moshe                        328                96                    424             1
Littman Amnon                       315                84                    399             1
Levi Noah                           284                82                    366             1
Cohen Yakov                         243                65                    308             1
</TABLE>

      Personnel

      At the end of 2004, 27 persons were  employed by the Bank (24.5  full-time
      positions), as compared with 28 persons (25.75 full-time positions) at the
      end of 2003.


                                      -17-
<PAGE>

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A summary of the operating results with related parties:

                                                              Year ended
                                                             December 31
                                                        ------------------------
                                                           2004          2003
                                                             (In thousands)
                                                        ------------------------
                                                         Reported      Adjusted
                                                          amounts       amounts
                                                        ----------    ----------

Participation in expenses by the affiliate                   95            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

      Subsidiaries

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                          2004         2003
                                                                        ---------------------
                                                                         (NIS in thousands)
                                                                        Reported     Adjusted
                                                                        amounts      amounts
                                                                        --------     --------
<S>                                                                      <C>          <C>
      (a)   Investment in shares
            Cost of shares                                                22,533       22,533
            Post acquisition losses                                      (21,475)     (21,508)
                                                                        --------     --------
            Total investment                                               1,058        1,025
                                                                        ========     ========

<CAPTION>
      (b)   Details of subsidiaries                                       Affiliated Company

            Name of company:                                          The Palestine Agricultural
                                                                      Settlement Association Ltd.
            Company details:                                            Agricultural Financial
                                                                             Institution
                                                                        ---------------------
                                                                          2004         2003
                                                                        --------     --------
<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                             1,058        1,025
            Contribution to net profit (loss) on ordinary activities          33           56
</TABLE>


                                      -18-
<PAGE>

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

            Balance Sheet

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                --------------------
                                                                  2004        2003
                                                                 (NIS in thousands)
                                                                --------------------
                                                                Reported    Adjusted
                                                                amounts     amounts
                                                                --------    --------
<S>                                                               <C>         <C>
      Assets

      Loans out of designated deposits by the State of Israel      5,044       6,518

      Loans out of designated deposits by the Jewish Agency        1,346       3,991

      Other loans                                                  2,586       2,715

      Cash and deposits with banks                                 2,319       2,198

      Other assets                                                     9          18
                                                                --------    --------

                                                                  11,304      15,440
                                                                ========    ========

      Liabilities and Shareholders' Equity

      Designated deposits from the Government of Israel            5,148       6,692

      Designated deposits from the Jewish Agency                   3,905       6,574

      Other liabilities                                              134         124

      Shareholders' Equity                                         2,117       2,050
                                                                --------    --------

                                                                  11,304      15,440
                                                                ========    ========
</TABLE>

The Bank's share in equity,  50% of NIS 2,117 thousand,  namely in the amount of
NIS 1,058 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 26, 2005, their maturity date was deferred until July 31, 2005, 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 26, 2005 the Accountant General approved the extension
      of the maturity date to July 31, 2005.

      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
      cancellation  of its membership in the clearing - house 60 days after this
      date. On April 14, 2005 the Bank submitted a petition to the High Court of
      Justice in order to receive an order nisi and a  temporary  order  against
      the Bank of Israel, the temporary governor,  the License Committee and the
      Supervisor of Banks.

      On April 19, 2005, Her Honor the Justice Hayut, ruled that: "at this stage
      there is no place for a temporary order ".

      The  hearing  on the  petition  was on May  16,  2005  and to  date of the
      preparing  of the  financial  statements  a decision  has yet to have been
      received.

      In an answer to the Bank's  request,  an approval  from the  Governor  was
      received on May 25, 2005 for continuation of the Bank's  membership in the
      clearing - house  until July 31,  2005 under the  condition  that the Bank
      will follow the directives of the Supervisor of Banks.

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.

      General Corporate Tax Structure

      Israeli  companies are  generally  subject to corporate tax at the rate of
      36% of their taxable income.

      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.  The basic capital gains tax rate
      applicable to corporations  effective until December 31, 2002 had been 36%
      and the maximum tax rate for individuals had been 50%.  Effective  January
      1, 2003,  the capital  gains tax rate imposed upon sale of capital  assets
      acquired  after that date has been reduced to 25%;  capital  gains accrued
      from  assets  acquired  before that date are subject to a blended tax rate
      based on the relative  periods of time before and after that date that the
      asset was held.

      In  addition,  if the  ordinary  shares  are  traded on the Tel Aviv Stock
      Exchange (or listed on a stock exchange recognized by the Israeli Ministry
      of Finance),  gains on the sale of ordinary shares held 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.

      The U.S.-Israeli Tax Treaty exempts U.S. residents who hold an interest of
      less than 10% in an Israeli company, and who held an interest of less than
      10% 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.

      Under the United States - Israel Tax Treaty,  the maximum tax on dividends
      paid to a holder of ordinary shares who is a Treaty United States Resident
      will be 25%.


                                      -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
      - 2004 amounts to NIS 48,559  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 48,460  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. However,
      we distribute  annually to our  shareholders an annual report,  containing
      financial  statements  that have been  examined  and  reported on, with an
      opinion expressed by, an independent public accounting firm.

      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. 450 Fifth Street, N. W., 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.

      The portion of the  allowance in excess of 1% may be charged on account of
      the  additional  allowance.  As of  December  31,  2004,  the  general and
      additional  allowances represent 25.41% 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.

      As aforementioned,  the Bank recorded a special allowance in the amount of
      NIS 6,000  thousands.  The special  allowance  will be  maintained  in its
      nominal amount, subject to the aforesaid.

      Foreign currency exchange risk

      The Bank has both assets and 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, would not
      affect the fair value of the  assets.  Liabilities  would be  effected  by
      about adjusted NIS 7.4 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  26,  2005  the  Accountant
            General  approved the  extension  of the  maturity  date to July 31,
            2005.

      (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)

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 February  25, 2003 the Board of Directors  of the Bank  approved  audit
      fees to the  independent  auditors for the year ended December 31, 2003 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.

      On August 2, 2004, the Government  Companies  Authority approved the above
      amount for the year 2003.

      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).

      After  finishing  all the audit work for the year 2004,  a final  approval
      will be given by the Government Companies Authority.

      There were no other services provided.

      The fees for professional services for the 2 years ended December 31, 2004
      were as follows

      =========================================
                              2004        2003
                              NIS         NIS
      -----------------------------------------
      Audit fees            165,000     165,000
      =========================================


                                      -25-
<PAGE>

PART III

ITEM 17. FINANCIAL STATEMENTS

      See pages F-1 to F-48 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 26, 2005


                                      -26-
<PAGE>

                         ISRAEL BANK OF AGRICULTURE LTD.

                              FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2004

<PAGE>

                         ISRAEL BANK OF AGRICULTURE LTD.

                              FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2004

                                      INDEX

                                                                          Page
                                                                        --------

Report of Independent Auditors                                              2

Balance Sheets                                                            6 - 7

Statements of Operations                                                    8

Statements of Changes in Shareholders' Deficiency                           9

Statements of Cash Flows                                                    10

Notes to the Financial Statements                                           11


                                      -1-
<PAGE>

                       [LETTERHEAD OF ROSENBLUM-HOLTZMAN]

                         Report of Independent Auditors
                               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, 2004 and 2003,  and the related  statements
of operations,  changes in equity (deficiency) and cash flows for the years then
ended.  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 1,058 thousand and NIS 1,025
thousand as of December 31, 2004 and 2003, respectively, and the Bank's share in
the net income of which  totaled  NIS 33 thousand  and NIS 56  thousand  for the
years then ended, 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.


                                      -2-
<PAGE>

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,
2004 and 2003 and,  the  results of its  operations,  and its cash flows for the
years then ended, 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).

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. 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.

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 1,197  million as of
December 31, 2004 and the ratio of capital to credit risk components, calculated
according to the  provisions of the  Supervisor of Banks is negative and amounts
to  (108.44%).  Further,  the maturity date of the  Government  deposits and the
principal of the capital notes held by the Government was postponed to March 31,
2005. 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 (See Note 21 to the financial statements).


                                                     Rosenblum-Holtzman
                                             Certified Public Accountants (Isr.)

Tel Aviv, Israel
February 27 ,2005
Except for Note 21, as to which the date is June 26, 2005.


                                      -3-
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                         ISRAEL BANK OF AGRICULTURE LTD.

      We  have  audited  the  accompanying  balance  sheet  of  Israel  Bank  of
Agriculture  Ltd.  ("the  Bank")  as of  December  31,  2002 , and  the  related
statement of operations,  changes in equity  (deficiency) and cash flows for the
year ended December 31, 2002. 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 988  thousand  as of
December 31, 2002,  and the Bank's share in the net income of which  totaled NIS
19 thousand, for the year ended December 31, 2002. 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. These standards
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by 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,
2002, and the results of its  operations,  and its cash flows for the year ended
December 31, 2002, 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 21).

      As explained in Note 1C, the aforementioned financial statements have been
prepared on the basis of historical  cost adjusted to the reflect changes in the
general  purchasing power of Israeli currency,  in accordance with Statements of
the Institute of Certified Public Accountants in Israel.


                                      -4-
<PAGE>

      The accompanying  financial staements 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 on the basis that current cash collections of
the Bank will  enable it to pay  operating  expenses  and  interest  (mainly  to
Government)  and for the payment of the  principal of capital  notes held by the
public as  stated  in Note  1A(2)(c).  The Bank has a  shareholder's  deficiency
amounting to NIS 1,014  million as of December 31, 2002 and the ratio of capital
to  credit  risk  components,  calculated  according  to the  provisions  of the
Supervisor of Banks is negative and amounts to (59.85%).  Further,  the maturity
date of the  Government  deposits was postponed to April 1, 2003. The Government
intends, during the period until the maturity date, 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
as 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  recovereability  and
classification  of assets and the amount and  classification of liabilities that
they may result from the outcome of this uncertainty.


           ROSENBLUM HOLTZMAN                      KOST FORER & GABBAY
   Certified Public Accountants (Isr.)     Certified Public Accountants (Isr.)

Haifa, Israel
March 2, 2003
Except for Note 22, as to which the date is June 24, 2003.


                                      -5-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

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

                                                           As of December 31
                                                       -------------------------
                                                          2004          2003
                                                        Reported      Adjusted
                                              Note     amounts (1)   amounts (2)
                                            --------   -----------   -----------

ASSETS

    Cash on hand and deposits with banks        2          56,421        38,586

    Credit to the public                        3         238,372       251,618

    Credit to the Government of Israel          4          22,122        29,839

    Investment in affiliate                     5           1,058         1,025

    Bank building and equipment                 6             299           343

    Other assets                                7           2,192         2,118
                                                        ---------     ---------

TOTAL ASSETS                                              320,464       323,529
                                                        =========     =========

(1)   Cessation of the adjustment for the effect of inflation  based on December
      2003 CPI.

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


       /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 27, 2005

     The accompanying notes are an integral part of the financial statements


                                      -6-
<PAGE>

<TABLE>
<CAPTION>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

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

                                                                   As of December 31
                                                              ---------------------------
                                                                  2004           2003
                                                                Reported       Adjusted
                                                    Note       amounts (1)    amounts (2)
                                                  --------    -----------    ------------
<S>                                                  <C>       <C>            <C>
LIABILITIES AND SHAREHOLDERS'
DEFICIENCY

Deposits from the public                              8               880          1,022
Government of Israel deposit                          9           443,316        438,291
Other liabilities                                    10             7,568          7,930
                                                              -----------    -----------
                                                                  451,764        447,243

Deferred deposits from the Government of Israel      11           991,919        895,672

Deferred capital notes:
    Held by the Government                           11            73,835         75,052
                                                              -----------    -----------

Total liabilities                                               1,517,518      1,417,967

Non-participating Preferred Shares                                     11             11

Shareholders' deficiency                                       (1,197,065)    (1,094,449)
                                                              -----------    -----------

Total liabilities and shareholders' equity                        320,464        323,529
                                                              ===========    ===========
</TABLE>

(1)   Cessation of the adjustment for the effect of inflation  based on December
      2003 CPI.

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

     The accompanying notes are an integral part of the financial statements


                                      -7-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

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

<TABLE>
<CAPTION>
                                                                                                 For the year ended
                                                                                                     December 31
                                                                                     -------------------------------------------
                                                                                         2004            2003            2002
                                                                                     -----------     -----------     -----------
                                                                                               Reported               Adjusted
                                                                           Note               amounts (1)            amounts (2)
                                                                         --------    ----------------------------    -----------
<S>                                                                         <C>         <C>              <C>             <C>
Loss from financing activities
Loss from financing activities before allowance for
  doubtful debts (4)                                                        15           (94,060)        (67,918)        (61,868)
Increase in allowance for doubtful debts                                    3c                --          (3,500)             --
                                                                                     -----------     -----------     -----------
Loss from financing activities after allowance for doubtful debts                        (94,060)        (71,418)        (61,868)
                                                                                     -----------     -----------     -----------
Operating and other income
Rental income                                                                                426             542             508
Other income                                                                16               129             113              87
                                                                                     -----------     -----------     -----------
Total operating and other income                                                             555             655             595
                                                                                     -----------     -----------     -----------
Operating and other expenses
Salaries and related expenses                                               17             6,508           7,019           6,616
Depreciation on bank building and equipment                                                   44              43              34
Building and equipment maintenance                                                         1,152           1,117             667
Other expenses                                                              18             1,440           1,629           1,524
                                                                                     -----------     -----------     -----------
Total operating and other expenses                                                        (9,144)         (9,808)         (8,841)
                                                                                     -----------     -----------     -----------
Operating loss in reported amounts                                                      (102,649)        (80,571)        (70,114)
Erosions and adjustments (3)                                                                  --         (19,150)             --
                                                                                     -----------     -----------     -----------
Operating loss                                                                          (102,649)     (2)(99,721)        (70,114)
Equity in profits of an affiliate                                                             33      (2)     56              19
                                                                                     -----------     -----------     -----------
Net loss for the year                                                                   (102,616)     (2)(99,665)        (70,095)
                                                                                     ===========     ===========     ===========

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                                                                    (490.30)   (2)  (476.20)        (334.90)
                                                                                     -----------     -----------     -----------
Income from financing activities before allowance for doubtful
  debts, interest on Government deposits and deferred capital notes                        7,861          21,598           3,253

Interest on Government deposits and deferred capital notes                              (101,921)        (89,516)        (65,121)
                                                                                     -----------     -----------     -----------
(4) Loss from financing activities before expense before
allowance for doubtful debts                                                             (94,060)        (67,918)        (61,868)
                                                                                     ===========     ===========     ===========
</TABLE>

(1)   For  the  year  2004 -  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)   Amounts adjusted for the effect of inflation based on December 2003 CPI.

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

     The accompanying notes are an integral part of the financial statements


                                      -8-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

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

<TABLE>
<CAPTION>
                                                                   Total
                                                                outstanding
                                Outstanding     Receipts on    share capital                        Total
                                   share         account of     and 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, 2002           864,568         308,479       1,173,047      (2,097,736)        (924,689)

Loss for the year                         --              --              --         (70,095)         (70,095)
                                ------------    ------------    ------------    ------------     ------------
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 December 31, 2004         864,568         308,479       1,173,047      (2,370,112)      (1,197,065)
                                ============    ============    ============    ============     ============
</TABLE>

(*)   Cessation of the  adjusted  for the effect of inflation  based on December
      2003 CPI.

     The accompanying notes are an integral part of the financial statements


                                      -9-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

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

<TABLE>
<CAPTION>
                                                                                    For the year ended
                                                                                        December 31
                                                                         ----------------------------------------
                                                                            2004           2003           2002
                                                                          Reported             Adjusted
                                                                         amounts (1)          amounts (2)
                                                                         ----------     -------------------------
<S>                                                                        <C>             <C>            <C>
Cash flows from operating activities:
Loss for the year                                                          (102,616)       (99,665)       (70,095)

Adjustments to reconcile the cash flows used in operating activities:
 Equity in the profits of an affiliate                                          (33)           (56)           (19)
 Depreciation on the bank's building and equipment                               44             43             34
                                                                         ----------     ----------     ----------
Net cash used in operating activities                                      (102,605)       (99,678)       (70,080)
                                                                         ----------     ----------     ----------

Cash flows from investing activities
Credit to the public                                                         13,246         26,460         45,616
Credit to the Government of Israel                                            7,717            320         (4,701)
Purchase of equipment                                                            --            (11)           (80)
Other assets                                                                    (74)          (489)          (123)
                                                                         ----------     ----------     ----------
Net cash provided by investing activities                                    20,889         26,280         40,712
                                                                         ----------     ----------     ----------

Cash flows from financing activities:
Deposits from the public, net                                                  (142)           (55)          (756)
Deposits from the Government, net                                             5,025          1,345         (3,199)
Other liabilities, net                                                         (362)           488           (520)
Deferred Government deposits                                                 96,247         96,554         55,280
Deferred capital notes, net                                                  (1,217)       (43,985)           857
                                                                         ----------     ----------     ----------
Net cash provided by financing activities                                    99,551         54,347         51,662
                                                                         ----------     ----------     ----------

Increase (Decrease) in cash on hand and deposits with banks                  17,835        (19,051)        22,294
Balance of cash on hand and deposits with banks
  at the beginning of the year                                               38,586         57,637         35,343
                                                                         ----------     ----------     ----------
Balance of cash on hand and deposits with banks
  at the end of the year                                                     56,421         38,586         57,637
                                                                         ==========     ==========     ==========
</TABLE>

(1)   Cessation of the adjustment for the effect of inflation  based on December
      2003 CPI.

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

     The accompanying notes are an integral part of the financial statements


                                      -10-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

                                 INDEX TO NOTES

<TABLE>
<CAPTION>
  Note                                                                              Page
--------                                                                          --------
<S>        <C>                                                                    <C>
 1.        The Bank, Its Main Activities and Significant Accounting Policies      12 -  21

 2.        Cash on Hand and Deposits with Banks                                      22

 3.        Credit to the Public (Less Allowances for Doubtful Debts)              22 -  30

 4.        Credit to the Government of Israel                                        30

 5.        Investment in an Affiliate                                             30 -  31

 6.        Building and Equipment                                                    32

 7.        Other Assets                                                              33

 8.        Deposits from the Public                                                  33

 9.        Deposits from the Government                                              33

10.        Other Liabilities                                                         34

11.        Deferred Government Deposits and Deferred Capital Notes                   35

12.        Share Capital                                                          36 -  37

13.        Contingent Liabilities, Claims and Commitments                            38

14.        Related Parties                                                        38 -  39

15.        Loss from Financing Activities Before Allowance for Doubtful Debts        40

16.        Commissions and Other Income                                              41

17.        Salaries and Related Expenses                                             41

18.        Other Expenses                                                            41

19.        Income Taxes                                                              42

20.        Reconciliation Between Israel GAAP and U.S. GAAP                       42 -  44

21.        Subsequent events                                                         45

22.        Information on the basis of Nominal Historical Data for tax purposes   46 -  48

23.        Other Information in Nominal Values                                       48
</TABLE>


                                      -11-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004
--------------------------------------------------------------------------------

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.


