This is a translation from the Hebrew and has been prepared for convenience only. In case of any discrepancy, the Hebrew will prevail. 02 ANNUAL REPORT 2005 BOARD OF DIRECTORS & MANAGEMENT | CONTENT | REPORT OF THE BOARD OF DIRECTORS TO THE GENERAL MEETING OF SHAREHOLDERS MAIN TRENDS IN THE ISRAELI ECONOMY IN 2005 7 THE DISCOUNT GROUP – GENERAL OVERVIEW AND STRUCTURE OF THE GROUP 12 INCOME AND PROFITABILITY 15 DEVELOPMENTS IN INCOME AND EXPENSES 16 DEVELOPMENT OF ASSETS AND LIABILITIES 24 FIXED ASSETS AND INSTALLATIONS 30 TAXATION 37 CAPITAL RESOURCES 38 LIQUIDITY AND RAISING SOURCES IN THE BANK 40 EXPOSURE TO RISKS AND RISK MANAGEMENT 42 ACTIVITY OF THE GROUP ACCORDING TO PRINCIPAL SEGMENTS OF OPERATIONS 60 FURTHER DETAILS AS TO ACTIVITY IN CERTAIN PRODUCTS 97 STRUCTURE OF THE BANKING GROUP 116 MAIN INVESTEE COMPANIES 117 HUMAN RESOURCES 130 CONTROL OF THE BANK 135 LEGISLATION AND SUPERVISION 156 CRITICAL ACCOUNTING POLICIES 166 LEGAL PROCEEDINGS 171 MATERIAL AGREEMENTS 176 THE INTERNAL AUDIT IN THE GROUP 183 INVOLVEMENT AND CONTRIBUTION TO THE COMMUNITY 185 AUDITORS’ REMUNERATION 192 REMUNERATION OF THE CHAIRMAN OF THE BOARD OF DIRECTORS AND SENIOR EXECUTIVE OFFICERS 193 MISCELLANEOUS 194 BOARD OF DIRECTORS AND MANAGEMENT 196 | MANAGEMENT REVIEW SCHEDULE A - CONSOLIDATED BALANCE SHEET - MULTI-PERIOD DATA 203 SCHEDULE B - CONSOLIDATED STATEMENT OF INCOME - MULTI-PERIOD DATA 204 SCHEDULE C - INCOME AND EXPENSE RATIOS OF THE BANK AND ITS CONSOLIDATED SUBSIDIARIES 206 SCHEDULE D - BANK’S EXPOSURE TO FLUCTUATIONS IN INTEREST RATES 212 SCHEDULE E - CREDIT RISK CLASSIFIED BY ECONOMIC SECTORS ON A CONSOLIDATED BASIS 214 SCHEDULE F - CREDIT RISK ON A CONSOLIDATED BASIS BY GEOGRAPHIC REGION - ULTIMATE RISK IN DEVELOPING COUNTRIES (LDC) 216 SCHEDULE G - CONDENSED CONSOLIDATED BALANCE SHEET FOR END OF EACH QUARTER- MULTI-QUARTER DATA 217 SCHEDULE H - CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR EACH QUARTER - MULTI-QUARTER DATA 218 PRESIDENT & CEO’S CERTIFICATION 220 CHIEF ACCOUNTANT CERTIFICATION 221 STATEMENT OF THE BOARD OF DIRECTORS AND MANAGEMENT ON THEIR RESPONSIBILITY FOR THE ANNUAL REPORT 222 | FINANCIAL STATEMENTS 2003 AUDITORS’ REPORT TO THE SHAREHOLDERS 225 BALANCE SHEET - CONSOLIDATED AND THE BANK 227 CONSOLIDATED STATEMENT OF INCOME 228 STATEMENT OF INCOME - THE BANK 229 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY 230 STATEMENT OF CASH FLOWS 232 NOTES TO THE FINANCIAL STATEMENTS 235 ANNUAL REPORT 2005 ISRAEL DISCOUNT BANK LIMITED AND ITS SUBSIDIARIES | BOARD OF DIRECTORS SHLOMO ZOHAR Chairman, the Bank; Mercantile Discount Bank Ltd.; Israel Credit Cards Ltd.; Israel Discount Capital Markets & Investments Ltd.; The Provident Fund of the Staff of Israel Discount Bank Ltd. Vice Chairman, Israel Discount Bank of New York. Director, Discount Bancorp, Inc.; S. Zohar Consulting & Management Ltd. GAD ARBEL Economic Financial Consultant. Director, Discount Bancorp, Inc.; Israel Discount Bank of New York. Outside Director, Nitsba Holdings 1995 Ltd. Member, Board of Trustees and Chairman, Audit Committee, The College of Management and Academic Studies. Member, Administrative Committee, The Veteran Pension Funds. BETZALEL EIGER Chairman & CEO, Dorea Investments & Development Ltd. Chairman, Liberty Properties Ltd. Director, Comsec. Ltd. ITTAMAR GIVTON Managing Director, Automotive Equipment Group. Director, Automotive Equipment Ltd.; Moto Parts Ltd.; Israel Automobile Corporation Ltd.; Automotive Equipment & Vehicles (2004) Ltd.; Metive Ltd.; Automotive Industries Ltd.; Advanced Vehicles C.R.M Ltd.; M.S.Y. Sport Cars Israel Ltd.; Metropolitan Public Transport Ltd.; Metrodan Be'er Sheva Ltd. Member of Management Committee, Buxenbaum-Neta Fund (private fund). Member of Management, Sheba Fund (Endowment). BEN-ZION GRANIT Management Consultant. Member of Management, Ilan-Israel Foundation for Handicapped Children. GENE KLEINHENDLER Attorney-at-Law and Partner in Law Offices of Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. Director, K.H. Trustees Ltd.; Kleinhendler & Halevy Trustees Ltd.; Law Firm of Gene Kleinhendler; Trust for Employment Benefits Ltd.; Gross, Kleinhendler, Hodak, Halevy, Greenberg Trustees Ltd.; Jerack Inc. DR. ARIE OVADIA Companies Consultant. University Lecturer. Chairman, The Israel Phoenix Assurance Co. Ltd.; Giron Development & Building Ltd. Director, Strauss-Elite Ltd.; Israel Petrochemical Industries Ltd.; Carmel Ulpinim Ltd.; Hadar Ltd.; Mehadrin Ltd. TSIPPI SAMET (Outside Director) Outside Director, Hazera Genetics Ltd.; Mivtahim Pension Funds Ltd; Menorah Mivtahim Gemel Ltd.; Sinai Insurance Holdings (1993) Ltd. Chair, Investment Committee, Avner-Motor Vehicle Accident Victims Insurance Ltd. President, Adif College for Insurance, Pension and Financial Studies. Director, Merav—Yaniv Pension Consultants Ltd. TIDA SHAMIR Attorney-at-Law and Director, Law Firm of Tida Shamir. Outside Director, Gazit Globe Ltd. Director, Dikla Insurance Co. Ltd.; G.M.S.L. Ltd. PROF. EYTAN SHESHINSKY Professor of Public Finance, Hebrew University, Jerusalem. JOSEPH SINGER (Outside Director) Director & Managing Partner, Giza Singer & Even Ltd. Director, Singer & Even Ltd.; Midroog Ltd.; Midroog Holdings Ltd; Giza Singer & Even Finance Ltd.; Singer, Even & Kraizberg Holdings Ltd. Outside Director, Edmond de Rothschild Mutual Funds Management Ltd. and Chairman of its Investment Committee. ZVI STREIGOLD Attorney-at-Law and Director, Law Firm of Zvi Streigold. ZEEV VUREMBRAND CEO, Clalit Health Services. Chairman, Mor Institute for Medical Data Ltd.; Shila Ltd; Clalit - Medical Engineering Ltd. JORGE ZAFRAN Director and CEO, Power Phone Marketing Ltd.; Power Dialing Ltd.; Inter-American Marketing Services Ltd.; Cadillac Properties and Building Company Ltd.; Israel Learning Systems Ltd. Joint Managing Director, T.M. Intertrom Ltd. PROF. BEN-ZION ZILBERFARB Professor of Economics, Bar-Ilan University. Edmond de Rothschild Professor of Global Assets Management, School of Banking and Capital Markets, Netanya Academic College. Outside Director, Fundtech Ltd.; Brimag Digital Age Ltd.; Clal Provident Fund and Education Fund Financing Ltd. Director, Prof. Ben-Zion Zilberfarb Economics and Management Consultant Ltd. | MANAGEMENT GIORA OFFER President & Chief Executive Officer. RONIT ABRAMSON ROKACH Executive Vice President \ Legal Adviser \ Legal Advisory Group. NISSIM ALAGEM Executive