The Bank maintains its books of account and prepares its financials statements in Turkish lira in accordance with the Turkish Commercial Code, Banking Law and tax regulations. The accompanying financial statements are prepared in accordance with the Uniform Chart of Accounts, standard balance sheet, income statement, supplementary financial statements and footnotes to these financial statements and the explanations related to the applications of such financial statements and the accounting and valuation principles thereto that are based on the article 13 of the Banking Law 4389 as revised by Law Number 4672 and 4491 and other related decree and communiqués.

Inflation Accounting

The accompanying financial statements originaly prepared under the historical cost convention (except for the revaluation of premises and equipment in accordance with the Turkish Procedural Tax Code) are restated in accordance with Temporary Article 4 (Regulations related with the procedures of the Independent Audit) of Banking Act numbered 4389 (The Regulation). The consolidated and unconsolidated financial statements of banks should be restated in line with International Accounting Standard 29 in accordance with Article 7 of the Regulation. IAS 29 is applicable for the accounting periods beginning from January 1, 1990 and deals with the effect of inflation on financial statements prepared in highly inflationary economies. There are certain criteria prescribed by IAS 29 in order to define an economy as highly inflationary, one of which is the cumulative inflation rate over three years approaching, or exceeding 100%. As of June 30, 2002, the three year cumulative rate in Turkey has been 272.3%, based on the wholesale price index as published by the Turkish State Institute of Statistics.

IAS 29 requires that financial statements prepared in highly inflationary economies be stated in terms of the measuring units current at the balance sheet date and corresponding figures for previous periods be restated in the same units.

The main guidelines for the restatement are as follows:

Monetary assets and liabilities are not restated because they are already expressed in terms of the monetary unit current at the balance sheet dates.

Non-monetary assets and liabilities and components of shareholders' equity (except for revaluation surplus which is eliminated) which are not expressed in term of the measuring unit current at the balance sheet dates are restated by applying on the wholesale price index as published by the Turkish State Instute of Statistics. Cash proceeds in share capital increases are restated based on collection dates whereas increases through revaluation fund are not considered. Share capital increases made through transfer of reserves and unallocated profit are considered as cash injections made by the shareholders and restated based on the date they are subject to such share capital increase.

Non-monetary items subject to depreciation are restated after eliminating the related revaluation effects. Since depreciation is computed over restated amounts, the charge in the income statement is not subject to restatement.

Non-monetary items which are stated at market prices are not restated since they are already expressed in terms of the measuring unit current at the balance sheet date.

The costs of subsidiaries and equity participations, which are stated at Turkish Lira, are restated based on payment dates after eliminating the free shares obtained through share capital increases made by transfer of revaluation funds of subsidiaries and participations. Foreign currency subsidiaries and participations are stated at cost plus foreign currency valuation.

All items in the income statement are restated on the accrual basis and by applying the relevant conversion factors.

The gain or loss on net monetary position is included in the statement of operations as gain / loss on net monetary position. Prior year effects of inflation accounting is reflected in the accumulated deficit and the restatement effect of paid-in capital is stated as a line item as a reserve under the shareholders' equity.

Wholesale price indices and conversion factors declared by the State Institute of Statistics used to restate the consolidated financial statements as of June 30, 2002 are as follows :

Restatement of balance sheet and income statement items through the use of a general price index and relevant conversion factors does not necessarily mean that the Bank could realize or settle the same values of assets and liabilities as indicated in the consolidated balance sheets. Similarly, it does not necessarily mean that the Bank could return or settle the same values of shareholders' equity to its shareholders.

General Loan Loss Reserve and Reserve for Loans Under Follow-up :

The reserve for loan losses is charged to expenses. This reserve is the amount for the probable future losses of existing loans that the Bank management provides, in accordance with local regulations.

As of June 30, 2002, in accordance with the paragraphs 1 and 12 of Article 11 of Banking Act numbered 4389 and the regulation on "Determination of Types of Loans and Other Receivables Subject to Reserve and Procedures Related With Such Reserves" published in Official Gazette numbered 24448 on June 30, 2001, the Bank has set a special reserve and a general reserve over loans under follow-up and other loans and certain assets which are described as loans respectively. General loan loss reserve is provided at 0.5% and 0.1% of cash and non-cash loans respectively.

Foreign Currency Assets and Liabilities:

Foreign exchange gains and losses arising from foreign currency transactions are reflected in the accounts as realized during the course of the period. Foreign currency assets and liabilities have been translated into Turkish Lira at period-end foreign exchange rates of the Bank and their effects are recorded in foreign exchange gain or loss.