                                      -12-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      A.    General (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 February 13, 2005,
                        their  maturity date was deferred  until March 31, 2005.
                        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, 2004,  and
                        the  current  collection  anticipated  in 2005  from the
                        payment  arrangement with the moshavim and the kibbutzim
                        will  allow the Bank in 2005,  subject to what is stated
                        above, to pay the ongoing operating expenses  (primarily
                        salaries) and make interest payments to the Government.


                                      -13-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      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.

      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 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)   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 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.


                                      -14-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      C.    Financial Statements Presentation Basis(Cont.)

            (2)   The starting  point for  preparing  the  financial  statements
                  (Cont.)

                  (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  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:

            (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.


                                   -15-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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

                        (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.

                        (3)   In  order  to  have  a  comparative  basis  of the
                              financial  data of 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.


                                   -16-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      C.    Financial Statements presentation basis (Cont.)

            (4)   Comparative figures - 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 these  financial
                        statements   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)

                  (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).


                                   -17-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      C.    Financial Statements presentation basis (Cont.)

            (4)   Comparative figures - Adjusted amounts for the end of 2003

                  (C)   Statement of operations (Cont.)

                        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.

                        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
                                           --------------------------    --------------------------
                                            2004      2003      2002      2004      2003      2002
                                                                            %         %         %
                                           ------    ------    ------    ------    ------    ------
<S>                                        <C>       <C>       <C>         <C>      <C>       <C>
            Rate of exchange of the
             U.S. dollar                    4.308     4.379     4.737      (1.6)    (7.56)     7.27
            Rate of exchange of the
             Euro                          5.8768    5.5331    4.9696      6.21     11.34     27.18
            Consumer Price Index (in
             Points) for the month of
              November                     114.20    113.20     115.4      0.88     (1.91)     6.65
              December                     114.32    112.95     115.1      1.21     (1.87)     6.48
</TABLE>


                                   -18-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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.


                                   -19-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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, 2004, the
            general and additional  allowances  represent 25.41% 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.

      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.


                                   -20-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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 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.

      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.

      O.    Adoption of recently issued Accounting Standards and their impact on
            the financial statements

            In October 2001, the Israel  Accounting  Standards  Board  published
            Accounting  Standard  No.  12  which  deals  with  the  discontinued
            adjustment of financial statements. In accordance with this Standard
            and  Accounting  Standard No. 17 with respect to the deferral of the
            implementation of Standard No. 12, financial statements ceased to be
            adjusted for inflation in Israel commencing January 1, 2004.

            Until  December 31, 2003,  the Bank prepared its adjusted  financial
            statements  in  accordance  with  Opinion  No.  36 of  Institute  of
            Certified Public Accountants in Israel. The adjusted amounts,  which
            are included in the  financial  statements  as of December 31, 2003,
            served as the  starting  point for the nominal  financial  reporting
            commencing January 1, 2004.

            The  implementation of the above standard mainly affected  financing
            income and expenses items.


                                   -21-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 2 - Cash on Hand and Deposits with Banks

                                                                December 31
                                                              2004        2003
                                                            Reported    Adjusted
                                                             amounts     amounts
                                                            --------    --------
                                                              In thousands NIS
                                                            --------------------

      Cash on hand and deposits with the Bank of Israel       56,404      38,553
      Deposits with banks                                         17          33
                                                            --------    --------
      Total                                                   56,421      38,586
                                                            ========    ========
      Cash and deposits for an original period of up to
       three months in the Bank of Israel and banks           56,421      38,586
                                                            ========    ========

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

      A.    Composition:

<TABLE>
<CAPTION>
                                                              December 31
                                                       ------------------------
                                                          2004          2003
                                                        Reported      Adjusted
                                                         amounts       amounts
                                                       ----------    ----------
                                                           In thousands NIS
                                                       ------------------------
<S>                                                       <C>           <C>
      Credit (*)                                          124,149       127,217
      Credit from designated deposits (**)                 83,606        95,946
                                                       ----------    ----------
      Total credit to the public for which the Bank
       is responsible                                     207,755       223,163

      Less - general and additional allowances for
       doubtful debts                                     (24,844)      (24,869)
      Special allowance                                    (6,000)       (6,000)
                                                       ----------    ----------
      Total                                               176,911       192,294
                                                       ----------    ----------
      Credit from designated deposits, repayment of
      which to the depositor is conditional upon the
      collection of the loan and includes a margin         61,461        59,324
                                                       ----------    ----------
      Total credit to the public                          238,372       251,618
                                                       ==========    ==========
</TABLE>

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

(*)   An amount of NIS 68,975  thousand  (2003 - NIS 60,136  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.


                                   -22-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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
                                                                ----------------------
                                                                  2004         2003
                                                                Reported     Adjusted
                                                                 amounts      amounts
                                                                ---------    ---------
                                                                    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)                     83,285       95,455

                 Moshavim (including factories and regional
                   and national organizations)                    124,470      127,708
                                                                  -------      -------
                Total credit to the Agricultural Sector for
                which the Bank is responsible (**)                207,755      223,163

            (b) Credit for which the Bank is not
                 responsible (*):
                        Balance as of balance sheet date           45,127       40,829
                                                                ---------    ---------
                  Total credit to the Agricultural Sector         252,882      263,992
                                                                =========    =========
</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 68,975 thousand (2003 - NIS 60,131 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.


                                   -23-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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
                                                                            --------------------
                                                                              2004        2003
                                                                            Reported    Adjusted
                                                                             amounts     amounts
                                                                            --------    --------
                                                                              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                               3,818       4,142

            (2) Credit which was rescheduled during the
                current year without waiver of income -
                Balance as of balance sheet date                               7,037       5,388

      (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                                      87,871      89,628

      (c)  Credit in temporary arrears, balance at balance sheet date             38       3,615

      (d)  Credit under special supervision:
           Balance as of balance sheet date                                   68,043      69,950

      (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 2,260
           thousand (2003 - NIS 2,735 thousand)                               40,948      50,440
                                                                            --------    --------

      Total                                                                  207,755     223,163
                                                                            ========    ========
</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.


                                   -24-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      C.    Allowances for doubtful debts

<TABLE>
<CAPTION>
                                               December 31, 2004                        December 31, 2003
                                                Reported amounts                         Adjusted amounts
                                    --------------------------------------    -------------------------------------
                                                   Allowance                                 Allowance
                                    --------------------------------------    -------------------------------------
                                    Specific(*)  Additional(**)    Total      Specific(*)  Additional(**)   Total
                                    -----------  -------------   ---------    -----------  -------------- ---------
<S>                                    <C>            <C>          <C>           <C>            <C>         <C>
Balance at the beginning
  of the year                          109,011        30,869       139,880       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                              (8,579)           --        (8,579)      (14,425)           --      (14,425)
                                     ---------     ---------     ---------     ---------     ---------    ---------
Erosion and adjustment
  of balances                               --           (25)          (25)        1,563           113        1,676
                                     ---------     ---------     ---------     ---------     ---------    ---------
Balance at the end of the year         100,432        30,844       131,276       109,011        30,869      139,880
                                     =========     =========     =========     =========     =========    =========

<CAPTION>
                                               December 31, 2002
                                               Adjusted amounts
                                    ---------------------------------------
                                                   Allowance
                                    ---------------------------------------
                                    Specific (*)  Additional(**)   Total
                                    ------------  --------------  ---------
<S>                                    <C>             <C>          <C>
Balance at the beginning
  of the year                          136,911         31,138       168,049
                                     ---------      ---------     ---------
Allowance during the current year           --             --            --
Decrease in allowances                     (25)            --           (25)
                                     ---------      ---------     ---------
Amount charged to statement of
operations                                 (25)            --           (25)
                                     ---------      ---------     ---------
Write offs                             (16,458)            --       (16,458)
                                     ---------      ---------     ---------
Erosion and adjustment
  of balances                           (2,055)          (382)       (2,437)
                                     ---------      ---------     ---------
Balance at the end of the year         118,373         30,756       149,129
                                     =========      =========     =========
</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.


                                   -25-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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 2004                                  December 31 2003
--------------------------------------------     -----------------------------------------------
                       No. of      Credit                                No. of        Credit
Credit to borrowers   borrowers   Reported       Credit to borrowers    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          15           76                        7           18            58
    10         20          14          220            7          18           11           162
    20         40          19          563           18          35           18           464
    40         80          20        1,160           35          70           21         1,063
    80        150          17        1,960           70         140           20         2,008
   150        300          21        4,710          140         285           23         4,822
   300        600          21        9,395          285         530           23         9,338
   600      1,200          28       23,861          530       1,060           26        20,111
 1,200      2,000          16       24,191        1,060       1,770           20        27,161
 2,000      4,000          24       61,419        1,770       3,500           34        83,240
 4,000      8,000           7       39,305        3,500       7,100            7        33,663
 8,000     20,000           3       40,895        7,100      17,700            4        41,073
20,000     40,000          --           --       17,700      35,000           --            --
                      -------     --------                               -------      --------

 Total                    205      207,755        Total                      225       223,163
                      =======     ========                               =======      ========
</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.


                                   -26-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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 causes 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.  The last  date for
            performance  of  transactions  according to resolution  737 has been
            extended  till  August  8,  2005 and in  Kav-imut  and Kav  Ha-Tefer
            (Border  Area) and National "A"  Preference  area  settlements  till
            February 8, 2007.

            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 possible to promote the  distribution  of the
            proceeds that were accumulated at the administration of arrangements
            in the agricultural sector.


                                   -27-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      E.    Credit to the moshavim (Cont.)

            As  of  the  date  of  these   financial   statements,   there   are
            approximately  50  moshavim in respect of which  recovery  judgments
            have not yet been granted, and 81 settlements that were agreed upon.
            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
            and exchange rate 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.

            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%).


                                   -28-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      F.    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.


                                   -29-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

      F.    Credit to the Kibbutzim (Cont.)

            As of the signing of the  amendment to the  supplementary  agreement
            and until  December 31,  2004,  a further 41 kibbutzim  have entered
            into the  arrangement,  among  them  are  peripheral  kibbutzim  and
            "incentive" Kibbutzim and 37 kibbutzim which have been classified as
            real estate, and there remain 4 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 141
            million and, in exchange  for the write off of the  "Balloon" by all
            of the banks, the kibbutzim returned approximately 11,699 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)

                                                                December 31
                                                            --------------------
                                                              2004        2003
                                                            Reported    Adjusted
                                                             amounts     amounts
                                                            --------    --------
                                                            In thousands of NIS
                                                            --------------------
      Credit in respect of participation in write-off of
       Balloon and incentive                                  16,385      24,410
      Write-offs against deferred deposits                     5,737       5,429
                                                            --------    --------
      Total credit to the Government (including deposits)     22,122      29,839
                                                            ========    ========

Note 5 - Investment in an Affiliate

                                                                December 31
                                                            --------------------
                                                             2004        2003
                                                           Reported    Adjusted
                                                            amounts     amounts
                                                           --------    --------
                                                            In thousands of NIS
                                                           --------------------

      (a) Composition:
          Cost of shares                                     22,533      22,533
          Post acquisition losses                           (21,475)    (21,508)
                                                           --------    --------
          Total investment                                    1,058       1,025
                                                           ========    ========


                                   -30-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 5 - Investment in an Affiliate (Cont.)

      (b)   Details of the Company:

            Name of company:  The Palestine Agricultural  Settlement Association
                              Ltd. Agricultural financial institution

                                                                  2004     2003
                                                                 ------   ------
      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)   1,058    1,025

        Contribution to net operating profit (loss) (NIS in
        thousand)                                                   33       56


                                      -31-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 6 - Building and Equipment

<TABLE>
<CAPTION>
                                                       Cost                                        Depreciation
                                   --------------------------------------------  ------------------------------------------------
                                                                        In thousands of NIS
                                                                        Reported amounts (*)
                                   ----------------------------------------------------------------------------------------------
                       Rate of     Beginning   Additions    Disposals            Accumulated   Allowance              Accumulated
                     depreciation     of       during the    during     End of   at beginning   during     Disposals    at end
                           %         year         year      the year     year       of year      year     during year   of year
                     ------------  ---------   ----------   ---------   -------  ------------  ---------  ----------- -----------
<S>                       <C>         <C>            <C>         <C>      <C>         <C>            <C>         <C>      <C>
Building (**)                 4%        367          --          --         367         186          12          --         198

Equipment and
   Furniture              6-20%       1,454          --          --       1,454       1,292          32          --       1,324
                        -------     -------     -------     -------     -------     -------     -------     -------     -------

Total building and
   Equipment                          1,821          --          --       1,821       1,478          44          --       1,522
                                    =======     =======     =======     =======     =======     =======     =======     =======

<CAPTION>
                      Depreciated Balance
                      -------------------
                      In thousands of NIS
                      Reported amounts (*)
                      -------------------
                      Beginning
                         of       End of
                        Year       year
                      ---------   -------
<S>                       <C>         <C>
Building (**)             181         169

Equipment and
   Furniture              162         130
                      -------     -------

Total building and
   Equipment              343         299
                      =======     =======
</TABLE>

(*)   For  the  year  2004 -  cessation  of the  adjustment  for the  effect  of
      inflation based on December 2003 CPI. For the year 2003 - adjusted for the
      effect of inflation based on December 2003 CPI.

(**)  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.


                                      -32-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 7 - Other Assets

                                                                December 31
                                                           ---------------------
                                                             2004         2003
                                                           Reported     Adjusted
                                                            amounts      amounts
                                                           --------     --------
                                                            In thousands of NIS
                                                           ---------------------

      Refund of payroll tax                                   1,942        1,992
      Other accounts receivable                                 250          126
                                                           --------     --------
               Total other assets                             2,192        2,118
                                                           ========     ========

Note 8 - Deposits from the Public

                                                                December 31
                                                           ---------------------
                                                             2004         2003
                                                           Reported     Adjusted
                                                            amounts      amounts
                                                           --------     --------
                                                            In thousands of NIS
                                                           ---------------------

      Demand deposits                                           831          974
      Time deposits                                              17           17
      Designated deposits                                        32           31
                                                           --------     --------
                                                                880        1,022
                                                           ========     ========

      Includes deposits the repayment of which to the
       depositor is dependent on collection of the
       related credit with margin                                32           31
                                                           ========     ========

Note 9 - Deposits from the Government

                                                                December 31
                                                           ---------------------
                                                             2004         2003
                                                           Reported     Adjusted
                                                            amounts      amounts
                                                           --------     --------
                                                            In thousands of NIS
                                                           ---------------------

       Designated and other deposits **                     443,316      438,291
                                                           ========     ========

      (**) Includes deposits for which the repayment
           to the depositor is stipulated on the
           collection of the credit (without any margin)     64,718       62,246
                                                           ========     ========


                                      -33-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 10 - Other Liabilities

                                                                December 31
                                                           ---------------------
                                                             2004         2003
                                                           Reported     Adjusted
                                                            amounts      amounts
                                                           --------     --------
                                                            In thousands of NIS
                                                           ---------------------

      Accrued severance pay (1)                               1,279        1,279
      Accrued vacation pay and sick leave (2)                 5,399        5,359
      Accrued payroll differences                               180          180
      Accrued recuperation payment and bonus                     --          399
      Other accounts payable credit balances                    710          713
                                                           --------     --------
      Total other liabilities                                 7,568        7,930
                                                           ========     ========

      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 1,494  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.


                                      -34-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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

                                                                December 31
                                                           ---------------------
                                            Weighted         2004         2003
                                          interest rate      (In thousands NIS)
                                           December 31,    ---------------------
                                              2004         Reported     Adjusted
                                                %           amounts      amounts
                                          -------------    --------     --------
            In Israeli currency:
            Not linked                       9.9-28.5       501,830      427,349
            Linked to the Index                3.66         488,350      466,661
            Linked to foreign currency         6.22           1,739        1,662
                                                           --------     --------
                                                            991,919      895,672
                                                           ========     ========

            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 March 31, 2005, 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 February 13, 2005, the Accountant  General approved the extension
            of the maturity date to March 31, 2005.


                                      -35-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 12 - Share Capital

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

<TABLE>
<CAPTION>
                                                                          Reported amounts
                                                                        In thousands of NIS
                                                                       ----------------------
                                                                         2004         2003
                                                         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.


                                      -36-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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 108 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 - 2004,  amounted  to NIS 48,559  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 48,460 thousand. In years preceding 1999 a dividend was paid.


                                      -37-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 13 - Contingent Liabilities, Claims and Commitments

                                                                December 31
                                                           ---------------------
                                                             2004         2003
                                                           Reported     Adjusted
                                                            amounts      amounts
                                                           --------     --------
                                                            In thousands of NIS
                                                           ---------------------
      Off balance sheet financial instruments
        Transactions for which the amount stated
        constitutes a credit risk:
             Unutilized lines of credit                         197          213
                                                           ========     ========

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
                               --------------------    --------------------    --------------------    --------------------
                                 2004        2003        2004        2003        2004        2003        2004        2003
                               Reported    Adjusted    Reported    Adjusted    Reported    Adjusted    Reported    Adjusted
                                amounts     amounts     amounts     amounts     amounts     amounts     amounts     amounts
                               --------    --------    --------    --------    --------    --------    --------    --------
                                                                        In thousands of NIS
                               --------------------------------------------------------------------------------------------
<S>                                   <C>        <C>         <C>         <C>         <C>         <C>         <C>         <C>
The following include
 balances of the affiliate:
    Assets - credit to the
      public                         --          --          --           4          --          --          --          --
    Liabilities - deposits
      from the public                 2          16          25          26          43          51          66          53
</TABLE>

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

<TABLE>
<CAPTION>
                                                               Year ended December 31
                                                          --------------------------------
                                                            2004        2003        2002
                                                          Reported    Adjusted    Adjusted
                                                           amounts     amounts     amounts
                                                                In thousands of NIS
                                                          --------------------------------
<S>                                                             <C>         <C>        <C>
            Participation in expenses by the affiliate          95          95         130
            Management fees to shareholders                     --          --          10
</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.


                                      -38-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 14 - Related Parties (Cont.)

      (c)   (Cont.)

            The  following   balance  sheet  items  include  balances  of  these
            entities:

                                                                December 31
                                                          ----------------------
                                                            2004          2003
                                                          Reported      Adjusted
                                                           amounts       amounts
                                                          --------      --------
                                                            In thousands of NIS
                                                          ----------------------
            Assets:
              Credit to the public                         16,334        18,495

            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,
                                                  ---------------------------------------------------------
                                                             2004                          2003
                                                  --------------------------    ---------------------------
                                                     Total                         Total
                                                   Benefits                      Benefits
                                                   Reported       Number of      Adjusted       Number of
                                                  amounts (1)   beneficiaries   amounts (2)   beneficiaries
                                                  -----------   -------------   -----------   -------------
                                                      In                            In
                                                    housands                      housands
                                                     of NIS                        of NIS
                                                  -----------                   -----------
<S>                                                     <C>           <C>             <C>            <C>
            Related party employed by the Bank          473           1               486            1
            Directors not employed by the Bank           58           8                19            5
                                                    -------                       -------
                                                        531                           505
                                                    =======                       =======
</TABLE>


                                      -39-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                                                         Year ended December 31
                                                                  -----------------------------------
                                                                    2004         2003         2002
                                                                        Reported           Adjusted
                                                                       Amounts (1)         Amounts(2)
                                                                  ---------------------    ----------
                                                                           In thousands of NIS
                                                                  -----------------------------------
<S>                                                                <C>          <C>          <C>
            In respect to assets
             From credit to the public                              24,543       21,711       18,059
             From credit to the Government of Israel                   538          349          866
             From deposits with the Bank of Israel                   2,132        2,501         (423)
             From deposits with banks                                    1          422       (1,258)
             From other assets                                          --           --          (18)

            In respect to liabilities
             On deposits from the:
              Public                                                   (15)         (37)          28
              Government                                           (20,632)     (10,097)     (15,285)
              On other liabilities                                      --           --            6

            On respect to deferred deposits and capital notes:
              On deferred Government deposits                      (96,247)     (81,190)     (55,265)
              On deferred capital notes:
              Held by the public                                        --           --       (3,265)
              Held by the Government                                (5,674)      (8,326)      (6,592)

            Other
             Other financing income                                  1,294        6,749        1,279
                                                                  --------     --------     --------
            Total loss from financing activities before
             allowance for doubtful debts                          (94,060)     (67,918)     (61,868)
                                                                  ========     ========     ========
</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.

      (1)   For the year  2004-Cessation  of the  adjustment  for the  effect of
            inflation based on December 2003 CPI.

            For the year  2003-Cessation  of the  adjustment  for the  effect of
            inflation based on December 2002 CPI.

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


                                      -40-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 16 - Commissions and Other Income

<TABLE>
<CAPTION>
                                                            Year ended December 31
                                                       --------------------------------
                                                         2004        2003        2002
                                                             Reported          Adjusted
                                                              amounts          Amounts
                                                       --------------------    --------
                                                             In thousands of NIS
                                                       --------------------------------
<S>                                                         <C>         <C>          <C>
            Bookkeeping                                      35          42          55
            Collections and transfers                        22          17          17
            Management fees from affiliated company          --          --          10
            Other                                            72          54           5
                                                       --------    --------    --------
                                                            129         113          87
                                                       ========    ========    ========
</TABLE>

Note 17 - Salaries and Related Expenses

<TABLE>
<CAPTION>
                                                            Year ended December 31
                                                       --------------------------------
                                                         2004        2003        2002
                                                             Reported          Adjusted
                                                              amounts           Amounts
                                                       --------------------    --------
                                                             In thousands of NIS
                                                       --------------------------------
<S>                                                       <C>         <C>         <C>
            Salaries                                      5,053       5,585       5,530
            Severance pay, pension, provident fund
             contributions and sick pay                   1,136       1,126         784
            National Insurance, employees tax and
             salary tax                                     319         308         302
                                                       --------    --------    --------
                                                          6,508       7,019       6,616
                                                       ========    ========    ========
</TABLE>

Note 18 - Other Expenses

<TABLE>
<CAPTION>
                                                            Year ended December 31
                                                       --------------------------------
                                                         2004        2003        2002
                                                             Reported          Adjusted
                                                              amounts           Amounts
                                                       --------------------    --------
                                                             In thousands of NIS
                                                       --------------------------------
<S>                                                       <C>         <C>         <C>
            Professional services                           345         338         192
            Communications                                  116         115         119
            Computer services                                77          81          74
            Office expenses                                  64          54          64
            Promotion and advertising                        16          10          16
            Insurance                                       289         269         211
            Professional training and extension courses      --          --           4
            Director fees                                    58          20          28
            Commissions                                      11          30          19
            Trustee commissions due to shares and
             capital notes                                   57         229         288
            Taxes and toll fees                              81          81          66
            Participation in the budget of kibbutzim
             management                                     105         160         108
            Participation in the budget of Moshavim
             management                                     112         115         238
            Others                                          109         127          97
                                                       --------    --------    --------
                                                          1,440       1,629       1,524
                                                       ========    ========    ========
</TABLE>


                                      -41-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 19 - Income Taxes

      (a)   The Bank has received final tax  assessments up to and including the
            year ended December 31, 1999.

      (b)   The Bank's tax loss carry forwards amount to NIS 1,395,779  thousand
            (2003 - NIS 1,272,157  thousand).  A deferred tax benefit in the net
            amount of NIS 488,523 thousand was not included in the balance sheet
            (2003 - NIS 457,977 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.


                                      -42-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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 2,352 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.


                                      -43-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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
                                                           ----------------------------------
                                                             2004         2003         2002
                                                           --------     --------     --------
                                                                 Reported            Adjusted
                                                                  amounts             amounts
                                                           ---------------------     --------
                                                                  (In thousands of NIS)
                                                           ----------------------------------
<S>                                                        <C>           <C>          <C>
            Cash flows from operating activities:
            Loss for the year                              (102,616)     (99,665)     (70,095)
            Adjustments to reconcile the cash flows
             used in operating activities:
            Equity in the profits of an affiliate               (33)         (56)         (19)
            Depreciation on the bank's building and
              equipment                                          44           43           34
                                                           --------     --------     --------
            Net cash used in operating activities           102,605      (99,678)     (70,080)
                                                           --------     --------     --------
            Cash flows from investing activities
            Decrease (increase) in credit to the public     (20,842)      (7,580)        (878)
            Collection from the public                       34,088       34,040       46,494
            Decrease (increase) in credit to the
             Government of Israel                            (3,964)     (14,205)     (15,626)
            Collection from the Government of Israel         11,681       14,525       10,925
            Purchase of equipment                                --          (11)         (80)
            Other assets                                        (74)        (489)        (123)
                                                           --------     --------     --------
            Net cash provided by investing activities        20,889       26,280       40,712
                                                           --------     --------     --------
            Net cash provided by financing activities        99,551       54,347       51,662
                                                           --------     --------     --------
            (Decrease) increase in cash on hand and
            deposits with banks                              17,835      (19,051)      22,294
            Balance of cash on hand and deposits
             with banks at the beginning of the year         38,586       57,637       35,343
                                                           --------     --------     --------
            Balance of cash on hand and deposits
             with banks at the end of the year               56,421       38,586       57,637
                                                           ========     ========     ========
</TABLE>


                                      -44-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

Note 21 - Subsequent events

      (1)   On June 26, 2005, 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 31,
            2005 (see note 1A(2) and Note 11(c)).

      (2)   On February 7, 2005 a letter from the Government Companies Authority
            was received by the Bank according to which the Government Companies
            Authority   intends  to  bring  to  the   Ministers   Committee  for
            Privatization  a  proposal  about the  privatization  of the Bank by
            selling  material  assets and in the end of the process to liquidate
            the Bank.

            On May 9, 2005 the opinion of the Board of Directors  regarding  the
            proposal was submitted to the Government Companies Authority.

      (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
            cancellation of its membership in the clearing - house 60 days after
            this date.  On April 14,  2005 the Bank  submitted a petition to the
            High  Court  of  Justice  in order to  receive  an order  nisi and a
            temporary order against the Bank of Israel, the temporary  governor,
            the License Committee and the Supervisor of Banks.

            On April 19, 2005, Her Honor, the Justice Hayut ruled that: "at this
            stage there is no place for a temporary order "

            The hearing on the  petition  was on May 16, 2005 and to date of the
            preparing  of the  financial  statements  a decision has yet to have
            been received.

            In an answer to the Bank's  request,  an approval  from the Governor
            was  received  on May  25,  2005  for  continuation  of  the  Bank's
            membership  in the  clearing - house  until July 31,  2005 under the
            condition that the Bank will follow the directives of the Supervisor
            of Banks.


                                      -45-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (Cont.)
--------------------------------------------------------------------------------

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

              (a)    Balance sheets:

<TABLE>
<CAPTION>
                                                                      December 31
                                                               -------------------------
                                                                  2004           2003
                                                                     (In thousands)
                                                               -------------------------
<S>                                                            <C>            <C>
            ASSETS

            Cash on hand and deposits with banks                   56,421         38,586
            Credit to the public                                  238,372        251,618
            Credit to the Government of Israel                     22,122         29,839
            Investment in an affiliate                              1,058          1,025
            Bank building and equipment                               173            202
            Other assets                                            2,192          2,118
                                                               ----------     ----------
            Total assets                                          320,338        323,388
                                                               ==========     ==========

            LIABILITIES AND SHAREHOLDERS' DEFICIENCY

            Deposits from the public                                  880          1,022
            Government of Israeli deposits                        443,316        438,291
            Other liabilities                                       7,568          7,930
                                                               ----------     ----------
                                                                  451,764        447,243

            Deferred deposits from the Government of Israel       991,919        895,672

            Deferred capital notes:
              Held by the Government                               73,835         75,052
                                                               ----------     ----------
            Total liabilities                                   1,517,518      1,417,967
            Shareholders' deficiency                           (1,197,180)    (1,094,579)
                                                               ----------     ----------
            Total liabilities and shareholders' deficiency        320,338        323,388
                                                               ==========     ==========
</TABLE>


                                      -46-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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
                                                                ----------------------------------
                                                                  2004         2003         2002
                                                                          (In thousands)
                                                                ----------------------------------
<S>                                                             <C>           <C>         <C>
            Loss from financing activities
            Loss from financing activities before
             allowance for doubtful debts*                       (94,060)     (67,918)    (120,296)
            Allowance for doubtful debts                              --       (3,500)          --
                                                                --------     --------     --------
            Loss from financing activities after
             allowance for doubtful debts                        (94,060)     (71,418)    (120,296)
                                                                --------     --------     --------
            Operating and other income
             Rental income                                           426          542          511
             Commissions and other income                            129          113           89
                                                                --------     --------     --------
             Total operating and other income                        555          655          600
                                                                --------     --------     --------
            Operating and other expenses
             Salaries and related expenses                         6,508        7,019        7,093
             Depreciation for building and equipment                  29           28           19
             Maintenance of building and equipment                 1,152        1,117          659
             Other expenses                                        1,440        1,629        1,545
                                                                --------     --------     --------
            Total operating and other expenses                    (9,129)      (9,793)      (9,316)
                                                                --------     --------     --------
            Operating loss                                      (102,634)     (80,556)    (129,012)
            Equity in profits of an affiliate                         33           37           78
                                                                --------     --------     --------
            Net loss for the year                               (102,601)     (80,519)    (128,934)
                                                                ========     ========     ========
            Loss per NIS 1 nominal value of share
             capital - operating loss                            (490.27)     (384.80)     (616.10)
                                                                ========     ========     ========
            (*) Income (loss) from financing activities
            before allowance for doubtful debts, interest on
            Government deposits and deferred capital notes         7,861       21,598       (8,578)
            Interest on Government deposits and
            deferred capital notes                              (101,921)     (89,516)    (111,718)
                                                                --------     --------     --------
            Loss from financing activities before
            allowance for doubtful debts                         (94,060)     (67,918)    (120,296)
                                                                ========     ========     ========
</TABLE>


                                      -47-
<PAGE>

                                                 ISRAEL BANK OF AGRICULTURE LTD.

NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2004 (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 of    Accumulated
                                           capital        shares        deficit         Total
                                          ----------    ----------    ----------     ----------
                                                             (In thousands)
                                          -----------------------------------------------------
<S>                                              <C>        <C>       <C>            <C>
            Balance at January 1, 2002           220        91,893      (977,239)      (885,126)
              Loss for the year                   --            --      (128,934)      (128,934)
                                          ----------    ----------    ----------     ----------
            Balance at January 1, 2003           220        91,893    (1,106,173)    (1,014,060)
              Loss for the year                   --            --       (80,519)       (80,519)
                                          ----------    ----------    ----------     ----------
            Balance at January 1, 2004           220        91,893    (1,186,692)    (1,094,579)
              Loss for the year                   --            --      (102,601)      (102,601)
                                          ----------    ----------    ----------     ----------
            Balance at
              December 31, 2004                  220        91,893    (1,289,293)    (1,197,180)
                                          ==========    ==========    ==========     ==========
</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
                                                                           ----------------------
                                                                             2004          2003
                                                                           --------      --------
<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>

                                      -48-