Vice President \ Commercial Banking Division. LINDA BENSHOSHAN Executive Vice President \ Asset Management Division. JOSEPH BERESSI Executive Vice President \ Chief Accountant \ Accounting Group. ISRAEL DAVID Executive Vice President \ Retail Banking Division. AMNON GIDEON Executive Vice President \ Human Resources Group. NOAM HANEGBI Executive Vice President \ Operations & Information Systems Division. RONY HIZKIYAHU Executive Vice President \ Corporate Banking Division \†from January - March 2006, temporary Risk Manager, in place of Dr. Goldschmidt, who retired at the end of 2005. ELI HOTER Executive Vice President \ Marketing & Strategic Planning Division. SHLOMO PITCHON Senior Executive Vice President \ Internal Auditor. RUTH MOSHKOVITZ Corporate Secretary. 04 xxx MAIN TRENDS IN THE ISRAELI ECONOMY IN 2005 7 THE DISCOUNT GROUP – GENERAL OVERVIEW AND STRUCTURE OF THE GROUP 12 INCOME AND PROFITABILITY 15 DEVELOPMENTS IN INCOME AND EXPENSES 16 DEVELOPMENT OF ASSETS AND LIABILITIES 24 FIXED ASSETS AND INSTALLATIONS 30 TAXATION 37 CAPITAL RESOURCES 38 LIQUIDITY AND RAISING SOURCES IN THE BANK 40 EXPOSURE TO RISKS AND RISK MANAGEMENT 42 ACTIVITY OF THE GROUP ACCORDING TO PRINCIPAL SEGMENTS OF OPERATIONS 60 FURTHER DETAILS AS TO ACTIVITY IN CERTAIN PRODUCTS 97 STRUCTURE OF THE BANKING GROUP 116 MAIN INVESTEE COMPANIES 117 HUMAN RESOURCES 130 CONTROL OF THE BANK 135 LEGISLATION AND SUPERVISION 156 CRITICAL ACCOUNTING POLICIES 166 LEGAL PROCEEDINGS 171 MATERIAL AGREEMENTS 176 THE INTERNAL AUDIT IN THE GROUP 183 INVOLVEMENT AND CONTRIBUTION TO THE COMMUNITY 185 AUDITORS’ REMUNERATION 192 REMUNERATION OF THE CHAIRMAN OF THE BOARD OF DIRECTORS AND SENIOR EXECUTIVE OFFICERS 193 MISCELLANEOUS 194 BOARD OF DIRECTORS AND MANAGEMENT 196 ANNUAL REPORT 2005 The Board of Directors, on March 28, 2006, approved and authorized for publication the consolidated financial statements of the Bank and its subsidiaries for the year ended December 31, 2005. MAIN DEVELOPMENTS IN THE ISRAELI ECONOMY IN 2005 | PRINCIPAL ECONOMIC DEVELOPMENTS The Gross Domestic Product increased in 2005 at a rate of 5.2%, a rate higher than the growth rate in 2004 which stood at 4.4%. The business product increased by 6.6%, compared with an increase of 6.3% in 2004. The export of goods and services increased by 7%, compared with an increase of 17.4% in 2004, and the import of goods and services increased by 4.4%, compared with an increase of 11.8% in 2004. As for domestic uses, private consumption increased by a rate of 4%, compared with an increase at the rate of 5% in 2004. Investment in fixed assets increase by 1%, as compared with a decrease of 0.2% in 2004, and public consumption increased by 2.7%, compared with a decrease of 2.4% in 2004. The average unemployment rate stood at 9.1% in 2005, compared with an average rate of 10.4% in 2004. The number of employee positions in the market increased in the first eleven months of the year at an annual rate of 2.5%, reaching a monthly average of 2.54 million positions, of which 0.81 million positions in the public sector and 1.73 million positions in the business sector. Industrial production expanded in 2005 at an annual rate of 3.8%, reflecting a