Revenue and Expense Recognition:

All income and expense items are recognized on an accrual basis except for commissions and service fees which are recorded on a cash basis. Upon subsidiaries and equity participations decision to distribute dividend, dividend income is recognized on an accrual basis.

Reserve for Retirement Pay:

In accordance with the existing Turkish Social Security Legislations, the Bank has to pay retirement benefit to its employees in the event of their retirement or termination for reasons other than resignation or misconduct, based on their accumulated periods of service at the balance sheet date on the basis of 30 days' pay (maximum TL1,104) for each year worked. The Bank provides for retirement pay liability based on actual payments in accordance with Accounting Standards and Uniform Chart of Accounts applicable to banks.

As of June 30,2002 the reserve amount reflects the Bank's maximum responsibility towards the personnel who have the right.

Items Held in Trust:

Items held by the Bank on behalf of its customers are not included in the accompanying balance sheets, since such items are not assets of the Bank.

Repo transactions:

Repurchase and reverse repurchase transactions are started to be followed-up in the balance sheet effective from February 1, 2002, in accordance with the change in the Uniform Chart of Accounts. Hence government bonds, treasury bills and Eurobonds which are sold to customers under repurchase agreements are classified as "Investment Securities Subject to Repurchase Agreements" under "Investment Securities" on the balance sheet. Funds borrowed through repurchase agreements are shown in liabilities as "Funds Borrowed Through Interbank Deposits and Repurchase Transactions" and the related interest expense is booked on an accrual basis. Marketable securities purchased under reverse repurchase agreements are stated as a line item under "Interbank Placements and Reverse Repurchase Transactions". The difference between purchase and re-sale prices of marketable securities purchased under reverse repurchase agreements are accrued over the term of the transactions. Interest expense from repurchase transactions and interest income from reverse repurchase transactions are stated under "Interest Expense on Interbank Money Market and Repurchase Transactions" and "Interest Income from Interbank Placements and Reverse Repurchase Transactions" accounts, respectively.

Taxation on Income:

Corporation Tax is computed at the rate of 30%. An additional 10% of the total taxation charge is levied to support a state fund which results in an effective Corporation Tax rate of 33%. Income exempted from Corporation Tax (except dividend from equity participations) is subject to taxation at the rate of 11% or 19.8% (including state fund). In case of dividend distributions in the form of cash, depending on public or privately owned status of the Bank, 5% or 15% income tax (plus 10% state fund) is calculated over distributed amount and paid on behalf of shareholders.

Advance tax is calculated and paid as 25% of the quarterly income. Such advance payments are being deducted from the final tax liability calculated over current year operations.

Deferred Tax Liabilities / Assets:

Certain items of income and expense are subject to taxation in periods different than those in which they are recognized in the financial statements. The Bank has calculated and booked a deferred tax asset or liability related to these timing differences. In accordance with the announcement made on March 1, 2002 related to the regulations regarding the procedures of the Independent Audit, in line with Temporary Article 4 of Banking Act numbered 4389, the Bank has not computed any deferred tax asset or liability over the effects of inflation accounting.

Impairment of Assets:

An assessment is made at each balance sheet date to determine whether there is objective evidence that fixed assets, equity participations and investment in subsidiaries may be impaired. If such evidence exists, the estimated recoverable amounts of related assets are determined and any impairment loss recognized for the difference between the recoverable amounts and the carrying amounts are accounted for as an allowance on the balance sheet and the amount of the loss is included in the net profit and loss for the year.

Forward Currency Exchange Contracts:

The Bank enters into forward currency exchange contracts to hedge its foreign currency position. The discount or premium on a forward contract that is the effect of the difference between the foreign exchange rates at the inception of the contract and the contract rate, is amortised over the life of the forward contract and included in recording gain or loss.

Other Statement Items:

All other balance sheet items are stated at their historical values.

From December 31, 2001 the Bank prepared its financial statements, which have previously been prepared under the historic cost convention except for the revaluation of fixed assets, in line with inflation accounting.

Had the Bank classified the above securities under investment portfolio as of December 31, 2001 and since valued them using internal rate of return method and recognized income, current year net income would have been TL3,881.

The Bank's foreign currency net general position is managed according to the limits set by the Banking Regulation and Supervisory Agency (BRSA) with special reference to market conditions.

The related party balances are as follows: