----

----

----

| o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|------------------------------------------------------------------------------------------------|

| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|--------------------------------------------------------------------------------------|

| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|------------------------------------------------------------------------------------------|

| o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|---------------------------------------------------------------------------------------------|

----

| Title of each class                                  | Name of each exchange on which registered |
|------------------------------------------------------|-------------------------------------------|
| American Depositary Shares, each representing        | The NASDAQ Global Select Market           |
| one ordinary share, nominal value NIS 0.01 per share |                                      |
| Ordinary Shares, nominal value NIS 0.01 per share*   | The NASDAQ Global Select Market           |

| Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
|---------------------------|---------------------|-------------------------|

----

| ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                         | 5   |
|---------------------------------------------------------------------------------------|-----|
| ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                       | 5   |
| ITEM 3. KEY INFORMATION                                                               | 5   |
| ITEM 4. INFORMATION ON THE COMPANY                                                    | 32  |
| ITEM 4A. UNRESOLVED STAFF COMMENTS                                                    | 70  |
| ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  | 71  |
| ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 101 |
| ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             | 122 |
| ITEM 8. FINANCIAL INFORMATION                                                         | 129 |
| ITEM 9. THE OFFER AND LISTING                                                         | 133 |
| ITEM 10. ADDITIONAL INFORMATION                                                       | 135 |
| ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 147 |
| ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 149 |
| ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 151 |
| ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 151 |
| ITEM 15. CONTROLS AND PROCEDURES                                                      | 151 |
| ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 152 |
| ITEM 16B. CODE OF ETHICS                                                              | 152 |
| ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 152 |
| ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  | 153 |
| ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 153 |
| ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACOUNTANT                           | 153 |
| ITEM 16G. CORPORATE GOVERNANCE                                                        | 153 |
| ITEM 17. FINANCIAL STATEMENTS                                                         | 153 |
| ITEM 18. FINANCIAL STATEMENTS                                                         | 153 |
| ITEM 19. EXHIBITS                                                                     | 153 |

----

----

ITEM 

ITEM 

ITEM 

----

|                                                         |   | Year ended December 31,                                |    |
|--------------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                         |   | 2008                                                   |    |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2012 |   |
|                                                         |   | New Israeli Shekels in millions(except per share data) |    |   | US$ inmillions (1) |   |
| Consolidated Statement of Income Data                        |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                     |   |                                                   | 6,302   |   |   |   | 6,079 |   |   |   | 6,674 |   |   |   | 6,998 |   |   |   | 5,572 |   |   |   | 1,493 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                             |   |                                                   | 3,868   |   |   |   | 3,770 |   |   |   | 4,093 |   |   |   | 4,978 |   |   |   | 4,031 |   |   |   | 1,080 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                 |   |                                                   | 2,434   |   |   |   | 2,309 |   |   |   | 2,581 |   |   |   | 2,020 |   |   |   | 1,541 |   |   |   | 413 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing expenses                               |   |                                                   | 388     |   |   |   | 387 |   |   |   | 479 |   |   |   | 711 |   |   |   | 551 |   |   |   | 148 |   |
| General and administrative expenses                          |   |                                                   | 284     |   |   |   | 290 |   |   |   | 306 |   |   |   | 291 |   |   |   | 236 |   |   |   | 63 |   |
| Impairment of goodwill                                       |   |                                                   | -       |   |   |   |   |   |   |   |   |   |   |   | 87  |   |   |   |   |   |   |   |   |   |
| Other income, net                                            |   |                                                   | 64      |   |   |   | 69 |   |   |   | 64 |   |   |   | 105 |   |   |   | 111 |   |   |   | 30 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating profit                                             |   |                                                   | 1,826   |   |   |   | 1,701 |   |   |   | 1,860 |   |   |   | 1,036 |   |   |   | 865 |   |   |   | 232 |   |
|                                                         |   |                                                   | -       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Finance income                                               |   |                                                   | 30      |   |   |   | 28 |   |   |   | 28 |   |   |   | 39 |   |   |   | 27 |   |   |   | 7 |   |
| Finance expenses                                             |   |                                                   | 214     |   |   |   | 204 |   |   |   | 209 |   |   |   | 333 |   |   |   | 261 |   |   |   | 70 |   |
| Finance costs, net                                           |   |                                                   | 184     |   |   |   | 176 |   |   |   | 181 |   |   |   | 294 |   |   |   | 234 |   |   |   | 63 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit before income tax                                     |   |                                                   | 1,642   |   |   |   | 1,525 |   |   |   | 1,679 |   |   |   | 742 |   |   |   | 631 |   |   |   | 169 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expenses                                          |   |                                                   | 444     |   |   |   | 384 |   |   |   | 436 |   |   |   | 299 |   |   |   | 153 |   |   |   | 41 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit for the year                                          |   |                                                   | 1,198   |   |   |   | 1,141 |   |   |   | 1,243 |   |   |   | 443 |   |   |   | 478 |   |   |   | 128 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per ordinary share and per ADS                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                       |   |                                                   | 7.71    |   |   |   | 7.42 |   |   |   | 8.03 |   |   |   | 2.85 |   |   |   | 3.07 |   |   |   | 0.82 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                                                      |   |                                                   | 7.65    |   |   |   | 7.37 |   |   |   | 7.95 |   |   |   | 2.84 |   |   |   | 3.07 |   |   |   | 0.82 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding (in thousands) |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                       |   |                                                   | 155,350 |   |   |   | 153,809 |   |   |   | 154,866 |   |   |   | 155,542 |   |   |   | 155,646 |   |   |   | 155,646 |   |
| Diluted:                                                     |   |                                                   | 156,520 |   |   |   | 154,817 |   |   |   | 156,296 |   |   |   | 155,779 |   |   |   | 155,773 |   |   |   | 155,773 |   |

----

|                                                      |   | Year ended December 31,                                |   |
|-----------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                      |   | 2008                                                   |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2012 |   |
|                                                      |   | New Israeli Shekels in millions(except per share data) |   |   | US$ inmillions (1) |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Financial Data                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures (2)                                  |   |                                                   | 589    |   |   |   | 522 |   |   |   | 435 |   |   |   | 468 |   |   |   | 558 |   |   |   | 149 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (3)                                       |   |                                                   | 2,298  |   |   |   | 2,304 |   |   |   | 2,570 |   |   |   | 2,178 |   |   |   | 1,602 |   |   |   | 429 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividend per share (4)                                    |   |                                                   | 5.45   |   |   |   | 6.86 |   |   |   | 7.85 |   |   |   | 2.25 |   |   |   | 1.03 |   |   |   | 0.28 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital reduction (4)                                     |   |                                                   | -      |   |   |   | – |   |   |   | 9.04 |   |   |   | - |   |   |   |   |   |   |   | - |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Statement of Cash Flow Data                               |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                 |   |                                                   | 1,915  |   |   |   | 1,753 |   |   |   | 1,958 |   |   |   | 1,570 |   |   |   | 1,705 |   |   |   | 458 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in investing activities                     |   |                                                   | (514   | ) |   |   | (732 | ) |   |   | (486 | ) |   |   | (1,085 | ) |   |   | (471 | ) |   |   | (126 | ) |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in financing activities                     |   |                                                   | (1,365 | ) |   |   | (876 | ) |   |   | (1,480 | ) |   |   | (274 | ) |   |   | (1,218 | ) |   |   | (328 | ) |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet Data (at year end)                          |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                                            |   |                                                   | 1,472  |   |   |   | 1,807 |   |   |   | 1,830 |   |   |   | 2,308 |   |   |   | 2,120 |   |   |   | 569 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non current assets                                        |   |                                                   | 3,693  |   |   |   | 3,816 |   |   |   | 3,797 |   |   |   | 4,779 |   |   |   | 4,297 |   |   |   | 1,150 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Advance payment in respect of theacquisition of 012 smile |   |                                                   | -      |   |   |   | - |   |   |   | 30 |   |   |   | - |   |   |   |   |   |   |   | - |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property and equipment                                    |   |                                                   | 1,935  |   |   |   | 2,064 |   |   |   | 2,058 |   |   |   | 2,051 |   |   |   | 1,990 |   |   |   | 533 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| License and other intangible assets                       |   |                                                   | 1,260  |   |   |   | 1,260 |   |   |   | 1,077 |   |   |   | 1,290 |   |   |   | 1,217 |   |   |   | 326 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                                  |   |                                                   | -      |   |   |   | - |   |   |   | - |   |   |   | 407 |   |   |   | 407 |   |   |   | 109 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred income tax asset                                 |   |                                                   | 81     |   |   |   | 14 |   |   |   | – |   |   |   | 30 |   |   |   | 36 |   |   |   | 9 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative financial instruments                          |   |                                                   | -      |   |   |   | 4 |   |   |   | 6 |   |   |   | 24 |   |   |   | 1 |   |   |   | * |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                              |   |                                                   | 5,165  |   |   |   | 5,623 |   |   |   | 5,627 |   |   |   | 7,087 |   |   |   | 6,417 |   |   |   | 1,719 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities (5)                                   |   |                                                   | 1,734  |   |   |   | 1,915 |   |   |   | 1,826 |   |   |   | 1,889 |   |   |   | 1,525 |   |   |   | 408 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term liabilities (5)                                 |   |                                                   | 1,699  |   |   |   | 1,746 |   |   |   | 3,175 |   |   |   | 4,773 |   |   |   | 4,151 |   |   |   | 1,112 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                                         |   |                                                   | 3,433  |   |   |   | 3,661 |   |   |   | 5,001 |   |   |   | 6,662 |   |   |   | 5,676 |   |   |   | 1,520 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                                |   |                                                   | 1,732  |   |   |   | 1,962 |   |   |   | 626 |   |   |   | 425 |   |   |   | 741 |   |   |   | 199 |   |
|                                                      |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity          |   |                                                   | 5,165  |   |   |   | 5,623 |   |   |   | 5,627 |   |   |   | 7,087 |   |   |   | 6,417 |   |   |   | 1,719 |   |

----

| (1) | The translations of NIS amounts into US dollars appearing throughout this annual report have been made at the exchange rate on December 31, 2012, of NIS 3.733 = US$1.00 as published by the Bank of Israel, unless otherwise specified. See “Item 3A. Key Information – Selected Financial Data – Exchange Rate Data”. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Capital Expenditure represents additions to property and equipment and computer software. |
|-----|-------------------------------------------------------------------------------------------|

| (3) | Adjusted EBITDA as reviewed by the Chief Operating Decision Maker (“CODM”) represents earnings before interest (finance costs, net), taxes, depreciation, amortization (including amortization of intangible assets, deferred expenses-right of use, and share based compensation expenses) and impairment charges, as a measure of operating profit. Adjusted EBITDA is not a financial measure under IFRS and may not be comparable to other similarly titled measures in other companies. Adjusted EBITDA may not be indicative of the Company’s historic operating results nor is it meant to be predictive of potential future results. We use the term "Adjusted EBITDA" to highlight the fact that amortization includes amortization of deferred expenses – right of use and employee share- based compensation expenses, but the Adjusted EBITDA is fully comparable to EBITDA information which has been previously provided for prior periods. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | The dividend per share was calculated in respect of the period for which it was announced. During 2012, the Company declared a dividend in the amount of approximately NIS 160 million (US$ 43 million), or NIS 1.03 per share. The aggregate total dividend for 2011 was NIS 350 million or NIS 2.25 per share. The aggregate total dividend for 2010 was NIS 1,217 million or NIS 7.85 per share. A further NIS 1,400 million, or NIS 9.04 per share, was distributed to shareholders in March 2010 following the reduction of the shareholders’ equity as approved by the Courts. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | See Notes 15 and 16 to the consolidated financial statements for information regarding long-term liabilities and current maturities of long-term bank loans and notes payable. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                        |   | Year ended December 31,         |   |    |                |   |
|-----------------------------------------------------------------------------|--------|---------------------------------|--------|---------|---------------------|--------|
|                                                                        |   | 2008                            |   |    | 2009                |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2012 |   |
|                                                                        |   | New Israeli Shekels in millions |   |    | US $ inmillions (1) |   |
|                                                                        |   |                            |   |    |                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation Between Operating Cash flow and Adjusted EBITDA              |   |                            |   |    |                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                   |   |                            | 1,915  |    |                |   | 1,753 |   |   |   | 1,958 |   |   |   | 1,570 |   |   |   | 1,705 |   |   |   | 458 |   |
| Liability for employee rights upon retirement                               |   |                            | (5     | )       |                |   | (1 | ) |   |   | (8 | ) |   |   | 26 |   |   |   | 12 |   |   |   | 3 |   |
| Accrued interest, exchange and linkage differences on long-term liabilities |   |                            | (182   | )       |                |   | (167 | ) |   |   | (160 | ) |   |   | (289 | ) |   |   | (222 | ) |   |   | (60 | ) |
| Increase (Decrease) in accounts receivable and assets:                      |   |                            |   |    |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                                       |   |                            | (47    | )       |                |   | 229 |   |   |   | 214 |   |   |   | 190 |   |   |   | (467 | ) |   |   | (125 | ) |
| Other (*)                                                                   |   |                            | (4     | )       |                |   | 16 |   |   |   | 34 |   |   |   | 2 |   |   |   | 16 |   |   |   | 4 |   |
| Inventories                                                                 |   |                            | (8     | )  |                |   | 33 |   |   |   | (57 | )  |   |   | 58 |   |   |   | (65 | )  |   |   | (17 | )  |
|                                                                        |   |                            |   |    |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (Increase) in accounts payable and accruals:                       |   |                            |   |    |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                                       |   |                            | (10    | )       |                |   | (43 | ) |   |   | 40 |   |   |   | 37 |   |   |   | 107 |   |   |   | 28 |   |
| Parent group-trade                                                          |   |                            | (1     | )       |                |   | 17 |   |   |   | (38 | ) |   |   | (70 | ) |   |   | 72 |   |   |   | 19 |   |
| Other (*)                                                                   |   |                            | 48     |    |                |   | (43 | ) |   |   | (15 | ) |   |   | 54 |   |   |   | 64 |   |   |   | 17 |   |
| Decrease (Increase) in asset retirement obligation                          |   |                            | (1     | )       |                |   | 1 |   |   |   | (1 | ) |   |   | (1 | ) |   |   | (1 | ) |   |   | - |   |
| Income tax paid                                                             |   |                            | 420    |    |                |   | 339 |   |   |   | 426 |   |   |   | 311 |   |   |   | 153 |   |   |   | 41 |   |
| Financial expenses, net (**)                                                |   |                            | 173    |    |                |   | 170 |   |   |   | 177 |   |   |   | 290 |   |   |   | 228 |   |   |   | 61 |   |
|                                                                        |   |                            |   |    |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (2)                                                         |   |                            | 2,298  |    |                |   | 2,304 |   |   |   | 2,570 |   |   |   | 2,178 |   |   |   | 1,602 |   |   |   | 429 |   |

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|   | (1) | The translations of NIS amounts into US dollars appearing throughout this annual report have been made at the exchange rate on December 31, 2012, of NIS 3.733 = US$1.00 as published by the Bank of Israel, unless otherwise specified. See “Item 3A. Key Information – Selected Financial Data – Exchange Rate Data”. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Adjusted EBITDA as reviewed by the Chief Operating Decision Maker (“CODM”) represents earnings before interest (finance costs, net), taxes, depreciation, amortization (including amortization of intangible assets, deferred expenses-right of use, and share- based compensation expenses) and impairment charges, as a measure of segment profit. Adjusted EBITDA is not a financial measure under IFRS and may not be comparable to other similarly titled measures in other companies. Adjusted EBITDA may not be indicative of the Company’s historic operating results nor is it meant to be predictive of potential future results. We use the term "Adjusted EBITDA" to highlight the fact that amortization includes amortization of deferred expenses – right of use and employee share-based compensation expenses, but the Adjusted EBITDA is fully comparable to EBITDA information which has been previously provided for prior periods. |
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|                                                               |   | At December 31, |   |
|--------------------------------------------------------------------|--------|-----------------|--------|
|                                                               |   | 2010            |   |   | 2011 |   |   | 2012 |   |
|                                                               |   |            |   |   |   |   |   |   |   |
| Cellular Industry Data                                             |   |            |   |   |   |   |   |   |   |
|                                                               |   |            |   |   |   |   |   |   |   |
| Estimated population of Israel (in millions) (1)                   |   |            | 7.7    |   |   |   | 7.8 |   |   |   | 8.0 |   |
| Estimated Israeli cellular telephone subscribers (in millions) (2) |   |            | 9.9    |   |   |   | 10.0 |   |   |   | 10.2 |   |
| Estimated Israeli cellular telephone penetration (3)               |   |            | 129    | % |   |   | 128 | % |   |   | 128 | % |

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|                                                                                             |   | Year ended December 31, |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                             |   | 2008                    |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partner Data                                                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cellular subscribers (000’s)  (at period end) (4)                                     |   |                    | 2,898  |   |   |   | 3,042 |   |   |   | 3,160 |   |   |   | 3,176 |   |   |   | 2,976 |   |
| Pre-paid cellular subscribers (000’s)  (at period end) (4)                            |   |                    | 745    |   |   |   | 811 |   |   |   | 870 |   |   |   | 894 |   |   |   | 874 |   |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Post-paid cellular subscribers (000’s)  (at period end) (4)                           |   |                    | 2,153  |   |   |   | 2,231 |   |   |   | 2,290 |   |   |   | 2,282 |   |   |   | 2,102 |   |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share of total Israeli cellular subscribers  (at period end) (5)                            |   |                    | 32     | % |   |   | 32 | % |   |   | 32 | % |   |   | 32 | % |   |   | 29 | % |
| Average monthly usage per cellular  subscriber (“MOU”) (mins.) (6)              |   |                    | 365    |   |   |   | 364 |   |   |   | 366 |   |   |   | 397 |   |   |   | 450 |   |
| Average monthly revenue per cellular subscriber including roaming (“ARPU”) (NIS) (7) |   |                    | 161    |   |   |   | 151 |   |   |   | 148 |   |   |   | 111 |   |   |   |   97 |   |
| Churn rate for cellular subscribers (8)                                                          |   |                    | 18     | % |   |   | 18 | % |   |   | 21 | % |   |   | 29 | % |   |   | 38 | % |
| Number of fixed-lines (000’s) (9)  (at period end)                                    |   |                    |   |   |   |   |   |   |   |   | 69 |   |   |   | 292 |   |   |   | 288 |   |
| ISP subscribers (000’s) (at period end)                                                    |   |                    |   |   |   |   |   |   |   |   | 60 |   |   |   | 632 |   |   |   | 587 |   |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Estimated cellular coverage of Israeli population (at period end) (10)                           |   |                    | 98     | % |   |   | 98 | % |   |   | 99 | % |   |   | 99 | % |   |   | 99 | % |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of employees (full time equivalent) (at period end) (11)                                  |   |                    | 4,671  |   |   |   | 5,670 |   |   |   | 6,068 |   |   |   | 7,891 |   |   |   | 5,396 |   |

| (1) | The population estimates are as published by the Central Bureau of Statistics in Israel as of December 31, 2012. |
|-----|------------------------------------------------------------------------------------------------------------------|

| (2) | We have estimated the total number of Israeli cellular telephone subscribers based on Partner subscriber data as well as information contained in published reports and public statements issued by operators and data regarding the number of subscribers porting between operators. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Total number of estimated Israeli cellular telephone subscribers expressed as a percentage of the estimated population of Israel. The total number of estimated cellular telephone subscribers includes dormant subscribers as well as other subscribers who are not included in the Israeli population figures, such as Palestinians, visitors, and foreign workers. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | In accordance with general practice in the cellular telephone industry, we use the term “subscriber”, unless the context otherwise requires, to indicate a telephone or a data or video device, rather than either a bill-paying network customer, who may have a number of telephones connected to the network, or a cellular telephone user who may share a single telephone with a number of other users. “Subscriber” includes our pre-paid customers. A pre-paid subscriber is recognized as such only following the actual use of his pre-paid SIM card and, as of January 2011, only once they have generated revenues in the amount of at least one shekel (excluding VAT). References to the number of subscribers are stated net of subscribers who leave or are disconnected from the network, or who have not generated revenue for the Company for a period of over six consecutive months ending at a reporting date. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| (5) | Total number of Partner subscribers expressed as a percentage of the estimated total number of Israeli cellular subscribers. |
|-----|------------------------------------------------------------------------------------------------------------------------------|

| (6) | We have calculated our average monthly usage per cellular subscriber by (i) dividing, for each month in such period, the total number of minutes of usage, excluding in roaming usage, during such month by the average of the number of our subscribers, and (ii) dividing the sum of such results by the number of months in the relevant period. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | We have calculated our average monthly revenue per cellular subscriber by (i) dividing, for each month in the relevant year, the total cellular segment service revenues during the month by the average number of our cellular subscribers during that month, and (ii) dividing the sum of all such results by the number of months in the relevant period. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | We define the “churn rate” as the total number of cellular subscribers who disconnect from our network, either involuntarily or voluntarily, in a given period expressed as a percentage of the average of the number of our subscribers at the beginning and end of such period. Our churn rate includes subscribers who have not generated revenue for us for a period of the last six consecutive months ending at a reporting date. This includes cellular subscribers who have generated minute revenues only from incoming calls directed to their voice mail. Involuntary churn includes disconnections due to non-payment of bills or suspected fraudulent use, and voluntary churn includes disconnections due to subscribers terminating their use of our services. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9) | Fixed lines include Primary Rate Interface (“PRI”) lines, whereby each PRI is considered  to include 30 lines according to the number of channels, Session Initiation Protocol ("SIP") trunks and Voice over Broadband (“VoB”) lines. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10) | We measure cellular coverage using computerized models of our network, radio propagation characteristics and topographic information to predict signal levels at two meters above ground level in areas where we operate a network site. According to these coverage results, we estimate the population serviced by our network and divide this by the estimated total population of Israel. Population estimates are published by the Central Bureau of Statistics in Israel. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (11) | A full-time employee is contracted to work a standard 186 hours per month. Part-time employees are converted to full-time equivalents by dividing their contracted hours per month by the full-time standard. The result is added to the number of full-time employees to determine the number of employees on a full-time equivalent basis. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                            | Year ended December 31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                            | 2008                    |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |
|                                                                                                                                                                                                                                                                                                                            |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average (1)                                                      |                    |   | 3.588 |   |   |   | 3.927 |   |   |   | 3.732 |   |   |   | 3.579 |   |   |   | 3.844 |   |
| High                                                             |                    |   | 4.022 |   |   |   | 4.256 |   |   |   | 3.894 |   |   |   | 3.821 |   |   |   | 4.084 |   |
| Low                                                              |                    |   | 3.230 |   |   |   | 3.690 |   |   |   | 3.549 |   |   |   | 3.363 |   |   |   | 3.700 |   |
| End of period                                                    |                    |   | 3.802 |   |   |   | 3.775 |   |   |   | 3.549 |   |   |   | 3.821 |   |   |   | 3.733 |   |

| (1) | Calculated based on the average of the exchange rates on the last day of each month during the relevant period. |
|-----|-----------------------------------------------------------------------------------------------------------------|

|                                                                                                                   |   | September2012 |   |   | October2012 |   |   | November2012 |   |   | December2012 |   |   | January2013 |   |   | February2013 |   |   | March 2013 (throughMarch 15) |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------|--------|--------|-------------|--------|--------|--------------|--------|--------|--------------|--------|--------|-------------|--------|--------|--------------|--------|--------|------------------------------|--------|
|                                                                                                                   |   |          |   |   |        |   |   |         |   |   |         |   |   |        |   |   |         |   |   |                         |   |   |
| High                    |   |          | 4.029  |   |        |   | 3.895  |         |   |   | 3.952        |   |   |        | 3.835  |   |         |   | 3.791  |                         |   |   | 3.733 |   |   |   | 3.733 |   |
| Low                     |   |          | 3.887  |   |        |   | 3.792  |         |   |   | 3.810        |   |   |        | 3.726  |   |         |   | 3.714  |                         |   |   | 3.663 |   |   |   | 3.681 |   |

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|   | · | Grant of licenses and frequencies to two new competitors.  In April 2011, UMTS frequencies were awarded to MIRS (subsequently renamed “HOT Mobile”) and Golan Telecom Ltd. (“Golan Telecom”), which entered the market in May 2012. HOT Mobile and Golan Telecom were awarded various benefits and leniencies, such as low minimum license fee and a reduction mechanism of the license fee offered to the winner (to the minimum fee set) based on the market share gained by the winner in the private sector over 5 years after being awarded the license. In order to achieve the market share, these new entrants have launched aggressive tariff plans which include unlimited use packages. As a result the competition has increased, which has and may continue to adversely affect our churn rate and revenues. See “Item ‎4B.11b Regulatory developments leading to new entrants in the Cellular Services market"; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Facilitating entry of MVNOs.  During 2010, the Ministry of Communications adopted regulations for providing licenses to Mobile Virtual Network Operators (“MVNOs”), and granted MVNO licenses to a number of companies, the first of which began to operate in December 2011 and two others during 2012. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | facilitating migration of customers among cellular companies.  On January 1, 2013, an amendment to the Telecommunications Law became effective which prohibits cellular companies from linking cellular service transactions and handset-related transactions.  This amendment was added to previous amendments promulgated by the Ministry of Communications to facilitate the migration of subscribers among cellular companies and thus enhance competition,  including the cancellation of exit fees before the end of a customer’s commitment period, cancellation of commitment periods and a prohibition on selling locked handsets; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·  | Facilitating migration of customers among cellular companies.  On January 1, 2013, an amendment to the Telecommunications Law became effective which prohibits cellular companies from linking cellular service transactions and handset-related transactions.  This amendment was added to previous amendments promulgated by the Ministry of Communications to facilitate the migration of subscribers among cellular companies and thus enhance competition,  including the cancellation of exit fees before the end of a customer’s commitment period, cancellation of commitment periods and a prohibition on selling SIM- locked handsets; |
|--------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Wholesale market prices. In May 2012, the Ministry of Communications adopted the main recommendations of the Hayek Committee, a public committee appointed to examine the telecommunications sector, for increasing competition in the telecommunications market. As a result of the Ministry’s adoption of such recommendations, if we do not reach agreements through direct negotiations with Bezeq-The Israel Telecommunication Corp., Ltd. ("Bezeq") and HOT Telecommunication Systems Ltd. (“HOT”), the only telecommunication operators with their own universal fixed-line infrastructure, for the supply of wholesale fixed-line services, the Ministry of Communications may intervene and set the wholesale tariffs we would be required to pay.  Should the tariffs be set at a level which is not economical for us, this would significantly limit our ability to compete in the fixed-line market. See “Item 4B Regulation- 4.7 Public Committee to Examine the Telecommunications Sector.” |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Gigabit Ethernet  Connection Prices. In June 2012, the Ministry of Communications published a hearing in which it proposed to abolish the payment that internet service providers are currently required to pay to broadband internet access infrastructure providers the fixed- line operators (currently Bezeq and HOT) - for the transfer of the traffic between end- users and the ISPs. The Ministry has yet to intervene and abolish these payments. Until such time as the Ministry  intervenes in this matter, we will continue to be required to make these payments to Bezeq and HOT. See “Item ‎4B.14d - viii Hearings and Examinations". |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Fixed-line interconnection tariffs. The Ministry of Communications employed a consultancy firm to assist in preparing a cost model for fixed-line networks in Israel. In March 2013, after the consultancy firm had submitted its report to the Ministry, the Ministry published a hearing in which it proposed to reduce the fixed-line interconnection tariffs from a level of NIS 0.035 (on average) to NIS 0.014. Interested parties were invited to file their positions in this hearing no later than April 30, 2013. Until such time as the Ministry decides to reduce the fixed-line interconnection prices, we will continue to pay tariffs which are significantly above cost, which prevents us from decreasing our costs. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Proposed Regulation of Roaming Services. The Ministry of Communications has recently published a hearing with respect to roaming services abroad. The measures proposed in the hearing may limit usage of these services by our subscribers and may negatively affect our roaming revenues. See Item "‎4B.14d4B.14d - viii Hearings and Examinations". |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Annulment of structural separation provisions applicable to Bezeq and HOT. In accordance with the policy of the Ministry of Communications, once the Ministry has set wholesale tariffs, Bezeq and HOT will have the authorization to offer their customers bundled fixed-line and mobile telecommunications services. This may allow them to take advantage of their nationwide presence and cross subsidization to market and sell more competitive and attractive offers than we will be able to offer, including cellular services. Bundled offerings have accelerated and are expected to accelerate price erosion in each of the services included. If the Ministry of Communications fails to implement a wholesale fixed-line market, our ability to respond to these bundled service offers may be further limited. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·  | Potential increased costs for our fixed-line services. The Ministry of Communications is also considering providing new company protections for Tamares Telecom Ltd. (“Tamares”), a company which laid an underwater cable in early 2012, in order to facilitate the company’s entry into the international transmission market, by setting minimum tariffs which Tamares’s main competitor, Mediterranean Nautilus Israel Ltd. (“Med Nautilus”), may charge its customers, which include Partner. Regulations published for public comment by the Ministry of Communications in November 2011 propose certain limitations on the terms of agreements with Med Nautilus, which would, among other effects, limit the discounts and capacity which Med Nautilus may provide and thus require ISP providers (other than Bezeq International) to purchase capacity on less favorable terms and prices. Because Bezeq International Ltd. (“Bezeq International”) has its own underwater cable and may supply itself with its own international transmission services at a lower cost, our ability to compete on price with Bezeq for services in the fixed-line telecommunications market may be reduced. See “Item ‎4B.14d - viii Hearings and Examinations". |
|--------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·  | Requiring the maintenance of network neutrality. New provisions became effective in 2011 requiring cellular operators to maintain “network neutrality” on the internet while browsing from cellular phones, and there is a law proposal to broaden these provisions to all operators in the telecommunications field. In addition, the Ministry of Communications clarified in September 2012, that the blocking or limiting of subscribers from defining their handsets as WiFi "hotspots" in a manner that enables additional handsets to use the cellular internet of the subscriber ("tethering") is prohibited. This amendment may significantly limit our ability to manage traffic on our network and as a result would increase our expenses and reduce profits. |
|--------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Proposed Privacy Regulation. The Information and Technology Authority, the Israeli privacy protection regulator, has circulated initial draft guidelines aimed at cellular operators. The guidelines, if adopted as currently drafted, would require operators to seek users' consent to the collection, amelioration and usage of data for marketing purposes, which may affect the extent to which we can collect and process information. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Anti-Trust Regulation. Pursuant to the Israeli Restrictive Trade Practices Law, 1988, if the Anti Trust Commissionaire decides that the Israeli cellular market is oligopolistic,  the Director General will have the authority to give instructions to all or some of the participants in our market, in order to, among other objectives,  maintain or increase the competition level among the participants, the Director General's authority would include the ability to issue orders to remove or to ease entry or transfer barriers, to terminate a participant's activity, or otherwise to regulate the activities of the market. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Applicability of Charge Cards Law to Cellular Payments. During the fourth quarter of 2012, the Attorney General opined before two separate tribunals that when subscribers of cellular operators subscribe to services that are paid through the cellular operator to third party providers, this payment mechanism should be considered a credit card charge and the cellular operator as acting as the "card issuer" under the Israeli Charge Cards Law, 1986.  The operation of credit card payment systems is subject to various laws and regulations governing their set-up, operations and responsibilities vis-à-vis the card holders and the providers of the services or goods purchased using the card. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| · | increasing our vulnerability to adverse economic, industry or business conditions or increases in the  consumer price index ("CPI"), particularly because a substantial portion of our borrowings is linked to the CPI; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | limiting our flexibility in planning for, or reacting to, changes in our industry and business as well as the economy generally; |
|--------|----------------------------------------------------------------------------------------------------------------------------------|

| · | requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, which reduces the funds available for dividend distributions and future business development; and |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | limiting our ability to obtain the additional financing we may need to operate, develop and expand our business. |
|--------|------------------------------------------------------------------------------------------------------------------|

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ITEM 4.                      INFORMATION ON THE COMPANY

| · | In April 1998, we received our license to establish and operate a cellular telephone network in Israel. |
|--------|---------------------------------------------------------------------------------------------------------|

| · | In January 1999, we launched full commercial operations with approximately 88% population coverage and established a nationwide distribution. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

| · | In October 1999, we completed our initial public offering of ordinary shares in the form of American Depositary Shares, and received net proceeds of approximately NIS 2,092 million, with the listing of our American Depositary Shares on NASDAQ and the London Stock Exchange. We used part of these net proceeds to repay approximately NIS 1,494 million in indebtedness to our principal shareholders, and the remainder to finance the continued development of our business. (In March 2008, we voluntarily delisted our ADSs from the London Stock Exchange.) |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In August 2000, we completed an offering, registered under the US Securities Act of 1933, as amended, of $175 million (approximately $170.5 million after deducting commissions and offering expenses) in 13% unsecured senior subordinated notes due 2010. These notes were redeemed in August 2005. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | On March 31, 2001, we had over 1,000,000 cellular subscribers. |
|--------|----------------------------------------------------------------|

| · | In July 2001, we registered our ordinary shares for trading on the Tel Aviv Stock Exchange. |
|--------|---------------------------------------------------------------------------------------------|

| · | In December 2001, the Ministry of Communications awarded us two bands of spectrum: one band of GSM 1800 spectrum and one band of 2100 UMTS third generation spectrum. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In June 2002, our license was extended until February 2022. |
|--------|-------------------------------------------------------------|

| · | In August 2003, we had over 2,000,000 cellular subscribers. |
|--------|-------------------------------------------------------------|

| · | In December 2004, we commercially launched our 3G network. |
|--------|------------------------------------------------------------|

| · | In March 2005, we completed a debt offering, raising NIS 2.0 billion in a public offering in Israel of notes due 2012. |
|--------|------------------------------------------------------------------------------------------------------------------------|

| · | In April 2005, we repurchased approximately 33.3 million shares from our Israeli founding shareholders, representing approximately 18.1% of our outstanding shares immediately before the repurchase. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In the third quarter of 2005, our Board of Directors and shareholders approved the distribution of our first cash dividend, in the amount of NIS 0.57 per share, totaling approximately NIS 86.4 million. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In March 2006, we launched services based on the High Speed Downlink Packet Access (“HSDPA”) technology. HSDPA is a technological enhancement to our 3G services that offers subscribers the ability to access our 3G services at higher speeds. The HSDPA technology has already been deployed to support up to 21 Mbps on the downlink and 5.76 Mbps on the uplink. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| · | In July 2006, we purchased Med-1 I.C.–1 (1999) Ltd.’s fiber-optic transmission business for approximately NIS 71 million, in order to enable us to reduce our transmission costs as well as to provide our business customers with bundled services of transmission of data and voice and fixed-line services. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In January 2007, we were granted a domestic fixed license by the Ministry of Communications, and in February 2007 we were granted a network termination point license. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In August 2008 the ISP license granted to us in 2003 by the Ministry of Communications was renewed for an additional period of five years. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

| · | In December 2008 and January 2009, we launched three additional non-cellular business lines: VoB telephony services, ISP services and Web VOD (video on demand). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In October 2009, Scailex became our principal shareholder through acquiring the entire interest in the Company of our previous controlling shareholder. Scailex is indirectly controlled by Mr. Ilan Ben-Dov. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In February 2010, the District Court approved the application submitted by the Company for a special dividend distribution in the total amount of NIS 1.4 billion (exceeding the surpluses for distribution) to the Company’s shareholders (“the capital reduction”). Following the District Court’s approval, a total amount of NIS 1.4 billion or approximately NIS 9.04 per share was paid on March 18, 2010, to shareholders and ADS holders of record on March 7, 2010, which resulted in a reduction of the shareholders’ equity by an equal amount. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | On March 3, 2011, we acquired all of the outstanding shares of 012 Smile Telecom Ltd., a leading provider of broadband and traditional telecommunications services in Israel. 012 Smile’s broadband services include broadband Internet access (ISP) with a suite of value-added services,  specialized data services and server hosting, as well as new innovative services such as local telephony via voice over broadband (VOB) and a WiFi network of hotspots across Israel. Traditional voice services include outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. 012 Smile services residential and business customers, as well as Israeli cellular operators and international communication services providers through its integrated multipurpose network. 012 Smile’s network allows it to provide services to almost all of the homes and businesses in Israel. The acquisition of 012 Smile supported our strategy of becoming a leading comprehensive communications group, expanding our range of services and products. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | On January 29, 2013, S.B. Israel Telecom, an affiliate of Saban Capital Group, a private investment firm, based in Los Angeles, California, specializing in the media, entertainment and communications industries. became our principal shareholder through acquiring 30.87%  of our issued and outstanding shares, principally from our previous controlling shareholder, Scailex.  See ”Item 7A Major Shareholders”. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | the cellular business segment, our main business, which represents the substantial portion of our total revenues. The cellular business segment includes all services provided over our cellular networks including airtime, interconnect, roaming and content services. In addition, the cellular business segment’s activities include sales of relevant equipment including cellular handsets, tablets, datacards, modems including built-in modems in laptops and related equipment and accessories. |
|--------|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | - | the fixed line business segment, which includes a number of services provided over fixed line networks including (1) Internet services ("ISP") that provides access to the internet  as well as home WiFi networks, including Value Added Services ("VAS") such as anti-virus and anti-spam filtering; and fixed-line voice communication services provided through Voice Over Broadband ("VOB"); (2) Transmission services and Primary Rate Interface (“PRI”); (3) International Long Distance services ("ILD"),  outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. In addition, this segment includes sales of related equipment such as routers and phones. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2012, our number of fixed telephony lines for both residential as well as business customers amounted to approximately 288,000 lines, compared to 292,000 at year-end 2011, and our ISP subscriber base reached approximately 587,000 customers, compared to 632,000 at year-end 2011. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | High Rate of Unlimited Packages. Israeli cellular operators provide, among other price-competitive offers, a particularly high rate of unlimited voice and text packages, and various data packages consisting of relatively high volumes of data at competitive prices. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Lack of Migration Barriers.  Due to regulatory changes, the Israeli cellular market to date has limited migration barriers. Operators are no longer able to offer beneficial packages to residential or small business customers that commit to longer periods or link sales of handsets to services.  In addition, there is full number portability. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| · | Cellular Telephone Market Saturation. Since 1994, the market has sustained a rapid annual rate of growth from a 2.6% penetration rate at year-end 1994 to an estimated penetration rate in Israel at December 31, 2012, of 128%, representing approximately 10.2 million subscribers out of an estimated population of approximately 8 million. The total number of estimated cellular telephone subscribers includes dormant subscribers and subscribers to multiple networks as well as other subscribers who are not included in the Israeli population figures, such as Palestinians, visitors, and foreign workers. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Entrance of New Operators. The regulatory changes in the telecommunications industry, particularly with respect to new entrants that include new cellular operators and MVNOs , have created a high level of competition in the industry. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Favorable Geography. Israel covers an area of approximately 8,000 square miles (20,700 square kilometers) and its population tends to be centered in a small number of densely populated areas. In addition, the terrain of Israel is relatively flat. These factors facilitate the roll out, maintenance and subsequent upgrades of a cellular network in a cost effective manner. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | High Penetration of Smartphones. Published market data shows that the relatively young Israeli population has a propensity to accept and use high technology products. The level of penetration of smartphones in the Israeli market is also estimated to be one of the highest in the world. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Pursue our Evolution intoa Diversified Multi-service Communications Group. In order to compete with the emerging comprehensive telecommunications groups, we are continuing to broaden and diversify our portfolio of products and services to evolve into a diversified multi-service communications and media service provider. Our goal is to provide a full range of telecommunications and media services which will enable customers to satisfy all their telecommunications needs through us. In addition to our major business providing cellular telecommunications services, our services offering range includes fixed-line telephony, ISP services, transmission services and, ILD services and other accompanying telecom and media services. The acquisition of 012 Smile in 2011 enabled us to expand our service offerings (see “Item ‎4A History and Development of the Company”).  We also intend to further enrich our media and content offerings in order to attract new customers and increase the level of loyalty and satisfaction of our existing customer base. Our licenses to operate in various telecommunications areas enable us to provide a wide range of services that will potentially be used to create a bundle of telecom and other adjacent services which we believe will favorably affect our ability to limit churn rates, increase customer loyalty, maximize the synergy between our lines of business and generate additional streams of revenues. |
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|   | · | Drive Customer Value through Customer Centric Strategy. We believe that, particularly in light of the intense competition in the Israeli telecommunications services markets, customer value is a key concern. We place a priority on striving for excellence in the customer experience and differentiating ourselves from our competitors by our high level of customer service by providing customer guidance through, among others, a user-friendly website and technical guidance to smartphones.  Internally, we seek to improve and align all company business model elements to deliver consistent satisfaction at each step of the customer’s experience  and provide a high quality network. |
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|   | · | Increasing Network Speed, Quality and Efficiency.   We have had and shall continue to have, a commitment to ensure the quality of our network in all its domains-cellular, fixed-line telephony, ISP and transmission and the integration of technological progress to support usage growth.  We continuously invest in our network platforms and transmission network and are preparing our network for upgrading to 4G, while ensuring smooth migration from existing networks to next generation networks. We are at an advanced stage of 4G deployment. |
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|   | · | Maintain Orange Premium Pricing. In order to better address our customer needs, while maintaining customer value, we launched the 012 Mobile brand in order to compete in the low price competitive landscape, thus enabling Partner to maintain premium pricing for its Orange brand. |
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|   | · | Improve Efficiency. We place a premium on improving operational efficiency, adjusting costs and workforce to a level appropriate for evolving market conditions.  During the fourth quarter of 2011, the structural separation between the Company and 012 Smile was terminated.  During 2012, we completed the process of merging the fixed-line businesses of Partner and of 012 Smile. The intense competition in the Israeli telecom, market requires us to further reduce costs to align them with reduced revenues. We have integrated some of the headquarter activities, including human resources, finance, legal, procurement and logistics, under one management structure. This process is designed to maximize operating synergies and to enhance the organizational and managerial focus required for dealing with the market challenges in both the short and the long term. |
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|   | · | Growth in Mobile Broadband. We are pursuing growth in mobile broadband to capitalize on the rapid increase in demand for ubiquitous mobile data services and devices. In this context, we are responding to the rapid growth of mobile data traffic, and adopting targeted segmentation and pricing strategies as well as taking advantage of different broadband connection modes, to deliver a valuable quality of broadband service to users. |
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|   | · | Maintain Strong Branding. We believe that a focused marketing strategy based upon strong branding reflecting our leading network, customer service and innovation will continue to be a differentiator in the competitive Israeli telecom market. |
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| · | Variety of communication products. We believe that our VoB, ISP services and ILD services, strengthen our position in the communications market.  Offering a variety of combined mobile and fixed-line products and services will enable us to better compete with the bundled services of other players, increase customer loyalty, and serve as an additional source of revenue. |
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| · | Focus on Customer Experience. We believe we provide a quality customer experience through quick, simple and reliable handling of customer needs and interactions, which we have achieved through investments in technology, launching new and clear plans, launching a new portfolio of smartphones and tablets, and new communications products as well as training of customer service skills. |
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| · | High Quality Networks. We believe that we set high standards for network quality.  We constantly invest in upgrading our network to the most advanced software and hardware, in all network domains – Radio Network, Fixed transmission network, fixed and mobile core network platforms, underlying IP infrastructure and supporting active and passive infrastructure (such as AC/DC power system, A/C, cabling, and antennae). We also continuously add more base cellular stations to gain better, denser site grids which give better coverage and capacity, resulting in a better quality of service in terms of accessibility (i.e. setup success), retainability (i.e. drop probability) and quality (e.g. peak and average data rates and voice quality). These investments, together with the use of sophisticated network planning, optimization and monitoring tools and techniques, have produced a high quality network which has been branded as the Orange "Ultranet". Orange Ultranet ranked first for its speed among Israeli networks based on a few hundred thousand samples recorded during the last quarter of 2012 by end- users. |
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| · | Strong Brand Identity. Since the launch of our full commercial operations in the cellular segment, we have made a substantial investment in promoting our brand identity in Israel to represent quality, innovation and customer service. Our marketing activities have resulted in wide-scale recognition of our brand for cellular services in Israel. |
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| · | Strong and Motivated Management Team. We have been able to attract a number of Israeli senior managers from the telecommunications, high-tech and consumer products industries. Our management team is experienced and highly respected and, we believe, well-positioned to manage and lead the Company. |
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|   | · | ISP services. As an internet service provider, we offer our customers ISP services and as a reseller we offer internet access. Our ISP services offering includes email accounts, home WiFi networking, anti-virus and site filtering based on the customer’s restriction definition, and other value added internet services. Furthermore, we offer an advanced set of communications services that house web servers and related software and provide connectivity to the Internet for business customers.   |
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|   | · | ILD services. As an international long distance provider, we offer our residential and business customers international telephony services including direct international dialing services, international and domestic pre-paid and post-paid calling cards, and call-back services. In addition, we offer our business customers international toll-free numbers and an international cellular service that offers fixed rates on calls from anywhere in the world. As an international long distance provider, we also provide hubbing traffic routing between network operators for termination of long distance calls outside of Israel. |
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|   | · | Transmission. We provide fixed-line transmission and data capacity services. Our fixed-line capacity also includes capacity which we lease from other land-line telecommunications service providers. The services we offer include primarily connectivity services by which we provide high quality, dedicated, point-to-point connection for business customers and telecommunications providers, as well as fixed-line services to business customers. |
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|   | · | VoB. This service allows users to make and receive telephone calls over the Internet through an internet connection. We offer traditional voice services to residential and business customers throughout Israel. Our service includes Quality of Service, which ensures high quality voice transmission regardless of the load on the internet connection, and a home gateway which is unique in the Israeli market for its range of sophisticated functionalities, including call “hijack” between the customer’s Orange fixed and Orange mobile telephone lines and a variety of domestic dialing for business customers. |
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|   | · | ISO 9001:2008, which focuses on fulfillment of clients and legal requirements; |
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|   | · | ISO 14001:2004, which coordinates our commitment to habitat and environment; and |
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|   | · | OHSAS 18001:2007, which directs our efforts to provide a safe and healthy work environment at our premises. |
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|   | · | A team of regional representatives and customer account managers, located in regional offices, supports small to medium-sized businesses. |
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|   | · | A team of corporate representatives and customer account managers who support large corporate customers. |
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|   | · | A “door to door” sales-force team located in regional offices focuses on individual and small business customers. |
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|   | · | A telemarketing department conducts direct sales by phone (to private and business customers), initiates contacts with prospective customers and coordinates appointments for the sales representatives. |
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| · | erection and operating permits from the Ministry of Environmental Protection; |
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| · | permits from the Civil Aviation Authority, in certain cases; and |
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| · | permits from the Israeli Defense Forces. |
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| Estimated Market Shares* |   | 2008   |   |   | 2009   |   |   | 2010   |   |   | 2011   |   |   | 2012   |   |
|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partner                  |   |   | 32     | %      |   |   | 32     | %      |   |   | 32     | %      |   |   | 32     | % |   |   | 29 | % |
| Cellcom                  |   |   | 35     | %      |   |   | 34     | %      |   |   | 34     | %      |   |   | 34     | % |   |   | 32 | % |
| Pelephone                |   |   | 29     | %      |   |   | 29     | %      |   |   | 29     | %      |   |   | 29     | % |   |   | 28 | % |
| HOT Mobile (MIRS)        |   |   | 4      | %      |   |   | 5      | %      |   |   | 5      | %      |   |   | 5      | % |   |   | 8 | % |
| Golan Telecom and others |   |   | -      |   |   |   | -      |   |   |   | -      |   |   |   | -      |   |   |   | 3 | % |

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|   | · | the maximum interconnect tariff payable by a telecommunications operator to a cellular operator for the completion of a call in its cellular network was reduced from the tariff of NIS 0.251 per minute to NIS 0.0687 per minute effective January 1, 2011; to NIS 0.0634 per minute effective January 1, 2012; to 0.0591 per minute effective January 1, 2013; and to NIS 0.0555 per minute effective January 1, 2014; and |
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|   | · | the maximum interconnect tariff payable by a telecommunications operator to a cellular operator for sending an SMS message to its cellular network was reduced from the tariff of NIS 0.0285 to NIS 0.0016 effective January 1, 2011; to NIS 0.0015 effective January 1, 2012; to NIS 0.0014 effective January 1, 2013; and to NIS 0.0013 effective January 1, 2014. |
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|   | · | The Ministry of Communications is evaluating the cost of roaming and may introduce new regulations that would limit fees charged by Israeli cellular companies for calls made by the customers of foreign network operators while they are in Israel and using our network, as well as for calls made by our own customers using their handsets abroad. The Ministry of Communications has requested additional and more specific international roaming data from the cellular companies. In October 2012, an amendment to the cellular operators' licenses became effective according to which cellular operators must block their subscribers’ ability to receive international roaming services from Jordanian and Egyptian networks unless the subscriber specifically requests the service and is informed of the tariffs. In addition cellular operators must allow their subscribers who wish to receive these roaming services to block data services from the foreign network. Because we consider roaming charges to be a significant source of revenue, such regulatory limits could adversely affect our revenues. |
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|   | · | The Ministry of Communications and the Council for Cable TV and Satellite Broadcasting have published a public hearing in order to determine whether there is a need to regulate the provision of video services over the internet which might compete with multiple channel television services. In October 2011 the Ministry of Communications published its recommendations that included conditions for the adoption of suitable regulation and monitoring of television broadcasts over the internet and the establishment of a continuing implementation team in order to update the existing regulation in the existing broadcasting market and to apply regulation to television broadcasts over the internet. |
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|   | · | On August 31, 2009, the Ministry of Communications announced that it would conduct a public hearing process regarding the regulation of broad band access services over cellular networks. Currently, a customer who obtains broad band access services over a cellular network must purchase both the broad band infrastructure and the ISP services from the cellular operator (which has itself entered into an agreement with an ISP provider), whereas a customer who obtains broad band access services over a fixed line network can purchase the broad band infrastructure and the ISP services from different vendors. The Ministry of Communications is examining the current method by which broad band access services based on cellular networks are provided to customers and has asked for public comments with regard to the current framework, as well as regarding possible alternative regulatory frameworks. As a result of this hearing, new regulations regarding broad band access services over cellular services could be introduced. We cannot assure you that, if introduced, such regulations would not adversely affect our business or operating results. |
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|   | · | The Ministry of Communications is conducting a re-assessment of the frequency fees set forth in the law in order to support effective allocation and the utmost utilization of the frequencies. |
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|   | · | In January 2011, the Ministry of Communications published a hearing regarding the pricing of international calls to mobile phone destinations. The Israeli international calls operators currently set higher rates for international calls to mobile phone destinations than those for fixed line destinations. In this consultation the Ministry proposes to regulate the price difference between international calls to mobile phone destinations and those for fixed line destinations in one of two possible manners: (1) setting a uniform maximal surcharge for international calls to mobile destinations to be added to the cost of a call to fixed line destinations in each country or (2) requiring the mobile telephony operators to set a uniform call fee for both types of destinations to each foreign country. |
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|   | · | In November 2011, the Ministry of Communications published a hearing regarding a proposed regulation related to the underwater international telecom connection from Israel, proposing certain limitations on the agreements with Med Nautilus, Partner’s provider, which shall, among other effects, limit the discounts and capacity Med Nautilus may provide to the Company, in order to provide new company protections for Tamares Telecom, a new company which has recently laid an underwater cable, to facilitate Tamares’ entry into the fixed line telecommunications market. More specifically, the Ministry of Communications may set, for a specified period of time, the minimum tariffs which Tamares’ main competitor, Med Nautilus, may charge its customers, including Partner, as well as maximum capacity which it may offer its customers, thus creating a place in the market for Tamares at rates which will protect its new business. |
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|   | · | In June 2012, the Ministry of Communications published a hearing in which it proposes to abolish the payment that internet service providers are currently required to pay to broadband internet access infrastructure providers - the fixed line operators (currently Bezeq and HOT) - for the transfer of the traffic between end users and the ISPs. In accordance with the Ministry's proposal, the payment for the broadband internet access infrastructure service shall be paid only by the end users. The Company submitted its response in August 2012. |
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|   | · | In September 2012, the Ministry of Communications published a hearing with respect to roaming during a state of emergency or during a significant continuous malfunction in which the Ministry of Communications considers determining that under certain conditions, upon the Minister of Communications' instruction, cellular operators that have their own network infrastructure, will be required to provide roaming services to the subscribers of other cellular operators that have network infrastructure, whose network has been rendered non-functioning for a significant amount of time following an event resulting from a state of emergency, a telecommunications crisis or during a significant continuous malfunction. The Company submitted its response to the hearing in October 2012. |
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|   | · | In October 2012, the Ministry of Communications published a hearing with respect to exemptions from erection and operation permits of Wireless Local Access Network (WLAN) access points  that operate on frequencies set forth in the Wireless Telegraph Ordinance, according to which the Ministry of Communications is considering to determine the following: |
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|   | i. | To allow the installation of WLAN access points anywhere and to remove the existing limitation regarding installations in bordered surroundings only (for example: cafes, airports and malls). |
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|   | ii. | To allow general and exclusive general licensees for the provision of domestic fixed-line services to offer their services through the use of WLAN technology and not to allow Mobile Network Operators licensees (MNOs) or Mobile Virtual Network Operators (MVNOs) to provide their services through the same technology. |
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|   | iii. | To determine that the erection and operation of the said access points shall be exempt from the need to obtain a permit. |
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|   | · | In January 2013, the Ministry of Communications published a hearing with respect to charging for roaming services abroad according to which as a default, new and existing subscribers would be blocked from cellular internet abroad. A subscriber that attempts to use cellular internet abroad without a package will receive an SMS regarding the tariff and the manner it can be purchased. A subscriber that purchases a package will receive an updated detailed SMS at 50% and 85% utilization of each component of the package. Once the package is 100% utilized, the services will be blocked except for the ability to send charged SMS and to dial a collect customer service number that will allow removal of the blockage. A subscriber that randomly consumes roaming services, without a package, shall be blocked once he reaches NIS 100 utilization and may request removal of the blockage through the collect customer service number. Depending on the outcome of these hearings, our revenues from roaming services may be adversely affected. |
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|   | · | In February 2013, the Ministry of Communications published a hearing regarding an outline engineering report that it is considering requiring cellular operators that have their own network infrastructure to submit at the end of each calendar year. The report would include expected updates of the plan for the upcoming two years, including inter alia, a detailed description of the company's engineering outline and details regarding disturbances or special difficulties. The Company submitted its response to the hearing in March 2013. |
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|   | · | In February 2013, the Ministry of Communications published a hearing regarding a change in interconnect tariffs for the completion of a call on a fixed-line network. According to the hearing, the Ministry is considering changing the interconnect tariff for the completion of a call on a fixed-line network such that the maximum uniform tariff will be NIS 0.0104, excluding VAT, for all hours of the day, instead of the current tariffs of NIS 0.0421 per minute during peak hours and NIS 0.0234 per minute during off-peak hours. In addition, the Ministry is considering updating the tariff annually in accordance with changes to the CPI and re-examining tariffs again towards the end of 2016 or when the Ministry re-examines the interconnect tariff for the completion of a call on a cellular network. |
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|   | · | ILITA-The Israeli Law, Information and Technology Authority, the privacy protection regulator, has circulated initial draft guidelines aimed at cellular operators. The guidelines, if adopted as currently drafted, would require operators to adopt elaborate mechanisms for seeking users’ consent to the collection and processing of personal information, which may affect the extent to which we can collect and process information. |
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|   | A. | Sale of wholesale services: |
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|   | i. | The Universal Infrastructure Operators that provide retail telecommunication services  will be required to offer wholesale services to the other telecommunication providers, that will offer services on the owners' infrastructure (the wholesale market), based on non-discriminatory conditions. |
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|   | ii. | The wholesale services tariffs and the terms of agreement shall be determined through negotiations between the Universal Infrastructure Operators and the service providers. An infrastructure owner that reaches an agreement with such other provider shall be required to offer the same terms, without discrimination, to all other providers. Affiliates of the infrastructure owner shall also be allowed to purchase wholesale services as long as these will be provided without discrimination to all other providers. |
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|   | iii. | The Ministry of Communications shall intervene and set the wholesale tariffs and said terms of agreement, in case an agreement has not been reached between the parties within 6 months from the date of the publication of the policy document or if the agreement between the parties includes tariffs or terms that are unreasonable, may harm the competition, may harm the public welfare or may harm the interest of the service provider. |
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|   | B. | Structural Separation |
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|   | i. | Within 9 months of a signed agreement between said parties, the structural separation between the fixed-line infrastructure owner and its international call provider and internet service provider (ISP) affiliates shall be abolished and replaced by an accounting separation. |
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|   | ii. | The Minister of Communications shall consider providing leniencies or abolishing the structural separation (and replacing it with an accounting separation) between the fixed-line infrastructure owner and its affiliated cellular operator, in accordance with the development of the wholesale market and the pace of development of competition based on packaged services that combine fixed-line services and cellular services in the private sector. |
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|   | iii. | In case a proper and appropriate wholesale market does not develop within 24 months from the date of the publication of the policy document, the Minister of Communications shall act to impose a structural separation in the fixed-line infrastructure owners, between the infrastructure and the services provided through this infrastructure to the end-customers. |
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|   | C. | Supervision over Bezeq Tariffs |
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|   | Within 6 months from the date such an agreement is signed between the said parties, the Ministry of Communications shall act to change the manner of supervision over Bezeq tariffs so that the supervision shall be done by setting a maximum tariff. |
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|   | D. | Television Broadcasts |
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|   | i. | The Ministry of Communications shall examine imposing a requirement to offer unbundled television services that are included in services packages that include telecommunication services (fixed-line and mobile) or broadband access services, which means a requirement to provide them at the same tariff as part of a service package or separately. |
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|   | ii. | The abolishing of the structural separation with respect to multi-channel television shall be done if there is a reasonable possibility to provide a basic package of television services through the internet by service providers that do not own fixed-line infrastructure. |
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| · | Our founding shareholders and their approved substitutes must hold, in the aggregate, at least 26% of each of our means of control. Furthermore, the maintenance of at least 26% of our means of control by our founding shareholders and their approved substitutes allows Partner to be protected from a license breach that would result from a transfer of shares for which the authorization of the Ministry of Communications was required, but not obtained. |
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| · | Israeli entities from among our founding shareholders and their approved substitutes must hold at least 5% of our issued and outstanding share capital and of each of our means of control. “Israeli entities” are defined as individuals who are citizens and residents of Israel and entities formed in Israel and controlled, directly or indirectly, by individuals who are citizens and residents of Israel, provided that indirect control is only through entities formed in Israel, unless otherwise approved by the Israeli Prime Minister or Minister of Communications. |
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| · | At least 10% of our Board of Directors must be appointed by Israeli entities, as defined above, provided that if the Board of Directors is comprised of up to 14 members, only one such director must be so appointed, and if the Board of Directors is comprised of between 15 and 24 members, only two such directors must be so appointed. |
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| · | Matters relating to national security shall be dealt with only by a Board of Directors committee that has been formed for that purpose. The committee includes at least 4 members, of which at least one is an external director. Only directors with the required clearance and those deemed appropriate by Israel’s General Security Service may be members of this committee. Resolutions approved by this committee shall be deemed adopted by the Board of Directors. |
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| · | The Ministry of Communications shall be entitled to appoint an observer to the Board of Directors and its committees, subject to certain qualifications and confidentiality undertakings. |
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| · | observing the provisions of the Telecommunications Law, the Wireless Telegraphy Ordinance, the regulations and the provisions of our license; |
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| · | acting to continuously improve our mobile telephone services, their scope, availability, quality and technology, and that there has been no act or omission by us harming or limiting competition in the mobile telephone sector; |
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| · | having the ability to continue to provide mobile telephone services of a high standard and to implement the required investments in the technological updating of our system in order to improve the scope of such services, as well as their availability and quality; and |
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| · | using the spectrum allocated to us efficiently, compared to alternative applications. |
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| · | voting rights in Partner; |
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| · | the right to appoint a director or managing director of Partner; |
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| · | the right to participate in Partner’s profits; or |
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| · | the right to share in Partner’s remaining assets after payment of debts when Partner is wound up. |
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| · | the founding shareholders or their approved substitutes of Partner continue to hold in the aggregate at least 26% of the means of control of Partner; |
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| · | our Articles of Association include the provisions described in this paragraph; |
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| · | we act in accordance with such provisions; |
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| · | our Articles of Association provide that an ordinary majority of the voting power at the general meeting of Partner is entitled to appoint all the directors of Partner other than external directors. |
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| · | Founding shareholders or their approved substitutes must hold at least 26% of the means of control of Partner. |
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| · | Israeli entities from among our founding shareholders and their approved substitutes must hold at least 5% of our issued share capital and of each of our means of control. |
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| · | The majority of our directors, and our general manager, must be citizens and residents of Israel. |
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| · | Neither the general manager of Partner nor a director of Partner may continue to serve in office if he has been convicted of certain legal offenses. |
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| · | No trust fund, insurance company, investment company or pension fund that is an Interested Party in Partner may: (a) hold, either directly or indirectly, more than 5% of any means of control in a competing mobile radio telephone operator without having obtained a permit to do so from the Ministry of Communications, or (b) hold, either directly or indirectly, more than 5% of any means of control in a competing mobile radio telephone operator in accordance with a permit from the Ministry, and in addition have a representative or appointee who is an Office Holder in a competing mobile radio telephone operator, unless it has been legally required to do so, or (c) hold, either directly or indirectly, more than 10% of any means of control in a competing mobile radio telephone operator, even if it received a permit to hold up to 10% of such means of control. |
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| · | No trust fund, insurance company, investment company or a pension fund that is an Interested Party in a competing mobile radio telephone operator may: (a) hold, either directly or indirectly, more than 5% of any means of control in Partner, without having obtained a permit to do so from the Ministry of Communications; or (b) hold, directly or indirectly, more than 5% of any means of control in Partner in accordance with a permit from the Ministry of Communications, and in addition have a representative or appointee who is an Office Holder in Partner, unless it has been legally required to do so; or (c) hold, either directly or indirectly, more than 10% of any means of control in Partner, even if it received a permit to hold up to 10% of such means of control. |
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| · | Partner, an Office Holder or Interested Party in Partner, or an Office Holder in an Interested Party in Partner does not control a competing mobile radio telephone operator, is not controlled by a competing mobile radio telephone operator, by an Office Holder or an Interested Party in a competing mobile radio telephone operator, by an Office Holder in an Interested Party in a competing mobile radio telephone operator, or by a person or corporation that controls a competing mobile radio telephone operator. |
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| · | We have illegally ceased, limited or delayed any one of our services; |
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| · | Any means of control in Partner or control of Partner has been transferred in contravention of our license; |
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| · | We fail to invest the required amounts in the establishment and operation of the mobile radio telephone system in accordance with our undertakings to the Ministry of Communications; |
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| · | We have harmed or limited competition in the area of mobile radio telephone services; |
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| · | A receiver or temporary liquidator is appointed for us, an order is issued for our winding up or we have decided to voluntarily wind up; or |
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| · | Partner, an Office Holder in Partner or an Interested Party in Partner or an Office Holder in an Interested Party of Partner is an Interested Party in a competing mobile radio telephone operator or is an Office Holder in a competing mobile radio telephone operator or in an interested party in a competing mobile radio telephone operator without first obtaining a permit from the Ministry of Communications to do so or has not fulfilled one of the conditions included in such permit. See “Item 4B Regulation–5.13 Our Permit Regarding Cross Ownership.” |
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| · | A change has occurred in the suitability of Partner to implement the actions and services that are the subject of our license. |
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| · | A change in our license is required in order to ensure effective and fair competition in the telecommunications sector. |
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| · | A change in our license is required in order to ensure the standards of availability and grade of service required of Partner. |
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| · | A change in telecommunications technology justifies a modification of our license. |
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| · | A change in the electromagnetic spectrum needs justifies, in the opinion of the Ministry of Communications, changes in our license. |
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| · | Considerations of public interest justify modifying our license. |
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| · | A change in government policy in the telecommunications sector justifies a modification of our license. |
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| · | A change in our license is required due to its breach by Partner. |
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| · | “Office Holder” means a director, manager, company secretary or any other senior officer that is directly subordinate to the general manager. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | “Control” means the ability to, directly or indirectly, direct the activity of a corporation, either alone or jointly with others, whether derived from the governing documents of the corporation, from an agreement, oral or written, from holding any of the means of control in the corporation or in another corporation, or which derives from any other source, and excluding the ability derived solely from holding the office of director or any other office in the corporation. Any person controlling a subsidiary or a corporation held directly by him will be deemed to control any corporation controlled by such subsidiary or by such controlled corporation. It is presumed that a person or corporation controls a corporation if one of the following conditions exist: (1) such person holds, either directly or indirectly, fifty percent (50%) or more of any means of control in the corporation; (2) such person holds, either directly or indirectly, a percentage of any means of control in the corporation which is the largest part in relation to the holdings of the other Interested Parties in the corporation; or (3) such person has the ability to prevent the taking of business decisions in the corporation, with the exception of decisions in the matter of issuance of means of control in a corporation or decisions in the matters of sale or liquidation of most businesses of the corporation, or fundamental changes of these businesses. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | “Controlling Corporation” means a company that has control, as defined above, of a foreign mobile radio telephone operator. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

| · | “Interested Party” means a person who either directly or indirectly holds 5% or more of any type of means of control, including holding as an agent. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

ITEM 4A.                 UNRESOLVED STAFF COMMENTS

----

|                                                                                  |   | Year ended December 31, |   |
|---------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                  |   | 2010                    |   |   | 2011 |   |   | 2012 |   |
|                                                                                  |   |                    |   |   |   |   |   |   |   |
| Revenues (NIS million)                                                                |   |                    | 6,674  |   |   |   | 6,998 |   |   |   | 5,572 |   |
| Operating profit (NIS million)                                                        |   |                    | 1,860  |   |   |   | 1,036 |   |   |   | 865 |   |
| Income before taxes (NIS million)                                                     |   |                    | 1,679  |   |   |   | 742 |   |   |   | 631 |   |
| Net profit (NIS million)                                                              |   |                    | 1,243  |   |   |   | 443 |   |   |   | 478 |   |
| Capital expenditures (NIS million)                                                    |   |                    | 435    |   |   |   | 468 |   |   |   | 558 |   |
| Cash flow provided by operating activities net of investment activities (NIS million) |   |                    | 1,472  |   |   |   | 485 |   |   |   | 1,234 |   |
| Cellular Subscribers (end of period, thousands)                                       |   |                    | 3,160  |   |   |   | 3,176 |   |   |   | 2,976 |   |
| Annual cellular churn rate (%)                                                        |   |                    | 21     | % |   |   | 29 | % |   |   | 38 | % |
| Average monthly usage per cellular subscriber (MOU) (in minutes)                      |   |                    | 366    |   |   |   | 397 |   |   |   | 450 |   |
| Average monthly revenue per cellular subscriber (ARPU) (NIS)                          |   |                    | 148    |   |   |   | 111 |   |   |   | 97 |   |

----

----

| Growth rate             |   | (negative 0.2%) |   |
|-------------------------|--------|-----------------|--------|
| After-tax discount rate |   |            | 11.7%  |   |
| Pre-tax discount rate   |   |            | 15.7%  |   |

----

----

|   | · | Payments to transmission, communication and content providers |
|--------|--------|---------------------------------------------------------------|

|   | · | Cost of handsets, accessories and ISP related equipment |
|--------|--------|---------------------------------------------------------|

|   | · | Depreciation, amortization and impairment charges |
|--------|--------|---------------------------------------------------|

|   | · | Wages and employee benefits expenses and car maintenance |
|--------|--------|----------------------------------------------------------|

|   | · | Operating lease, rent and overhead expenses |
|--------|--------|---------------------------------------------|

|   | · | Cost of handling, replacing or repairing handsets |
|--------|--------|---------------------------------------------------|

|   | · | network and cable maintenance |
|--------|--------|-------------------------------|

|   | · | Car kit installation, IT support, and other operating expenses |
|--------|--------|----------------------------------------------------------------|

----

|   | · | Payments to internet service providers ("ISPs") |
|--------|--------|-------------------------------------------------|

|   | · | Royalty expenses |
|--------|--------|------------------|

|   | · | Amortization of rights of use |
|--------|--------|-------------------------------|

|   | · | Other |
|--------|--------|-------|

|   | · | Wages and employee benefits expenses and car maintenance |
|--------|--------|----------------------------------------------------------|

|   | · | Advertising and marketing |
|--------|--------|---------------------------|

|   | · | Selling commissions, net |
|--------|--------|--------------------------|

|   | · | Operating lease, rent and overhead expenses |
|--------|--------|---------------------------------------------|

|   | · | Depreciation and amortization and impairment charges |
|--------|--------|------------------------------------------------------|

|   | · | Other |
|--------|--------|-------|

|   | · | Wages and employee benefits expenses and car maintenance |
|--------|--------|----------------------------------------------------------|

|   | · | Bad debts and allowance for doubtful accounts |
|--------|--------|-----------------------------------------------|

|   | · | Credit card and other commissions |
|--------|--------|-----------------------------------|

|   | · | Professional fees |
|--------|--------|-------------------|

|   | · | Depreciation |
|--------|--------|--------------|

|   | · | Other |
|--------|--------|-------|

|   | · | Unwinding of trade receivables |
|--------|--------|--------------------------------|

|   | · | Other income |
|--------|--------|--------------|

|   | · | Capital loss from sale of property and equipment |
|--------|--------|--------------------------------------------------|

|   | · | Interest expenses |
|--------|--------|-------------------|

|   | · | Linkage expenses to CPI |
|--------|--------|-------------------------|

|   | · | Fair value loss from derivative financial instruments, net |
|--------|--------|------------------------------------------------------------|

|   | · | Interest costs in respect of liability for employee rights upon retirement |
|--------|--------|----------------------------------------------------------------------------|

----

|   | · | Net foreign exchange rate losses |
|--------|--------|----------------------------------|

|   | · | Factoring costs, net |
|--------|--------|----------------------|

|   | · | Other finance costs |
|--------|--------|---------------------|

|   | · | Net foreign exchange rate gains |
|--------|--------|---------------------------------|

|   | · | Interest income from cash equivalents |
|--------|--------|---------------------------------------|

|   | · | Expected return on plan assets |
|--------|--------|--------------------------------|

|   | · | Fair value gain from derivative financial instrument, net |
|--------|--------|-----------------------------------------------------------|

|   | · | Other finance income |
|--------|--------|----------------------|

|   | · | number of subscribers |
|--------|--------|-----------------------|

|   | · | Average monthly revenue per subscriber (ARPU) |
|--------|--------|-----------------------------------------------|

|   | · | churn rate. |
|--------|--------|-------------|

|   | (1) | Assessing the useful economic lives of assets |
|--------|-----|-----------------------------------------------|

|   | (2) | Assessing the recoverable amount for impairment tests of assets with finite useful economic lives |
|--------|-----|---------------------------------------------------------------------------------------------------|

----

|   | (3) | Assessing the recoverable amount of goodwill for annual impairment tests |
|--------|-----|--------------------------------------------------------------------------|

| Growth rate             | (negative 0.2%) |
|-------------------------|-----------------|
| After-tax discount rate | 11.7%           |
| Pre-tax discount rate   | 15.7%           |

|   | (4) | Assessing allowance for doubtful accounts |
|--------|-----|-------------------------------------------|

----

|   | (5) | Considering uncertain tax positions |
|--------|-----|-------------------------------------|

|   | (6) | Business combinations – assessing purchase price allocations |
|--------|-----|--------------------------------------------------------------------|

|   | (1) | Considering the likelihood of contingent losses and quantifying possible settlements: |
|--------|-----|---------------------------------------------------------------------------------------|

|   | (2) | Estimating service revenues earned but not yet billed: |
|--------|-----|--------------------------------------------------------|

|   | (3) | Sales of equipment with accompanying services: |
|--------|-----|------------------------------------------------|

----

|   | (4) | Deferred tax assets: |
|--------|-----|----------------------|

|   | (5) | Determining CGUs for impairment tests of assets with finite useful lives: |
|--------|-----|---------------------------------------------------------------------------|

|   | (6) | Determining CGUs for impairment tests of goodwill: |
|--------|-----|----------------------------------------------------|

----

|                               |   | New Israeli Shekels     |   |
|------------------------------------|--------|-------------------------|--------|
|                               |   | Year ended December 31, |   |
|                               |   | 2011                    |   |   | 2012 |   |
|                               |   | In millions             |   |
|                               |   |                    |   |   |   |   |
| Service revenues                   |   |                    | 5,224  |   |   |   | 4,640 |   |
| Equipment revenues                 |   |                    | 1,774  |   |   |   | 932 |   |
| Total revenues                     |   |                    | 6,998  |   |   |   | 5,572 |   |
|                               |   |                    |   |   |   |   |   |   |
| Cost of revenues – Services  |   |                    | 3,570  |   |   |   | 3,212 |   |
| Cost of revenues – Equipment |   |                    | 1,408  |   |   |   | 819 |   |
| Total Cost of revenues             |   |                    | 4,978  |   |   |   | 4,031 |   |
| Gross profit                       |   |                    | 2,020  |   |   |   | 1,541 |   |

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Year ended December 31, 2012 |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | In millions                  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Cellular segment             |   |   | Fixed line segment |   |   | Elimination |   |   | Consolidated |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                         |   |   |   |   |   |   |   |   |   |   |
| Segment revenue – Services                                                                                   |   |                         | 3,564  |   |   |   | 1,076 |   |   |   |   |   |   | 4,640 |   |
| Inter-segment revenue – Services                                                                             |   |                         | 28     |   |   |   | 134 |   |   |   | (162 | )  |   |   |   |   |
| Segment revenue – Equipment                                                                                  |   |                         | 896    |   |   |   | 36 |   |   |   |   |   |   |   | 932 |   |
| Total revenues                                                                                                     |   |                         | 4,488  |   |   |   | 1,246 |   |   |   | (162 | )  |   |   | 5,572 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues – Services                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                         | 2,351  |   |   |   | 861 |   |   |   |   |   |   |   | 3,212 |   |
| Inter-segment cost of revenues- Services                                                                           |   |                         | 134    |   |   |   | 28 |   |   |   | (162 | )  |   |   |   |   |
| Segment cost of revenues – Equipment                                                                         |   |                         | 787    |   |   |   | 32 |   |   |   |   |   |   |   | 819 |   |
| Cost of revenues                                                                                                   |   |                         | 3,272  |   |   |   | 921 |   |   |   | (162 | )  |   |   | 4,031 |   |
| Gross profit                                                                                                       |   |                         | 1,216  |   |   |   | 325 |   |   |   |   |   |   |   | 1,541 |   |
| Operating expenses                                                                                                 |   |                         | 584    |   |   |   | 203 |   |   |   |   |   |   |   | 787 |   |
| Other income, net                                                                                                  |   |                         | 110    |   |   |   | 1 |   |   |   |   |   |   |   | 111 |   |
| Operating profit                                                                                                   |   |                         | 742    |   |   |   | 123 |   |   |   |   |   |   |   | 865 |   |
| Adjustments to presentation of Adjusted EBITDA                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| – Depreciation and amortization                                                                              |   |                         | 562    |   |   |   | 164 |   |   |   |   |   |   |   | 726 |   |
| – Other (mainly employee share based compensation expenses)                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         | 10     |   |   |   | 1 |   |   |   |   |   |   |   | 11 |   |
| Adjusted EBITDA                                                                                                    |   |                         | 1,314  |   |   |   | 288 |   |   |   |   |   |   |   | 1,602 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of Adjusted EBITDA to profit before tax:                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| - Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 726 |   |
| - Finance costs, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 234 |   |
| - Other (mainly employee share based compensation expenses)                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 11 |   |
| Profit before income tax                                                                                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 631 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | New Israeli Shekels               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | Year ended December 31, 2011 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | In millions                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | Cellular segment                  |   |   | Fixed line segment |   |   | Elimination |   |   | Consolidated |
| Segment revenue – Services                                                                         |   |                              | 4,219 |   |   |   | 1,005 |   |   |   |   |   |   | 5,224 |   |
| Inter-segment revenue – Services                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                              | 29 |   |   |   | 122 |   |   |   | (151 | ) |   |   |   |   |
| Segment revenue – Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                              | 1,748 |   |   |   | 26 |   |   |   |   |   |   |   | 1,774 |   |
| Total revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                              | 5,996 |   |   |   | 1,153 |   |   |   | (151 | ) |   |   | 6,998 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues – Services                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                              | 2,601 |   |   |   | 969 |   |   |   |   |   |   |   | 3,570 |   |
| Inter-segment cost of  revenues- Services                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                              | 122 |   |   |   | 29 |   |   |   | (151 | ) |   |   |   |   |
| Segment cost of revenues – Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                              | 1,379 |   |   |   | 29 |   |   |   |   |   |   |   | 1,408 |   |
| Cost of revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                              | 4,102 |   |   |   | 1,027 | * |   |   | (151 | ) |   |   | 4,978 |   |
| Gross profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                              | 1,894 |   |   |   | 126 |   |   |   |   |   |   |   | 2,020 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                              | 712 |   |   |   | 290 | * |   |   |   |   |   |   | 1,002 |   |
| Impairment of goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                              |   |   |   |   | 87 |   |   |   |   |   |   |   | 87 |   |
| Other income, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                              | 105 |   |   |   |   |   |   |   |   |   |   |   | 105 |   |
| Operating profit (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                              | 1,287 |   |   |   | (251 | ) |   |   |   |   |   |   | 1,036 |   |
| Adjustments to presentation of Adjusted EBITDA                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                                               |   |                              | 590 |   |   |   | 182 |   |   |   |   |   |   |   | 772 |   |
|      –Impairment of intangible assets, deferred expenses and goodwill                                                                                                                                                                                                                                                                                                                                                                             |   |                              |   |   |   |   | 349 |   |   |   |   |   |   |   | 349 |   |
|      –Other (mainly employee share based compensation expenses)                                                                                                                                                                                                                                                                                                                                                                                   |   |                              | 19 |   |   |   | 2 |   |   |   |   |   |   |   | 21 |   |
| Adjusted EBITDA                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                              | 1,896 |   |   |   | 282 |   |   |   |   |   |   |   | 2,178 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of Adjusted EBITDA to profit before tax                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (772 | ) |
|      -Impairment of intangible assets, deferred expenses and goodwill                                                                                                                                                                                                                                                                                                                                                                                   |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (349 | ) |
|      - Finance costs, net                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (294 | ) |
|      - Other (mainly employee share based compensation expenses)                                                                                                                                                                                                                                                                                                                                                                                        |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (21 | ) |
| Profit before income tax                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 742 |   |

----

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | New Israeli Shekels     |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | Year ended December 31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2010                    |   |   | 2011 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | In millions             |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |   |   |   |   |
| Service revenues                                                                                          |   |                    | 5,662  |   |   |   | 5,224 |   |
| Equipment revenues                                                                                        |   |                    | 1,012  |   |   |   | 1,774 |   |
| Total revenues                                                                                            |   |                    | 6,674  |   |   |   | 6,998 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |   |   |   |   |   |   |
| Cost of revenues – Services                                                                         |   |                    | 3,307  |   |   |   | 3,570 |   |
| Cost of revenues – Equipment                                                                        |   |                    | 786    |   |   |   | 1,408 |   |
| Total Cost of revenues                                                                                    |   |                    | 4,093  |   |   |   | 4,978 |   |
| Gross profit                                                                                              |   |                    | 2,581  |   |   |   | 2,020 |   |

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Year ended December 31, 2010 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | In millions                  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Cellular segment             |   |   | Fixed line segment |   |   | Elimination |   |   | Consolidated |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |   |   |   |   |   |   |   |   |   |   |
| Segment revenue – Services                                                                                                  |   |                         | 5,555  |   |   |   | 107 |   |   |   |   |   |   | 5,662 |   |
| Inter-segment revenue – Services                                                                                            |   |                         | 20     |   |   |   | 57 |   |   |   | (77 | ) |   |   |   |   |
| Segment revenue – Equipment                                                                                                 |   |                         | 987    |   |   |   | 25 |   |   |   |   |   |   |   | 1,012 |   |
| Total revenues                                                                                                                    |   |                         | 6,562  |   |   |   | 189 |   |   |   | (77 | ) |   |   | 6,674 |   |
| Segment cost of revenues – Services                                                                                         |   |                         | 3,174  |   |   |   | 133 |   |   |   |   |   |   |   | 3,307 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Inter-segment cost of revenues- Services                                                                                          |   |                         | 57     |   |   |   | 20 |   |   |   | (77 | ) |   |   |   |   |
| Segment cost of revenues – Equipment                                                                                        |   |                         | 751    |   |   |   | 35 |   |   |   |   |   |   |   | 786 |   |
| Cost of revenues                                                                                                                  |   |                         | 3,982  |   |   |   | 188 |   |   |   | (77 | ) |   |   | 4,093 |   |
| Gross profit                                                                                                                      |   |                         | 2,580  |   |   |   | 1 |   |   |   |   |   |   |   | 2,581 |   |
| Operating expenses                                                                                                                |   |                         | 760    |   |   |   | 25 |   |   |   |   |   |   |   | 785 |   |
| Other income, net                                                                                                                 |   |                         | 64     |   |   |   |   |   |   |   |   |   |   |   | 64 |   |
| Operating profit (loss)                                                                                                           |   |                         | 1,884  |   |   |   | (24 | ) |   |   |   |   |   |   | 1,860 |   |
| Adjustments to presentation of Adjusted EBITDA                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| – Depreciation and amortization                                                                                             |   |                         | 633    |   |   |   | 36 |   |   |   |   |   |   |   | 669 |   |
| – Impairment of intangible assets                                                                                           |   |                         | 16     |   |   |   |   |   |   |   |   |   |   |   | 16 |   |
| – Other (mainly employee share based compensation expenses)                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         | 25     |   |   |   |   |   |   |   |   |   |   |   | 25 |   |
| Adjusted EBITDA                                                                                                                   |   |                         | 2,558  |   |   |   | 12 |   |   |   |   |   |   |   | 2,570 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of Adjusted EBITDA to profit before tax :                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| - Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | (669 | ) |
|     - Impairment of intangible assets                                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | (16 | ) |
| - Finance costs, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | (181 | ) |
| - Other (mainly employee share based compensation expenses)                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | (25 | ) |
| Profit before income tax                                                                                                          |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 1,679 |   |

----

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Three months ended |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|
| NIS in millions                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | March 31           |   |   | June 30 |   |   | Sept. 30 |   |   | Dec. 31 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |               |   |   |   |   |   |   |   |   |   |   |
| Service Revenues                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |               |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |               |   |   |   |   |   |   |   |   |   |   |
| 2010                                                                         |   |               | 1,360  |   |   |   | 1,412 |   |   |   | 1,457 |   |   |   | 1,432 |   |
| 2011                                                                         |   |               | 1,212  |   |   |   | 1,360 |   |   |   | 1,366 |   |   |   | 1,286 |   |
| 2012                                                                         |   |               | 1,241  |   |   |   | 1,213 |   |   |   | 1,150 |   |   |   | 1,036 |   |

----

----

|                       |   | NIS in millions |   |
|----------------------------|--------|-----------------|--------|
|                       |   |            |   |
| Principal payments due in: |   |            |   |
| 2013                       |   |            | 120    |   |
| 2014                       |   |            | 120    |   |
| 2015                       |   |            | 120    |   |
| 2016                       |   |            | 120    |   |
|                       |   |            |   |   |
| Total                      |   |            | 480    |   |

|                       |   | NIS in millions |   |
|----------------------------|--------|-----------------|--------|
|                       |   |            |   |
| Principal payments due in: |   |            |   |
|                       |   |            |   |
| 2016                       |   |            | 230    |   |
| 2017                       |   |            | 230    |   |
| 2018                       |   |            | 230    |   |
|                       |   |            |   |   |
| Total                      |   |            | 690    |   |

----

|                       |   | NIS in millions |   |
|----------------------------|--------|-----------------|--------|
|                       |   |            |   |
| Principal payments due in: |   |            |   |
|                       |   |            |   |
| 2017                       |   |            | 109    |   |
| 2018                       |   |            | 109    |   |
| 2019                       |   |            | 109    |   |
| 2020                       |   |            | 109    |   |
| 2021                       |   |            | 109    |   |
|                       |   |            |   |   |
| Total                      |   |            | 545    |   |

----

|                       |   | NIS in millions |   |
|----------------------------|--------|-----------------|--------|
|                       |   |            |   |
| Principal payments due in: |   |            |   |
|                       |   |            |   |
| 2013                       |   |            | 186    |   |
| 2014                       |   |            | 187    |   |
| 2015                       |   |            | 187    |   |
| 2016                       |   |            | 187    |   |
| 2017                       |   |            | 187    |   |
|                       |   |            |   |   |
| Total                      |   |            | 934    |   |

|   | 1. | Credit Facilities |
|--------|----|-------------------|

|   | (a) | Facility D received by the Company on November 24, 2009, in the amount of NIS 700 million. No amounts were drawn under this facility as of December 31, 2011. In July 2012, the Company initiated a reduction of credit Facility D to NIS 25 million. The Company was charged a commitment fee of 0.4% per year for undrawn amounts.  |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | 012 Smile also had a credit facility in the amount of NIS 80 million. This facility was partially used as of December 31, 2011 to secure bank guarantees. In July 2012, the credit facility was reduced to NIS 35 million. 012 Smile was charged a commitment fee of 0.4% per year for undrawn amounts.  |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Bank Borrowings  |
|--------|----|-----------------------|

|       |   | Total principal (**) (NIS m) |   | Date originally received |         | Linkage terms |   |  Annual interest rate |
|------------|--------|------------------------------|--------|--------------------------|--------------|---------------|--------|----------------------------|
| Loan A (*) |   |                         | 522    |                     | Nov 11, 2010 |          | CPI    |                       | 2.75% CPI adj. |
| Loan C     |   |                         | 175    |                     | Jun 8, 2010  |          |   |                       | 5.7% fixed |
| Loan D     |   |                         | 175    |                     | Jun 9, 2010  |          |   |                       | 5.7% fixed |
| Loan E     |   |                         | 376    |                     | May 8, 2011  |          |   |                       | Prime minus 0.025% |
| Loan F (*) |   |                         | 485    |                     | Apr 10, 2011 |          | CPI    |                       | 3.42% CPI adj. |
|       |   |                         | 1,733  |                     |         |          |   |                       |   |

----

|   | Additional information: |
|--------|-------------------------|

|   | Loan A: The interest is payable on a semi-annual basis. The principal amount is repayable in three equal annual installments between 2016 and 2018. Loan B: On December 31, 2009, a loan was received in the amount of NIS 300 million for period of 4 years, bearing variable interest at the rate of the Israeli Prime interest rate minus a margin of 0.35%. The interest was payable quarterly. The principal was payable in one payment at the end of the loan period. On July 25, November 25 and December 9, 2012, the Company prepaid principal portions of Loan B in the amounts of NIS 25 million, NIS 70 million and NIS 205 million, respectively, which were due originally in December 28, 2013, thus completing full and final redemption of Loan B. Loan C: The principal and interest are payable annually. The loan is for a period of 10 years. On March 22, 2012, the Company prepaid the current portion of principal outstanding of the loan in the amount of NIS 25 million, which was due originally in June 8, 2012. On December 6, 2012, the Company prepaid the current portion of principal outstanding of the Loan in the amount of NIS 25 million, which was due originally in June 8, 2013. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|

|   | Loan D: The principal and interest are payable annually. The loan is for a period of 10 years. On July 26, 2012, the Company prepaid current portion of principal outstanding of the loan in the amount of NIS 25 million, which was due originally on June 9, 2013. Loan E: The interest is payable every three months. On March 28, 2012, the Company prepaid current portion of principal outstanding of the Loan in the amount of NIS 24 million, which was due originally in May 8, 2012. The principal installments payable are as follows: NIS 112 million on May 8, 2014, NIS 112 million on May 8, 2015, and NIS 152 million on May 8, 2019. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Loan F: On April 10, 2011, 012 Smile prepaid its long term bank loans and obtained a new loan from a leading Israeli commercial bank in a principal amount of NIS 500 million. The interest is payable quarterly. On July 25, 2012, the Company prepaid current portion of linked principal outstanding of the loan in the amount of NIS 31 million, which was due originally in December 31, 2012.The principal is payable as follows (linked to the CPI as of December 2012): NIS 144.5 million on December 31, 2014, NIS 144.5 million on December 31, 2015, and NIS 196 million on December 31, 2019. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (1) | The ratio of (a) the amount of all financial obligations of the Company including bank guarantees that the Company has undertaken ("Total Debt") to (b) EBITDA less Capital Expenditures shall not exceed 6.5 (the ratio as of December 31, 2011 and 2012, was 3.1 and 4.3, respectively); and |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The ratio of (a) Total Debt to (b) the EBITDA of the Company shall not exceed 4 (the ratio as of December 31, 2011 and 2012, was 2.4 and 2.8, respectively). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Current Portion Payable in 2013 as  of December 31, 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | NIS in millions |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |            |   |
| Principal on notes payable                                                                                                     |   |            | 306    |   |
| Principal on capital lease                                                                                                     |   |            | 1      |   |
| Interest on notes payables                                                                                                     |   |            | 107    |   |
| Interest on long term bank loans                                                                                               |   |            | 63     |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |            | 477    |   |

----

|   | · | Cash on hand; and |
|--------|--------|-------------------|

|   | · | Operating cash flows, net of cash flow from investing activities. |
|--------|--------|-------------------------------------------------------------------|

----

|                                                                                                      |   | Payments Due by Period (NIS in millions) |   |
|-----------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
| Contractual Obligations                                                                                   |   | Total                                    |   |   | less than 1year |   |   | 1-3 years |   |   | 3-5 years |   |   | more than 5 years |   |
|                                                                                                      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt*                                                                                           |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes Series B                                                                                            |   |                                     | 520    |   |   |   | 136 |   |   |   | 260 |   |   |   | 124 |   |   |   | - |   |
| Notes Series C                                                                                            |   |                                     | 806    |   |   |   | 23 |   |   |   | 46 |   |   |   | 499 |   |   |   | 238 |   |
| Notes Series D                                                                                            |   |                                     | 658    |   |   |   | 16 |   |   |   | 32 |   |   |   | 141 |   |   |   | 469 |   |
| Notes Series E                                                                                            |   |                                     | 1,089  |   |   |   | 238 |   |   |   | 446 |   |   |   | 405 |   |   |   | - |   |
| Long term bank borrowing                                                                                  |   |                                     | 2,022  |   |   |   | 63 |   |   |   | 724 |   |   |   | 520 |   |   |   | 715 |   |
| Capital Lease Obligations                                                                                 |   |                                     | 1      |   |   |   | 1 |   |   |   | - |   |   |   | – |   |   |   | – |   |
| Operating Leases                                                                                          |   |                                     | 1,160  |   |   |   | 234 |   |   |   | 372 |   |   |   | 263 |   |   |   | 291 |   |
|                                                                                                      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contribution to funds in respect ofEmployee rights in respect of severancepay funds                       |   |                                     | 18     |   |   |   | 18 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Commitments to pay forinventory purchases                                                                 |   |                                     | 1,388  |   |   |   | 454 |   |   |   | 934 |   |   |   | – |   |   |   | – |   |
| Commitments to pay for property,equipment purchases and softwareelements purchases (capital expenditures) |   |                                     | 156    |   |   |   | 98 |   |   |   | 58 |   |   |   | – |   |   |   | – |   |
| Commitments to pay for rights of use                                                                      |   |                                     | 234    |   |   |   | 18 |   |   |   | 36 |   |   |   | 50 |   |   |   | 130 |   |
| Commitments to pay for transmission services(See Note 18(6) to the consolidated financialStatements       |   |                                     | 315    |   |   |   | 55 |   |   |   | 120 |   |   |   | 140 |   |   |   | - |   |
|                                                                                                      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations                                                                        |   |                                     | 8,367  |   |   |   | 1,354 |   |   |   | 3,028 |   |   |   | 2,142 |   |   |   | 1,843 |   |

----

ITEM 6.                      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

| Name of Director                       |   | Age    |   | Position                           |
|----------------------------------------|--------|--------|--------|------------------------------------|
| Shlomo Rodav*                          |   | 63     |   | Chairman of the Board of Directors |
| Dr. Michael J. Anghel (1)(2)(3)(4)     |   | 74     |   | Director                           |
| Ilan Ben-Dov**                         |   | 56     |   | Director                           |
| Barry Ben Zeev  (1)(2)(3)(4) |   | 61     |   | Director                           |
| Adam Chesnoff*                         |   | 47     |   | Director                           |
| Fred Gluckman*                         |   | 42     |   | Director                           |
| Sumeet Jaisinghani*                    |   | 28     |   | Director                           |
| Yoav Rubinstein*                       |   | 39     |   | Director                           |
| Arieh Saban*                           |   | 66     |   | Director                           |
| Elon Shalev*                           |   | 61     |   | Director                           |
| Osnat Ronen(4)                         |   | 50     |   | Director                           |
| Yahel Shachar**                        |   | 50     |   | Director                           |
| Arik Steinberg (1)(2)(4)               |   | 48     |   | Director                           |
|                                   |   |   |   |                               |

|   | (1) | Member of the Audit Committee. |
|--------|-----|--------------------------------|

|   | (2) | Member of the Compensation Committee. |
|--------|-----|---------------------------------------|

|   | (3) | External Director under the Israeli Companies Law. |
|--------|-----|----------------------------------------------------|

|   | (4) | Independent Director under NASDAQ rules and under the Companies Law. |
|--------|-----|----------------------------------------------------------------------|

----

----

----

----

| Name of Officer |   | Age      |   | Position                                                                                     |
|-----------------|--------|----------|--------|----------------------------------------------------------------------------------------------|
|            |   |     |   |                                                                                         |
| Haim Romano     |   | 58       |   | Chief Executive Officer                                                                      |
| Ziv Leitman     |   | 54       |   | Chief Financial Officer                                                                      |
| Roly Klinger    |   | 53       |   | Vice President, Legal & Regulatory Affairs, Business Development and Corporate Secretary |
| Einat Rom1      |   | 47       |   | Vice President, Human Resources                                                              |
| Avi Cohen 2     |   | 47       |   | Vice President, Business Customers Division                                                  |
| Menahem Tirosh  |   | 61       |   | Chief Operating Officer                                                                      |
| Guy Emodi       |   |  49 |   | Vice President, Economics & Planning, Corporate Strategy and Operator Relations          |
| Ronit Rubin     |   | 48       |   | Vice President, Information Technology                                                       |
| Ori Watermann   |   | 38       |   | Vice President, Fixed- Line Division & CEO of 012 Smile                                  |
| Zvika Shenfeld  |   | 40       |   | Acting Head of Marketing, Content and Growth Engines Division                                |
| Amalia Glaser   |   | 48       |   | Spokesman and VP Communications and Corporate Governance Division                            |

----

----

----

----

----

| Details of the Compensation Recipient |   | Compensation for services(the compensation amounts are displayed in terms of cost for the Company)(NIS thousands) |   |                           | Other compensation & vehicle(the compensation amounts are displayed in terms of cost for the Company)(NIS thousands) |   |   | Total (NIS thousands) |   |
|---------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------|--------|
| Name                                  |   | Position                                                                                                                    |   | Payroll & Related expenses |                                                                                                                          |   | Bonus  |                       |   | Share based payments |   |   | Other |   |   |   |   |
| Haim Romano                           |   | Chief Executive Officer                                                                                                     |   |                           | 2,361                                                                                                                         |   |   | ­-                    |   |   |   | 1,804(1) |   |   |   | 154 |   |   |   | 4,319 |   |
| Yacov Kedmi                           |   | Former Head of Marketing, Content & Growth Engines Division (2)                                                         |   |                           | 1,543                                                                                                                         |   |   | -                          |   |   |   | 1,084(3) |   |   |   | 1,220(4) |   |   |   | 3,847 |   |
| Offer Peri                            |   | Former Chief Executive Officer of a subsidiary (012 Smile Telecom Ltd.) (5)                                                 |   |                           | 1,935                                                                                                                         |   |   | 153                        |   |   |   | 449(6) |   |   |   | 1,251(7) |   |   |   | 3,788 |   |
| Ziv Leitman                           |   | Chief Financial Officer                                                                                                     |   |                           | 1,276                                                                                                                         |   |   | -                          |   |   |   | 401(8) |   |   |   | 818(9) |   |   |   | 2,495(10) |   |

| (1)   | 800,000 share options were granted to Mr. Haim Romano upon the commencement of his position with a vesting period over three years. The fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 3.6 million. As of March 17, 2013, the share price was NIS 21.70, whereas the option exercise price (dividend adjusted) is NIS 37.16 and therefore as long as the option exercise price is higher than the share price, the grant has no actual economic value. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Mr. Kedmi ceased to serve as Head of Marketing, Content & Growth Engines Division effective January 31, 2013 and will terminate his employment with the Company on January 31, 2014. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | In 2010, 400,000 share options were granted to Mr. Kedmi with a vesting period over four years.  The fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 6.8 million. As of March 17, 2013, the share price was NIS 21.70 whereas the option exercise price (dividend adjusted) is NIS 57.47 (and therefore, as explained above, the grant has no actual economic value). In 2012, an additional 50,000 share options were granted to Mr. Kedmi with a vesting period of two years. The fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was NIS 158,000.  As of March 17, 2013, the share price was NIS 21.70 whereas the option exercise price (dividend adjusted) is NIS 13.23 (and therefore, as explained above, the grant has no actual economic value). |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (4)   | Other compensation includes a signing bonus that was paid to Mr. Kedmi upon the commencement of his position that was spread out for accounting purposes over a period of three years. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5)   | Mr. Peri ceased to serve as Chief Executive Officer of 012 Smile effective September 30, 2012, and terminated his employment with the Company on December 31, 2012. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6)   | In 2011, 142,500 share options were granted to Mr. Peri with a vesting period over two years.  The fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 1.148 million. As of March 17, 2013, the share price was NIS 21.70 whereas the option exercise price (dividend adjusted) of NIS 64.65 (and therefore, as explained above, the grant has no actual economic value). |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7)   | Other compensation includes expenses for retirement and payments for non-competition that were accumulated and paid during the reporting period of this annual report. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8)   | In 2011, 142,500 share options were granted to Mr. Leitman with a vesting period over two years.  The fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.8 million. As of March 17, 2013, the share price was NIS 21.70 compared to an exercise price (dividend adjusted) of NIS 60.02. In 2012, an additional 50,000 share options were granted to Mr. Leitman with a vesting period of two years. The fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was NIS 158,000. As of March 17, 2013, the share price was NIS 21.70 whereas the option exercise price (dividend adjusted) of NIS 13.23 (and therefore, as explained above, the grant has no actual economic value). |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9)   | Other compensation includes expenses for retirement that were accumulated during the reporting period of this annual report and will be paid only upon retirement. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10)   | Following the change of control, Mr. Leitman is eligible for a retention grant in the amount of NIS 350,000 at the end of a 12 month period following the change of control (January 29, 2014) and an additional amount of NIS 350,000 at the end of a 24 month period following the change of control (January 29, 2015). This grant is not included in the total compensation. |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | – | In order to comply with the conditions and restrictions imposed on us by the Ministry of Communications, including in our license, in relation to ownership or control over us, under certain events specified in our Articles of Association, the Board of Directors may determine that certain ordinary shares are dormant shares. Consequently, we received an exemption from NASDAQ with respect to its requirement (now under NASDAQ Rule 5640) that voting rights of existing shareholders of publicly traded common stock registered under Section 12 of the US Securities Exchange Act cannot be disparately reduced or restricted through any corporate action or issuance. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | – | As permitted under Israeli Companies Law, the Company’s Board of Directors generally proposes director nominees for shareholder approval. The conditions of NASDAQ Rule 5605(e), that director nominees must either be selected or recommended to the Board by the independent directors or a nomination committee comprised solely of independent directors, are thus not satisfied. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | – | We received an exemption from the requirement set out in NASDAQ Rule 5635(c) that listed companies receive shareholder approval when certain stock option or purchase plans are to be established or materially amended, or certain other equity compensation arrangement made or materially amended. This exemption was granted based on the fact that the NASDAQ requirement is inconsistent with applicable Israeli legal requirements, which require approval from a company’s Board of Directors upon the establishment or amendment of such a plan, except that approval of the shareholders' meeting would be required for the grant of options to directors or controlling partners. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

|   | 1) | any financial liability incurred by, or imposed upon the Office Holder in favor of another person in accordance with a judgment, including a judgment given in a settlement or a judgment of an arbitrator, approved by an authorized court. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2) | reasonable litigation expenses, including legal fees, incurred by the Office Holder or which he was ordered to pay by an authorized court. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) in the context of a proceeding filed against him by Partner or on Partner’s behalf or by a third party. |
|--------|-------------------------------------------------------------------------------------------------------------------|

|   | (b) in a criminal proceeding in which he was acquitted. |
|--------|---------------------------------------------------------|

|   | (c) in a criminal proceeding in which he was convicted of an offense which does not require criminal intent. |
|--------|--------------------------------------------------------------------------------------------------------------|

----

|   | 3) | reasonable litigation expenses, including legal fees, incurred by the Office Holder due to such investigation or proceeding conducted against him by an authority authorized to conduct an investigation and which was ended without filing of an indictment against him and without the imposition of a financial liability as a substitute for a criminal proceeding or that was ended without filing of an indictment against him but for which he was subject to a financial liability as a substitute for a criminal proceeding relating to an offense which does not require criminal intent, within the meaning of the relevant terms under the law.* |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (1) | a breach of the duty of loyalty toward us, unless the Office Holder acted in good faith and had reasonable grounds to assume that the action would not harm Partner’s interest; |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | a breach of the duty of care done intentionally or recklessly (“pzizut”) other than if made only by negligence; |
|-----|-----------------------------------------------------------------------------------------------------------------------------|

| (3) | an act intended to unlawfully yield a personal profit; |
|-----|--------------------------------------------------------|

| (4) | a fine a civil fine ("knas ezrahi"), a financial sanction ("itzum kaspi") or a penalty ("kofer") imposed on him; and |
|-----|----------------------------------------------------------------------------------------------------------------------|

| (5) | a Proceeding ("halich"). |
|-----|--------------------------|

----

|   | (1) | The breach of the duty of care towards the Company or towards any other person; |
|--------|-----|---------------------------------------------------------------------------------|

|   | (2) | The breach of the duty of loyalty towards the Company provided that the Office Holder has acted in good faith and had reasonable grounds to assume that the action would not harm the Company; |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | A financial liability imposed on him or her in favor of another person;* |
|--------|-----|--------------------------------------------------------------------------|

|   | (4) | Any other matter in respect of which it is permitted or will be permitted under any law to insure the liability of an Office Holder in the Company. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|                       |   | At December 31 |   |
|----------------------------|--------|----------------|--------|
|                       |   | 2010           |   |   |   | 2011* |   |   |   | 2012* |   |
|                       |   |           |   |   |   |   |   |   |   |   |   |
| Customer service           |   |           | 4,041  |   |   |   | 5,092 |   |   |   | 3,107 |   |
| Engineering                |   |           | 302    |   |   |   | 548 |   |   |   | 387 |   |
| Sales and sales support    |   |           | 586    |   |   |   | 792 |   |   |   | 808 |   |
| Information technology     |   |           | 277    |   |   |   | 399 |   |   |   | 372 |   |
| Marketing and Content      |   |           | 140    |   |   |   | 158 |   |   |   | 82 |   |
| Finance                    |   |           | 132    |   |   |   | 209 |   |   |   | 135 |   |
| Human resources            |   |           | 130    |   |   |   | 178 |   |   |   | 143 |   |
| Operations & Logistics |   |           | 364    |   |   |   | 376 |   |   |   | 266 |   |
| Remaining operations       |   |           | 96     |   |   |   | 138 |   |   |   | 95 |   |
| TOTAL                      |   |           | 6,068  |   |   |   | 7,891 |   |   |   | 5,396 |   |

----

| From day ... onwards |   |   | Employee provisions |   |   | Employer provisions |   |   | Employer provisions for compensation |   |   | Total |   |
|----------------------|--------|--------|---------------------|--------|--------|---------------------|--------|--------|--------------------------------------|--------|--------|-------|--------|
| 1.1.2011             |   |   |                | 3.33   | %      |                |   | 3.33   | %                                    |   |   | 3.34  | %      |   |   | 10 | % |
| 1.1.2012             |   |   |                | 4.16   | %      |                |   | 4.16   | %                                    |   |   | 4.18  | %      |   |   | 12.5 | % |
| 1.1.2013             |   |   |                | 5      | %      |                |   | 5      | %                                    |   |   | 5     | %      |   |   | 15 | % |
| 1.1.2014             |   |   |                | 5.5    | %      |                |   | 6      | %                                    |   |   | 6     | %      |   |   | 17.5 | % |

----

----

| Weighted average exercise price(NIS) |   | Number of optionsheld |   | Option expiration Year |
|--------------------------------------|--------|-----------------------|--------|------------------------|
| 62.63                                |   | 175,725               |   | 2013                   |
| 48.68                                |   | 401,891               |   | 2014                   |
| 26.21                                |   | 13,375                |   | 2015                   |
| 29.45                                |   | 32,500                |   | 2016                   |
| 53.44                                |   | 71,000                |   | 2017                   |
| 51.15                                |   | 1,296,604             |   | 2019                   |
| 59.94                                |   | 1,312,000             |   | 2020                   |
| 48.73                                |   | 2,301,775             |   | 2021                   |
| 17.63                                |   | 1,780,120             |   | 2022                   |
| 43.90                                |   | 7,384,990             |   | TOTAL                  |

|   | - | Granting and exercise:Options under the 2004 Plan may be granted without consideration to employees, directors, officers and advisors. The total number of Company's shares reserved for issuance upon exercise of all options granted under the 2004 Plan is 13,917,000 shares . The option holder may exercise all or part of his options at any time after the date of vesting but no later than the expiration of the exercise period, which will not exceed ten years from the date of option grant. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | tax treatment: The options will be granted to employees under the provisions of the capital gains tax route provided for in Section 102 of the Israeli Income Tax Ordinance. Inter alia, these terms provide that the Company will be allowed to claim, as an expense for tax purposes, the amounts credited to the employees as a benefit in respect of shares or options granted under the plan, which is the amount of the benefit taxable as work income in the hands of the employee, while the part of the benefit that is taxable as capital gains in the hands of the employee is not allowable. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Vesting:  Vesting periods are between 1 to 4 years, as determined by the Board of Directors at the time of granting the options. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Acceleration of vesting and adjustment:In the event of a change of control or voluntary winding up, option vesting and exercisability of outstanding options shall be accelerated. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | - | Exercise price adjustment:  For options granted on or after May 8, 2012, the dividend-adjustment mechanism (that was previously adopted by the Company as described below), was amended, such that the exercise price of such options following each dividend distribution in the ordinary course of business, would be reduced by the gross dividend amount so distributed, per ordinary share (and not the Excess Dividend, as defined in the following sentence).  Previously, for options granted on or after February 23, 2009 (the date of the relevant amendment to the 2004 Plan, under which the dividend adjustment mechanism was adopted), in the event of a dividend distribution in the ordinary course of business, in an amount in excess of 40% (or another threshold as established by the Board of Directors) of the Company’s net income for the relevant period (the “Excess Dividend”), the exercise price for such options were to be reduced by the amount of the Excess Dividend per ordinary share. In the event of a dividend distribution other than in the ordinary course of business, the exercise price of outstanding options shall be reduced by an amount which the Board of Directors considers such distribution will have or will be likely to have on the trading price of the ordinary shares. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Cashless exercise:  Options granted on or after February 23, 2009 (the date of the amendment to the 2004 Plan under which the cashless exercise mechanism was adopted), may only be exercised on a cashless basis, and the Board of Directors may require holders to so exercise their vested options during a fixed period.  (Holders of options granted before February 23, 2009, may choose between cashless exercise and the regular option exercise procedure).  In accordance with such cashless exercise, the option holder would receive from the Company, without payment of the exercise price, only the number of shares whose aggregate market value equals the economic gain which the option holder would have realized by selling all the shares purchased at their market price, net of the option exercise price. The exercise price of the options is based on the fair market value of the Company’s shares at the time of grant, defined as of any date as the average of the closing sale price of ordinary shares published by the Tel-Aviv Stock Exchange during the immediately preceding 30 trading days. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Effect of employee termination: In the event that an option holder’s employment with or service to the Company is terminated by the Company because of his willful and continued failure to perform his duties and obligations to the Company or his willful engaging in misconduct injurious to the Company such that, in each case, the actions or omissions of the option holder are sufficient to deny the option holder severance payment under the Israeli Severance Payment Law, 1963, his options will expire upon termination of employment or service. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | - | Administration of the 2004 Plan:  The 2004 Plan is administered by the compensation committee of the Board of Directors. Subject to the restrictions of the Companies Law, the compensation committee is authorized, among other things, to exercise all the powers and authorities, either specifically granted to it under the 2004 Plan or necessary or advisable for the administration of the 2004 Plan.  The Board of Directors may resolve to alter or amend the 2004 Plan in any respect, subject to other sections of the 2004 Plan, applicable law and the rules and regulations of any stock exchange applicable from time to time to the Company, by reason of their applicability to its shareholders or otherwise. The Company's Board of Directors may, at any time and from time to time, terminate the 2004 Plan in any respect, subject to any applicable approvals or consents that may be otherwise required by law, regulation or agreement, including by reason of their applicability to the shareholders or otherwise, and provided that no termination of the 2004 Plan shall adversely affect the terms of any option which has already been granted. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | 5,628,113 options have been exercised, |
|--------|---|----------------------------------------|

|   | - | 5,963,912 options have been forfeited and 279,842 options have expired (options that have been forfeited or that have expired are available for subsequent grants), and |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | 7,523,748 options remain outstanding, of which 3,723,702 are vested and exercisable |
|--------|---|-------------------------------------------------------------------------------------|

----

ITEM 7.                      MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

| Name                                                              |   | Shares beneficially owned |        |   | Issued Shares (1)% |   |   | Issued and Outstanding Shares (1)% |   |
|-------------------------------------------------------------------|--------|---------------------------|-------------|--------|--------------------|--------|--------|------------------------------------|--------|
| S.B. Israel Telecom Ltd.(2)                                       |   | 48,050,000                |        |   | 30.01              |   |   | 30.87                              |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Scailex Corporation Ltd., together with Suny Electronics Ltd. (3) |   |                      | 26,648,719  |   |               |   | 16.64  |                               |   |   | 17.12 |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Phoenix-Excellence Group (4)                                      |   |                      | 8,749,342   |   |               |   | 5.47   |                               |   |   | 5.62 |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Treasury shares (5)                                               |   |                      | 4,467,990   |   |               |   | 2.79   |                               |   |   | – |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Public (6)                                                        |   |                      | 72,197,647  |   |               |   | 45.09  |                               |   |   | 46.39 |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Total                                                             |   |                      | 160,113,698 |   |               |   | 100.00 |                               |   |   | 100.00 |   |

----

| (1) | As shown above and used throughout this annual report, the term “Issued and Outstanding Shares” does not include any treasury shares held by the Company. Treasury shares, which are included in “Issued Shares”, have no voting, dividend or other rights under the Israeli Companies Law, as long as they are held by the Company (“dormant shares”). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | S.B. Israel Telecom, an affiliate of Saban Capital Group, a private investment firm, based in Los Angeles, California, specializing in the media, entertainment and communications industries held on February 28, 2013, approximately 30.87%. of our Issued and Outstanding shares and voting rights. S.B.Israel Telecom also purchased from Scailex 2,983,333 ordinary shares representing another, approximately 1.91% of our Issued and Outstanding shares and voting rights, which shares are to be transferred by Scailex to S.B. Israel Telecom free and clear of any lien on one or more future deferred closing dates, subject to the conditions set forth in the share purchase agreement entered into between Scailex and S.B. Israel Telecom. See "Item ‎3D.3a - 30.87% of our issued and outstanding shares and voting rights were acquired in January 2013 and are held by our largest shareholder, who has entered into a shareholders’ agreement with our second largest shareholder, whose holdings, when aggregated with those of its parent company, amount to 17.12% of our issued and outstanding shares and voting rights." Scailex retained the entitlement to dividends in respect of the 44,850,000 Ordinary Shares transferred to S.B. Israel Telecom Ltd. at closing (representing approximately 28.82% of our issued and outstanding shares) out of the amount of distributable profits accrued as of December 31, 2012, up to an aggregate amount of approximately NIS 115,000,000. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Scailex, an Israeli corporation listed on the Tel Aviv Stock Exchange, held on February 28, 2013, , approximately 15.72% of our Issued and Outstanding shares and voting rights. Scailex is a majority owned subsidiary of Suny Electronics Ltd. ("Suny"), an Israeli corporation listed on the Tel Aviv Stock Exchange which is indirectly controlled by Mr. Ilan Ben-Dov. Suny held 1.40% of our Issued and Outstanding shares and total voting rights as of such date. As a result of his indirect control of Scailex and Suny, Mr. Ilan Ben-Dov indirectly controlled 17.12% of our Issued and Outstanding shares and total voting rights as of February 28, 2013.  Scailex retained the entitlement to dividends in respect of the 44,850,000 Ordinary Shares transferred to S.B. Israel Telecom Ltd. at closing (representing approximately 28.82% of our issued and outstanding shares) out of the amount of distributable profits accrued as of December 31, 2012, up to an aggregate amount of approximately NIS 115,000,000. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (4) | Phoenix Holdings Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange ("Phoenix") holds shares in the Company directly as well as through its wholly owned subsidiaries. Excellence Investments Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange ("Excellence"), which is controlled by Phoenix, holds shares in the Company directly as well as through other wholly-owned subsidiaries (Phoenix, Excellence and their subsidiaries collectively, the "Phoenix-Excellence Group"). 1,935,000 shares of the 8,806,309 shares held by the Phoenix-Excellence Group, representing approximately 1.24% of our Issued and Outstanding shares and total voting rights, are registered in the Company's Shareholders Register as part of the shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Treasury shares do not have a right to dividends or to vote. |
|-----|--------------------------------------------------------------|

| (6) | The shares under “Public” include 3,080,457 shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes. These shares, together with 2,173,126 shares held by Suny, 869,129 shares held by Scailex and 1,935,000 shares held by the Phoenix-Excellence Group, represent 5.03% of our issued shares (approximately 5.18% of the Issued and Outstanding Shares). Under the terms of our mobile telephone license, the Israeli founding shareholders from among our founding shareholders and their approved substitutes must hold at least 5% of our issued and outstanding share capital and of each of our means of control. The founding shareholders  must meet the requirements of “Israeli entities” which are defined as individuals who are citizens and residents of Israel and entities formed in Israel and controlled, directly or indirectly, by individuals who are citizens and residents of Israel, provided that indirect control is only through entities formed in Israel, unless otherwise approved by the Minister of Communications. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | the appointment of members to the Company’s board of directors in accordance with the composition specified in the Shareholders’ Agreement which provides, among other things, for the majority of the members of the board of directors to be candidates recommended by S.B. Israel Telecom;  |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | the execution of amendments to the Company’s Articles of Association described in the Shareholders’ Agreement;  |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------|

|   | c. | the approval of management agreements between S.B. Israel Telecom and/or its affiliates, on the one hand, and the Company, on the other hand;  |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d. | the approval of a registration rights agreement among the Company, S.B. Israel Telecom and Scailex, pursuant to which S.B. Israel Telecom and Scailex will be entitled to demand particular rights from the Company with respect to the registration of securities of the Company under applicable U.S. securities laws;  |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e. | the approval of run-off insurance for certain officers of the Company; and  |
|--------|----|----------------------------------------------------------------------------------|

|   | f. | the approval of a release, indemnity and insurance for certain officers of the Company. |
|--------|----|-----------------------------------------------------------------------------------------|

----

|   | a. | a material change in the Company’s line of business, or entry into a material new line of business, provided, however, that engaging in or entering into any line of business in the telecommunications or media fields would not be deemed a change in the current line of business of the Company or entering into any material new businesses;  |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | a merger of the Company with a communications service-provider, or the acquisition thereof by the Company, in a transaction valued in excess of US$250 million;  |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | the initiation of liquidation or dissolution proceedings, or a stay of proceedings or a creditors’ arrangement;  |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------|

|   | d. | transactions with interested parties, apart from the management agreements, a purchase of Ordinary Shares within the scope of a rights offering of the Company, the pro-rata receipt of dividends or distributions or a new registration rights agreement;  |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e. | a change in the Company’s share capital that has a material and disproportionate adverse impact on the rights attached to the Ordinary Shares held by Scailex, or the issuance of a class of shares (or similar security) senior to the Ordinary Shares;  |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | f. | voluntary delisting of the Ordinary Shares from the Tel-Aviv Stock Exchange Ltd.; and  |
|--------|----|---------------------------------------------------------------------------------------------|

|   | g. | amendments to the Company’s Articles of Association that have a material and disproportionate adverse impact on Scailex’s rights (provided that changing the majority vote required for the approval of a certain action would not be deemed to materially adversely affect Scailex’s rights in a disproportionate manner). |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

ITEM 8.                     FINANCIAL INFORMATION

|   | 1. | On April 12, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company charges its subscribers for certain content services without their consent. If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 343 million. On December 18, 2011, the parties filed a request to approve a settlement agreement. Following the courts' remarks, the parties were instructed to file a revised agreement, which was filed on March 18, 2012. Following further remarks by the court, the parties filed a revised agreement on September 28, 2012. The Company has accrued in the financial statements an amount to settle this claim based on the proposed agreement. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | On May 23, 2010, a claim and a motion to certify the claim as a class action were filed against the Company and the other cellular operators. The claim alleges that the Company, as well as the other defendants, is breaching its contractual and/or legal obligation to erect cellular sites in the appropriate scope, quantity and coverage in order to provide cellular services in the required and appropriate quality. The plaintiffs claimed that this omission also causes, inter alia, monetary damages caused to consumers as a result of lack of sufficient coverage, including call disconnections, insufficient voice quality etc., as well as a significant increase in the non-ionized radiation that the public is exposed to mainly from the cellular telephone handset. In addition, it is claimed that the Company and the other defendants are breaching their contractual and/or legal obligation to ensure and/or check and/or repair and/or notify the consumer, that after repair and/or upgrade and/or exchange of cellular handsets, the handsets may emit radiation in levels that exceed the levels of radiation as set forth by the manufacturer in the handset data and even exceeds the maximum permitted levels set forth by law. In addition, it was claimed that the Company and the other defendants do not fulfill their obligation to caution and warn the consumers of the risks involved in holding the handset and the proximity of the handset to the body while carrying it and during a phone call. In addition, it was claimed that if the handsets marketed by the Company and the other defendants emit non-ionizing radiation above the permitted level, at any distance from the body, then the marketing and sale of such handsets is prohibited in Israel. If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 3.677 billion. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 3. | On September 7, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company unlawfully charges its customers for services of various content providers, which are sent through text messages (SMS). If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 405 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | On February 1, 2011, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company did not comply with the requirements set by the Israeli Communications Law (telecommunications and broadcast) (amendment 40), 2008, regarding transmission of advertisements through telecommunication means (also known as "the spam law"). If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 560 million. On February 13, 2013, the parties filed a revised request to approve a settlement agreement that is subject to the court's approval. The Company has accrued in the financial statements an amount to settle this claim based on the proposed agreement. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | On June 6, 2011, a claim and a motion to certify the claim as a class action were filed against the Company and the three other cellular operators. The claim alleges that the Company sell or supply accessories that are intended for carrying cellular handsets on the body, in a manner that contradicts the instructions and warnings of the cellular handset manufacturers and the recommendations of the Ministry of Health, all this without disclosing the risks entailed in the use of these accessories when they are sold or marketed. If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 1,010 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | On January 9, 2012, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company did not comply with the provisions of the Israeli Consumer Protection Law and its license with respect to the manner of handling customer complaints regarding incorrect charges and that as a result the group members suffered non pecuniary damages as a result of anguish and a waste of their time. If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 392 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | In February 7, 2012, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company misled its customers by misrepresenting to them the balance of unused minutes of the package of minutes, while in fact it charged them for minutes that exceeded the package. If the claim is recognized as a class action the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 475 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8. | On May 13, 2012, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company does not grant its customers monetary refunds for cellular handsets that were purchased from the Company, starting from the first month after the purchase, as alleged that they are entitled to, and thereby breaches the Israeli Consumer Protection Law and profits unlawfully. If the claim is recognized as a class action the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 235 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 9. | On September 19, 2012, a lawsuit and a motion to certify the lawsuit as a class action were filed against the Company and another cellular operator.  The claim alleges that the Company limited and/or blocked the tethering function that allows smartphone handsets to be used as a wireless router for other handsets not in accordance with the Telecommunications Law. If the claim is recognized as a class action the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 8,089 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10. | On October 16, 2012 a claim and a motion to certify the claim as a class action was filed against the Company. The claim alleges that the Company unlawfully charges the Company's Pre-Paid subscribers for services of various content providers. If the claim is recognized as a class action the total amount claimed against the Company is estimated by the plaintiffs to be approximately NIS 700 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 11. | During 2008, several claims and motions to certify the claims as class actions were filed with various District Courts in Israel against several international telephony companies including 012. The plaintiffs allege that with respect to prepaid calling card services the defendants mislead the consumers in certain issues, charged consumers in excess, and formed a cartel that arranged and raised the prices of calling cards. On September 25, 2008 the Court decided to hear all the aforementioned suits and four other claims in which the 012 is not a party, but involve similar issues as the present claim, in the same proceeding. On December 9, 2008 the Court approved a motion to amend the actions and requests of all the unified claims. On January 1, 2009 the unified and amended suit and request were filed in place of the original suits and requests (in this section: "the Amended Suit" and "the Amended Request"). In the event of certification of the Suit and the Amended Suit as class actions the total amount claimed against 012 is NIS 354 million. Plaintiffs claim additional damages, which are not estimated, with respect to unsuccessful attempts to make calls utilizing the cards. On November 3, 2010, the court granted the plaintiff's request and certified the suit as a class action against all of the defendants. On December 13, 2010, 012 Smile filed a Motion with the Supreme Court for leave to appeal on the district court's decision granting class action certification. On April 14, 2011, the Supreme Court recommended that the parties turn to a mediation route. On May 10, 2012, the parties signed a settlement agreement regarding the Amended Request and regarding an additional suit, dealing with similar issues. On March 11, 2013, the parties signed a revised settlement agreement. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 12. | On February 15, 2012, a claim and a motion to certify the claim as a class action were filed against 012 Smile and other telecommunication operators (the "defendants"). The claim alleges that the defendants misled the purchasers of prepaid calling cards designated for international calls with respect to certain bonus minutes. The total amount claimed against 012 (and against each of the other defendants) if the claim is recognized as a class action is estimated by the plaintiff to be NIS 2.7 billion. On May 10, 2012, the parties signed a settlement agreement regarding the Amended Request and regarding an additional suit, dealing with similar issues. On March 11, 2013, the parties signed a revised settlement agreement. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 1. | On July 14, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner is breaching its contractual and/or legal obligation and/or is acting negligently by charging V.A.T for roaming services that are consumed abroad.  If the claim is recognized as a class action, the plaintiff demands to return the total amount of  V.A.T that was charged by Partner  for roaming services that were consumed abroad The plaintiff also pursues an injunction that will order Partner to stop charging VA.T for roaming services that are consumed abroad. The claim is still in the preliminary stage of the motion to certify it as a class action. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | On July 14, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that during the period between September 3, 2007 and December 31, 2008, Partner charged some of its subscribers for a time unit which is longer than 12 seconds while this charge was inconsistent with Partner's license. The total amount claimed from Partner is estimated by the plaintiffs to be more than the minimum amount for the authority of the District Court in Israel, which is NIS 2.5 million. On September 6, 2012, the court certified the claim as a class action. In light of the fact that Partner has already credited the relevant customers, Partner does not anticipate that it will be required to pay any additional amounts to the said customers |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | On August 21, 2011, a claim and a motion to certify the claim as a class action were filed against the Company and two other cellular operators. The claim alleges that Partner charges its customers for calls executed abroad by rounding up the actual duration of the call based on an interval that differs from that set out in its licenses. If the claim is recognized as a class action, the total amount claimed from Partner is estimated by the plaintiff to be at least the amount within the authority of the District Court in Israel, which is NIS 2.5 million. On September 6, 2012, the court dismissed the claim and the request. On November 1, the plaintiff submitted an appeal to the Supreme Court in Jerusalem. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | On July 31, 2012, a claim and a motion to certify the claim as a class action were filed against 012 Smile to the Central District Court in Israel. The claim alleges that 012 Smile's advertisements regarding certain tariffs did not include correct and complete information as to possible additional tariffs charged of third parties. As the plaintiff has not yet determined the size of the group, the estimated amount of the entire claim is not yet known. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | On August 8, 2012, a claim and a motion to certify the claim as a class action were filed against 012 Smile and another Internet Service Provider to the Central District Court in Israel. The claim alleges that the defendants breached certain provisions of their licenses by not offering their services at a unified tariff to all customers. The total amount claimed against 012 Smile if the lawsuit is recognized as a class action was not stated by the plaintiff. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | On December 24, 2012, a claim and a motion to certify the claim as a class action were filed against 012 Smile to the District Court in Haifa, Israel. The claim alleges that 012 Smile breached certain provisions of its licenses and the Consumer Protection Law by enabling a third party the use of automated dialers for  marketing and billing purposes over 012 telecom services.  As the plaintiff has not yet determined the size of the group, the estimated amount of the entire claim is not yet known. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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ITEM 9.                      THE OFFER AND LISTING

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | NASDAQ      |   |   | Tel Aviv Stock Exchange  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------|--------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | ($ per ADS) |   |   | (NIS per ordinary share) |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | High        |   |   | Low                      |   |   | High |   |   | Low |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |
| 2008                                                                                           |   |        | 24.62  |   |                     |   | 15.15 |   |   |   | 85.48 |   |   |   | 58.40 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2009                                                                                           |   |        | 20.46  |   |                     |   | 13.46 |   |   |   | 77.20 |   |   |   | 57.30 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2010                                                                                           |   |        | 24.13  |   |                     |   | 15.17 |   |   |   | 94.29 |   |   |   | 59.00 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |        | 20.62  |   |                     |   | 8.63 |   |   |   | 74.00 |   |   |   | 32.92 |   |
| First Quarter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |        | 20.62  |   |                     |   | 17.93 |   |   |   | 74.00 |   |   |   | 65.05 |   |
| Second Quarter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |        | 19.42  |   |                     |   | 14.76 |   |   |   | 67.70 |   |   |   | 51.30 |   |
| Third Quarter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |        | 16.01  |   |                     |   | 9.34 |   |   |   | 54.50 |   |   |   | 35.30 |   |
| Fourth Quarter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |        | 12.47  |   |                     |   | 8.63 |   |   |   | 44.00 |   |   |   | 32.92 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter                                                                                  |   |        | 9.23   |   |                     |   | 7.12 |   |   |   | 35.35 |   |   |   | 26.78 |   |
| Second Quarter                                                                                 |   |        | 7.64   |   |                     |   | 3.85 |   |   |   | 28.45 |   |   |   | 15.50 |   |
| Third Quarter                                                                                  |   |        | 5.45   |   |                     |   | 3.12 |   |   |   | 21.13 |   |   |   | 12.37 |   |
| Fourth Quarter                                                                                 |   |        | 6.52   |   |                     |   | 5.06 |   |   |   | 25.47 |   |   |   | 19.86 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| September 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |        | 5.45   |   |                     |   | 4.37 |   |   |   | 21.13 |   |   |   | 16.95 |   |
| October 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |        | 6.18   |   |                     |   | 5.06 |   |   |   | 23.40 |   |   |   | 19.86 |   |
| November 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |        | 6.50   |   |                     |   | 5.51 |   |   |   | 24.65 |   |   |   | 21.92 |   |
| December 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |        | 6.52   |   |                     |   | 5.45 |   |   |   | 25.47 |   |   |   | 21.44 |   |
| January 2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |        | 6.27   |   |                     |   | 5.49 |   |   |   | 23.26 |   |   |   | 20.44 |   |
| February 2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |        | 5.77   |   |                     |   | 5.46 |   |   |   | 21.51 |   |   |   | 20.56 |   |
|     March 2013 (through March 15)                                                                                                           |   |        | 6.05   |   |                     |   | 5.46 |   |   |   | 21.64 |   |   |   | 20.30 |   |

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ITEM 10.                    ADDITIONAL INFORMATION

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‎

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----

----

----

----

| · | General. Israeli law generally imposes a capital gains tax on the sale of capital assets by residents of Israel as defined for Israeli tax purposes, and on the sale of capital assets located in Israel or the sale of direct or indirect rights to assets located in Israel, including on the sale of our Shares by some of our shareholders (see discussion below). The Israeli Income Tax Ordinance distinguishes between “Real Capital Gain” and “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed on the basis of the increase in the CPI between the date of purchase and the date of sale. As of 2012,  the Real Gain accrued on the sale of our Shares and ADSs is generally taxed at a rate of 25% for corporations (24% in 2011) and a rate of up to 25%  for individuals (20% in 2011). Additionally, if such individual shareholder is considered a “Significant Shareholder” at any time during the 12-month period preceding such sale (i.e. if such individual shareholder holds directly or indirectly, along with others, at least 10% of any means of control in the company, including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director), the tax rate will be up to 30% (25% in 2011). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Taxation of Israeli Residents |
|--------|-------------------------------|

----

| · | Taxation of Non-Israeli Residents |
|--------|-----------------------------------|

| · | Taxation of Investors Engaged in a Business of Trading Securities |
|--------|-------------------------------------------------------------------|

| · | Withholding at Source from Capital Gains from Traded Securities |
|--------|-----------------------------------------------------------------|

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----

| · | a citizen or individual resident of the United States for US federal income tax purposes; |
|--------|-------------------------------------------------------------------------------------------|

| · | a corporation (or an entity taxable as a corporation for US federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | an estate whose income is subject to US federal income taxation regardless of its source; or |
|--------|----------------------------------------------------------------------------------------------|

| · | a trust if (A) a US court is able to exercise primary supervision over the trust’s administration and (B) one or more US persons have the authority to control all of the trust’s substantial decisions. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

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ITEM 11.                       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

|                                                        |   | Fair Value(NISequivalentin millions, except percentages) |    |   | Book Value(NISequivalentin millions, except percentages) |   |
|-------------------------------------------------------------|--------|----------------------------------------------------------|---------|--------|----------------------------------------------------------|--------|
|                                                        |   |                                                     |    |   |                                                     |   |
| NIS-denominated debt linked to the CPI (1)                  |   |                                                     |    |   |                                                     |   |
|                                                        |   |                                                     |    |   |                                                     |   |
| Long-term fixed Notes payable series B due 2016             |   |                                                     | 503     |   |                                                     |   | 478 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   | 3.4 | % |
| Long-term fixed Notes payable series C due 2018             |   |                                                     | 741     |   |                                                     |   | 688 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   | 3.35 | % |
| Long-term bank borrowing bearing fixed interest             |   |                                                     | 545     |   |                                                     |   | 522 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   | 2.75 | % |
| Long-term bank borrowing bearing fixed interest             |   |                                                     | 519     |   |                                                     |   | 485 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   | 3.42 | % |
| Other payables (2)                                          |   |                                                     |    | 2      |                                                     |   | 2 |   |
|                                                        |   |                                                     |    |   |                                                     |   |   |   |
| NIS-denominated debt not linked to the CPI                  |   |                                                     |    |   |                                                     |   |   |   |
| Long-term variable interest Notes payable series D due 2021 |   |                                                     | 515     |   |                                                     |   | 540 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   | 3.58 | % |
| Long-term fixed Notes payable series E due 2017             |   |                                                     | 987     |   |                                                     |   | 921 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   | 5.5 | % |
|                                                        |   |                                                     |    |   |                                                     |   |   |   |
| Long-term bank borrowing bearing variable interest (2)      |   |                                                     | 376     |   |                                                     |   | 376 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   | 3.79 | % |
| Long-term bank borrowing bearing fixed interest             |   |                                                     | 388     |   |                                                     |   | 350 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   | 5.70 | % |
|                                                        |   |                                                     |    |   |                                                     |   |   |   |
| Payables-trade and others (2)                               |   |                                                     | 828     |   |                                                     |   | 828 |   |
| Weighted average interest rate payable                      |   |                                                     |    |   |                                                     |   |   |   |
| Debt denominated in foreign currencies (mainly USD) (2)     |   |                                                     |    |   |                                                     |   |   |   |
|                                                        |   |                                                     |    |   |                                                     |   |   |   |
| Payables-trade and others                                   |   |                                                     | 217     |   |                                                     |   | 217 |   |
|                                                        |   |                                                     |    |   |                                                     |   |   |   |
| Finance lease (2)                                           |   |                                                     | 1  |   |                                                     |   | 1  |   |
|                                                        |   |                                                     |    |   |                                                     |   |   |   |
| Total                                                       |   |                                                     | 5,622   |   |                                                     |   | 5,408 |   |

| (1) | Amounts due for payment of principal and interest are adjusted according to the CPI. See “Item ‎5B Liquidity and Capital Resources”. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Book value approximates fair value at December 31, 2012. |
|-----|----------------------------------------------------------|

----

|                                                                      |   | As ofDecember 31,2012        |   |   | As ofDecember31, 2011 |   |   | Fair ValueatDecember 31,2012 |   |
|---------------------------------------------------------------------------|--------|------------------------------|--------|--------|-----------------------|--------|--------|------------------------------|--------|
|                                                                      |   | (NIS equivalent in millions) |   |
|                                                                      |   |                         |   |   |                  |   |   |                         |   |   |   |   |
| Forward transactions - for the exchange of NIS  into US Dollars |   |                         | 373    |   |                  |   | 382    |                         |   |   | (14) |   |
| Forward transactions-for the exchange of Euros into US Dollars            |   |                         | 247    |   |                  |   | 100    |                         |   |   | 1 |   |
| Embedded derivatives - for the exchange of US Dollars into NIS            |   |                         | 64     |   |                  |   | 56     |                         |   |   | 0 |   |
|  *Representing an amount less than 1 million                         |   |                         |   |   |                  |   |   |                         |   |   |   |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | Change |   |   | Equity                         |   |   | Profit |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------------------------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   | New Israeli Shekelsin millions |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |                           |   |   |   |   |
| December 31, 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |                           |   |   |   |   |
| Increase in the CPI of                                                                                          |   |   | 2.0    | %      |                           |   | (51    | )      |   |   | (51 | ) |
| Decrease in the CPI of                                                                                          |   |   | (2.0   | )%     |                           |   | 51     |   |   |   | 51 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |                           |   |   |   |   |   |   |   |
| December 31, 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |                           |   |   |   |   |   |   |   |
| Increase in the CPI of                                                                                          |   |   | 2.0    | %      |                           |   | (44    | )      |   |   | (44 | ) |
| Decrease in the CPI of                                                                                          |   |   | (2.0   | )%     |                           |   | 44     |   |   |   | 44 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | Change |   |   | Equity                         |   |   | Profit |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------------------------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   | New Israeli Shekelsin millions |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |                           |   |   |   |   |
| December 31, 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |                           |   |   |   |   |
| Increase in the USD of                                                                                          |   |   | 5.0    | %      |                           |   | 6      |   |   |   | 6 |   |
| Decrease in the USD of                                                                                          |   |   | (5.0   | )%     |                           |   | (6     | )      |   |   | (6 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |                           |   |   |   |   |   |   |   |
| December 31, 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |                           |   |   |   |   |   |   |   |
| Increase in the USD of                                                                                          |   |   | 5.0    | %      |                           |   | 3      |   |   |   | 3 |   |
| Decrease in the USD of                                                                                          |   |   | (5.0   | )%     |                           |   | (3     | )      |   |   | (3 | ) |

ITEM 12.                   DESCRIPTION OF SECURITIES OTHER THAN 

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ITEM 13.                   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

ITEM 14.                   MATERIAL 

ITEM 15.                   CONTROLS AND 

|   | · | pertain to the maintenance of our records that in reasonable detail accurately and fairly reflect our transactions during the year; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide reasonable assurance that our receipts and expenditures are made only in accordance with authorizations of our management and Board of Directors (as appropriate); and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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ITEM 16A.                AUDIT COMMITTEE FINANCIAL EXPERT

ITEM 16B. CODE OF ETHICS

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2011           |   |   | 2012           |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|----------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (NISthousands) |   |   | (NISthousands) |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |           |   |   |           |   |
| Audit Fees (1)                                                                                                                  |   |           | 3,403  |   |           |   | 2,905 |   |
| Audit-related Fees (2)                                                                                                          |   |           | 668    |   |           |   | 340 |   |
| Tax Fees (3)                                                                                                                    |   |           | 454    |   |           |   | 355 |   |
| TOTAL                                                                                                                           |   |           | 4,525  |   |           |   | 3,600 |   |

| (1) | Audit Fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor can reasonably provide, and include the group audit; statutory audits; comfort letters and consents; and assistance with and review of documents filed with the SEC. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Audit-related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and include consultations concerning financial accounting and reporting standards, as well as the purchase of an accounting data base. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Tax Fees include fees billed for tax compliance services, including the preparation of tax returns and claims for tax refund; tax consultations, such as assistance and representation in connection with tax audits and appeals, and requests for rulings or technical advice from taxing authority. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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ITEM 16D.                EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

ITEM 16E.                 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES

ITEM 16F.                 CHANGE IN REGISTRANT’S CERTIFYING ACOUNTANT

ITEM 16G.                CORPORATE GOVERNANCE

ITEM 17.                   FINANCIAL STATEMENTS

ITEM 18.                   FINANCIAL STATEMENTS

ITEM 19.                   EXHIBITS

| Exhibit No.               | Description                                                                                                                |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                       |
| 1.1                       | Articles of Association including amendments to be proposed for shareholder approval at the meeting on April 11, 2013      |
| **1.2                     | Partner’s Certificate of Incorporation                                                                               |
| **1.3                     | Partner’s Memorandum of Association                                                                                  |
| **2.(a).1                 | Form of Share Certificate                                                                                                  |
| ^^2.(a).2                 | Amended and Restated Deposit Agreement Between Partner and the Bank of New York                                            |
| ^^^^2.(a)3                | Amended and Restated Deposit Agreement Between Partner and Citibank N.A.                                                   |
| ^2.(b).1                  | Form of Indenture between Partner and the Trust Company of Union Bank Ltd.                                                 |
| >>>>2.(b).2   | Trust Deed                                                                                                                 |
| >>>>2.(b).3   | Amendment no. 1 to the Trust Deed of November 26, 2009                                                                     |
| ^4.(a).1                  | Restatement of the Relationship Agreement dated April 20, 2005                                                             |
| >>>>4.(a).1.1 | Letter of Undertaking by which Scailex entered into the Restated Relationship Agreement with the Company, October 28, 2009 |

----

| 4.(a).1.2                                                     | Letter of Undertaking by which S.B. Israel Telecom entered into the Restated Relationship Agreement with the Company, January 29, 2013                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **4.(a).2                                                     | License from the Israeli Ministry of Communications issued April 8, 1998, as amended by the amendments filed with the SEC as exhibits to our annual reports on Form 20-F for each of the years ended December 31, 2000, through December 31, 2010 (the “Amended License”).                                                                                                                                                                                                                                                        |
| **4.(a).4                                                     | License Agreement for use of the Orange Brand in Israel dated September 14, 1998                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| #4.(a).4.1                                                    | Restated Amendment, dated as of January 31, 2012, to the Brand License Agreement dated 14 September 1998                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **4.(a).5                                                     | Brand Support/Technology Transfer Agreement dated July 18, 1999                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **4.(a).6                                                     | Agreement with Ericsson Radio Systems AB dated May 28, 1998                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| #++4.(a).7                                                    | Agreement with LM Ericsson Israel Ltd. dated November 25, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.(a).9                                                     | Lease Agreement with Mivnei Taasia dated July 2, 1998                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ^^^4.(a).13                                                   | Asset Purchase Agreement with Med-1 dated as of January 22, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.(a).14-57                                                   | [reserved]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| >4.(a).58                                                  | Special License from the Israeli Ministry of Communications for the Provision of Fixed-Line Domestic Transmission and Data Communications Services issued August 14, 2006.                                                                                                                                                                                                                                                                                                                                                                    |
| >4.(a).59                                                  | Amendment No. 1 to Special License for the Provision of Fixed-Line Domestic Transmission and Data Communications Services issued September 10, 2006.                                                                                                                                                                                                                                                                                                                                                                                          |
| >4.(a).60                                                  | Exclusive General License from the Israeli Ministry of Communication for the Provision of Domestic Fixed Line Telecommunications Services issued January, 15 2007 as amended by the amendments filed with the SEC as exhibits to our annual reports on Form 20-F for each of the years ended December 31, 2006, through December 31, 2009 (the “Amended Domestic Fixed Line License”).                                                                                                                                            |
| #+++4.(a).65                                                  | Purchase Agreement with Nortel Networks Israel (Sales and Marketing) Ltd. dated November 12, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| #>>4.(a).67                                             | Swap Agreement with LM Ericsson Israel Ltd. dated December 20, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| #4.(a).68                                                     | [reserved]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| #>>>>4.(a).69                                     | Facility Agreement dated November 24, 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| #4.(a).70                                                     | [reserved]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| #4.(a).71                                                     | [reserved]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| >>>>>4.(a) 72                                  | 012 Smile Share Purchase Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| >>>>>4.(a) 73                                  | English translation of the original Hebrew language 012 Smile Credit Facility, dated January 31, 2010                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| +>4.(a).74                                                 | Amendment No. 58 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +>4.(a).75                                                 | Amendment No. 59 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +>4.(a).76                                                 | Amendment No. 60 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +>4.(a).77                                                 | Amendment No. 61 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +>4.(a).784.(a).794.(a).804.(a).814.(a).824.(a).834.(a).84 | Amendment No. 62 to our License from the Israeli Ministry of CommunicationsAmendment No. 63 to our License from the Israeli Ministry of CommunicationsAmendment No. 64 to our License from the Israeli Ministry of CommunicationsAmendment No. 65 to our License from the Israeli Ministry of CommunicationsAmendment No. 66 to our License from the Israeli Ministry of CommunicationsAmendment No. 67 to our License from the Israeli Ministry of CommunicationsAmendment No. 68 to our License from the Israeli Ministry of Communications |
| #>>>>4.(b).1                                      | Addendum to Lease Agreements from November 1, 2002 and Lease Agreements in Beit Ofek                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| >>>>4.(b).2                                       | Registration Rights Agreement with Scailex                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

----

| 6.         | See Note 2x to the consolidated financial statements for information explaining how earnings (loss) per share information was calculated.                                       |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| >>8. | List of Subsidiaries (see “Item 4C – Organizational Structure”).                                                                                              |
| 10.110.2   | Consent of Kesselman & KesselmanConsent of Giza Singer Even Ltd.                                                                                                            |
| 12.(a).1   | Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
| 12.(a).2   | Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
| 13.(a).1   | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                           |

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| **                   | Incorporated by reference to our registration statement on Form F-1 (No. 333-10992).                     |
|----------------------|----------------------------------------------------------------------------------------------------------|
| ++                   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2002. |
| +++                  | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2003. |
| ^                    | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2004. |
| ^^                   | Incorporated by reference to our registration statement on Form F-6 (No. 333-132680).                    |
| ^^^                  | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2005. |
| ^^^^                 | Incorporated by reference to our registration statement on Form F-6 (No. 333-177621).                    |
| >                 | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2006. |
| >>             | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2007. |
| >>>>     | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2009. |
| >>>>> | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2010. |
| +>                | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2011. |
| #                    | Confidential treatment requested.                                                                        |

----

|   | Partner Communications Company Ltd. |
|--------|-------------------------------------|
|   |                                |   |
|   | By: /s/  Haim Romano      |   |
|   |                                |   |
|   | Chief Executive Officer             |   |
|   |                                |   |
|   | March 19, 2013                      |   |
|   |                                |   |
|   | By: /s/  Ziv Leitman      |   |
|   |                                |   |
|   | Chief Financial Officer             |   |
|   |                                |   |
|   | March 19, 2013                      |   |

----

----

|                                                                                         | Page            |
|----------------------------------------------------------------------------------------------|-----------------|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                      | F - 2 - F - 3   |
| CONSOLIDATED FINANCIAL STATEMENTS:                                                           |            |
| Statements of Financial Position as of December 31, 2011 and 2012                            | F - 4 - F - 5   |
| Statements of Income for the years ended December 31, 2010, 2011 and 2012               | F - 6           |
| Statements of Comprehensive Income for the years ended December 31, 2010, 2011 and 2012 | F - 7           |
| Statements of Changes in Equity for the years ended December 31, 2010, 2011 and 2012    | F - 8           |
| Statements of Cash Flows for the years ended December 31, 2010, 2011 and 2012           | F - 9 - F - 11  |
| Notes to financial statements                                                                | F - 12 - F - 94 |

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of Independent 

| Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 68125, Israel, P.O Box 452 Tel-Aviv 61003   |
|---------------------------------------------------------------------------------------------------------------------------|
| Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.co.il                                                          |

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| Tel-Aviv, Israel                       | Kesselman & Kesselman                               |
|----------------------------------------|---------------------------------------------------------|
|     March 18, 2013 | Certified Public Accountants (Isr.)                     |
|                                   | A member of PricewaterhouseCoopersInternational Limited |

----

CONSOLIDATED STATEMENTS 

|                                                 |   |   |     |   |   New Israeli Shekels |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|------------------------------------------------------|--------|--------|----------|--------|---------------------------------|--------|--------|----------------------------------------------------|--------|
|                                                 |   |   |     |   | December 31,                    |   |
|                                                 |   |   |     |   | 2011                            |   |   | 2012                                               |   |   | 2012 |   |
|                                                 |   | Note   |     |   | In millions                     |   |
| CURRENT ASSETS                                       |   |   |     |   |                            |   |   |                                               |   |   |   |   |
| Cash and cash equivalents                            |   |   |     |   |                            | 532    |   |                                               |   | 548 |   |   |   | 147 |   |
| Trade receivables                                    |   |   | 8        |   |                            |   | 1,518  |                                               |   |   | 1,397 |   |   |   | 375 |   |
| Other receivables and prepaid expenses               |   |   |     |   |                            |   | 41     |                                               |   |   | 47 |   |   |   | 13 |   |
| Deferred expenses – right of use               |   |   | 12       |   |                            |   | 19     |                                               |   |   | 22 |   |   |   | 6 |   |
| Inventories                                          |   |   | 9        |   |                            |   | 162    |                                               |   |   | 98 |   |   |   | 26 |   |
| Income tax receivable                                |   |   |     |   |                            |   | 12     |                                               |   |   | 7 |   |   |   | 2 |   |
| Derivative financial instruments                     |   |   | 7        |   |                            |   | 24     |                                               |   |   | 1 |   |   |   | * |   |
|                                                 |   |   |     |   |                            |   | 2,308  |                                               |   |   | 2,120 |   |   |   | 569 |   |
|                                                 |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| NON CURRENT ASSETS                                   |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| Trade Receivables                                    |   |   | 8        |   |                            |   | 856    |                                               |   |   | 509 |   |   |   | 136 |   |
| Deferred expenses – right of use               |   |   | 12       |   |                            |   | 142    |                                               |   |   | 138 |   |   |   | 37 |   |
| Assets held for employee rights upon retirement, net |   |   | 17       |   |                            |   | 3      |                                               |   |   |   |   |   |   |   |   |
| Property and equipment                               |   |   | 10       |   |                            |   | 2,051  |                                               |   |   | 1,990 |   |   |   | 533 |   |
| Licenses and other intangible assets                 |   |   | 11       |   |                            |   | 1,290  |                                               |   |   | 1,217 |   |   |   | 326 |   |
| Goodwill                                             |   |   | 5, 13(b) |   |                            |   | 407    |                                               |   |   | 407 |   |   |   | 109 |   |
| Deferred income tax asset                            |   |   | 25       |   |                            |   | 30     |                                               |   |   | 36 |   |   |   | 9 |   |
|                                                 |   |   |     |   |                            |   | 4,779  |                                               |   |   | 4,297 |   |   |   | 1,150 |   |
|                                                 |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| TOTAL ASSETS                                         |   |   |     |   |                            |   | 7,087  |                                               |   |   | 6,417 |   |   |   | 1,719 |   |

|                    |   |                    |   |                      |
|-------------------------|--------|-------------------------|--------|---------------------------|
| Haim Romano             |   | Ziv Leitman             |   | Barry Ben-Zeev (Woolfson) |
| Chief Executive Officer |   | Chief Financial Officer |   | Director                  |
|                    |   |                    |   |                      |

----

TS

|                                                                                                                                                                                                |   |   |   |   |   New Israeli Shekels |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                                                                                                                                                |   |   |   |   | December 31,                    |   |
|                                                                                                                                                                                                |   |   |   |   | 2011                            |   |   | 2012                                               |   |   | 2012 |   |
|                                                                                                                                                                                                |   | Note   |   |   | In millions                     |   |
| CURRENT LIABILITIES                                                                                                                                                                                 |   |   |   |   |                            |   |   |                                               |   |   |   |   |
| Current maturities of notes payable and current borrowings                                                                                                                                          |   |   | 15,16  |   |                            |   | 498    |                                               |   |   | 306 |   |   |   | 82 |   |
| Trade payables                                                                                                                                                                                      |   |   |   |   |                            |   | 913    |                                               |   |   | 866 |   |   |   | 231 |   |
| Parent group - trade                                                                                                                                                                                |   |   | 26     |   |                            |   | 142    |                                               |   |   | 70 |   |   |   | 19 |   |
| Payables in respect of employees                                                                                                                                                                    |   |   |   |   |                            |   | 143    |                                               |   |   | 110 |   |   |   | 29 |   |
| Other payables (mainly institutions)                                                                                                                                                                |   |   |   |   |                            |   | 73     |                                               |   |   | 59 |   |   |   | 16 |   |
| Deferred revenues                                                                                                                                                                                   |   |   |   |   |                            |   | 52     |                                               |   |   | 40 |   |   |   | 11 |   |
| Provisions                                                                                                                                                                                          |   |   | 14     |   |                            |   | 65     |                                               |   |   | 60 |   |   |   | 16 |   |
| Derivative financial instruments                                                                                                                                                                    |   |   | 7      |   |                            |   | 3      |                                               |   |   | 14 |   |   |   | 4 |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   | 1,889  |                                               |   |   | 1,525 |   |   |   | 408 |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| NON CURRENT LIABILITIES                                                                                                                                                                             |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| Notes payable                                                                                                                                                                                       |   |   | 16     |   |                            |   | 2,605  |                                               |   |   | 2,321 |   |   |   | 622 |   |
| Bank borrowings                                                                                                                                                                                     |   |   | 15     |   |                            |   | 2,068  |                                               |   |   | 1,733 |   |   |   | 464 |   |
| Liability for employee rights upon retirement, net                                                                                                                                                  |   |   | 17     |   |                            |   | 48     |                                               |   |   | 50 |   |   |   | 13 |   |
| Dismantling and restoring sites obligation                                                                                                                                                          |   |   | 14     |   |                            |   | 25     |                                               |   |   | 28 |   |   |   | 8 |   |
|         Other non-current liabilities                                                                                                                            |   |   |   |   |                            |   | 10     |                                               |   |   | 10 |   |   |   | 3 |   |
| Deferred tax liability                                                                                                                                                                              |   |   | 25     |   |                            |   | 17     |                                               |   |   | 9 |   |   |   | 2 |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   | 4,773  |                                               |   |   | 4,151 |   |   |   | 1,112 |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| TOTAL LIABILITIES                                                                                                                                                                                   |   |   |   |   |                            |   | 6,662  |                                               |   |   | 5,676 |   |   |   | 1,520 |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| EQUITY                                                                                                                                                                                              |   |   | 21     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| Share capital - ordinary shares of NIS 0.01    par value: authorized - December 31, 2011    and 2012 - 235,000,000 shares;    issued and outstanding - |   |   |   | 2      |                            |   |   | 2                                                  |   |   |   | 1 |   |
| December 31, 2011 – *155,645,708 shares                                                                                                                                                       |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |
| December 31, 2012 – ­*155,645,708 shares                                                                                                                                                 |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |
| Capital surplus                                                                                                                                                                                     |   |   |   |   |                            |   | 1,100  |                                               |   |   | 1,100 |   |   |   | 295 |   |
| Accumulated deficit                                                                                                                                                                                 |   |   |   |   |                            |   | (326   | )                                                  |   |   | (10 | ) |   |   | (3 | ) |
| Treasury shares, at cost - December 31, 2011 and 2012 - 4,467,990 shares                                                                                                                            |   |   |   | (351   | )                               |   |   | (351                                               | )      |   |   | (94 | ) |
| TOTAL EQUITY                                                                                                                                                                                        |   |   |   |   |                            |   | 425    |                                               |   |   | 741 |   |   |   | 199 |   |
| TOTAL LIABILITIES AND EQUITY                                                                                                                                                                        |   |   |   |   |                            |   | 7,087  |                                               |   |   | 6,417 |   |   |   | 1,719 |   |

----

MENT

|                                |   |   |   |   | Convenience                             |   |
|-------------------------------------|--------|--------|--------|--------|-----------------------------------------|--------|
|                                |   |   |   |   | translation                             |   |
|                                |   |   |   |   | into U.S. Dollars                       |   |
|                                |   |   |   |   | New Israeli Shekels                     |   |   | (note 2a) |   |
|                                |   |   |   |   | Year ended December 31                  |   |
|                                |   |   |   |   | 2010                                    |   |   | 2011 |   |   | 2012 |   |   | 2012 |   |
|                                |   | Note   |   |   | In millions (except earnings per share) |   |
| Revenues, net                       |   |   | 6      |   |                                    |   | 6,674 |   |   |   | 6,998 |   |   |   | 5,572 |   |   |   | 1,493 |   |
| Cost of revenues                    |   |   | 6, 22  |   |                                    |   | 4,093 |   |   |   | 4,978 |   |   |   | 4,031 |   |   |   | 1,080 |   |
| Gross profit                        |   |   |   |   |                                    |   | 2,581 |   |   |   | 2,020 |   |   |   | 1,541 |   |   |   | 413 |   |
|                                |   |   |   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing expenses      |   |   | 22     |   |                                    |   | 479 |   |   |   | 711 |   |   |   | 551 |   |   |   | 148 |   |
| General and administrative expenses |   |   | 22     |   |                                    |   | 306 |   |   |   | 291 |   |   |   | 236 |   |   |   | 63 |   |
| Impairment of goodwill              |   |   | 13(b)  |   |                                    |   |   |   |   |   | 87 |   |   |   |   |   |   |   |   |   |
| Other income, net                   |   |   | 23     |   |                                    |   | 64 |   |   |   | 105 |   |   |   | 111 |   |   |   | 30 |   |
| Operating profit                    |   |   |   |   |                                    |   | 1,860 |   |   |   | 1,036 |   |   |   | 865 |   |   |   | 232 |   |
| Finance income                      |   |   | 24     |   |                                    |   | 28 |   |   |   | 39 |   |   |   | 27 |   |   |   | 7 |   |
| Finance expenses                    |   |   | 24     |   |                                    |   | 209 |   |   |   | 333 |   |   |   | 261 |   |   |   | 70 |   |
| Finance costs, net                  |   |   | 24     |   |                                    |   | 181 |   |   |   | 294 |   |   |   | 234 |   |   |   | 63 |   |
| Profit before income tax            |   |   |   |   |                                    |   | 1,679 |   |   |   | 742 |   |   |   | 631 |   |   |   | 169 |   |
| Income tax expenses                 |   |   | 25     |   |                                    |   | 436 |   |   |   | 299 |   |   |   | 153 |   |   |   | 41 |   |
| Profit for the year                 |   |   |   |   |                                    |   | 1,243 |   |   |   | 443 |   |   |   | 478 |   |   |   | 128 |   |
|                                |   |   |   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share                  |   |   |   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                               |   |   |   |   |                                    |   | 8.03 |   |   |   | 2.85 |   |   |   | 3.07 |   |   |   | 0.82 |   |
| Diluted                             |   |   | 27     |   |                                    |   | 7.95 |   |   |   | 2.84 |   |   |   | 3.07 |   |   |   | 0.82 |   |

----

 OF COMPREHENSIVE 

|                                                                  |   |   |   |   |   New Israeli Shekels |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|-----------------------------------------------------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                  |   |   |   |   | Year ended December 31          |   |
|                                                                  |   |   |   |   | 2010                            |   |   | 2011                                               |   |   | 2012 |   |   | 2012 |   |
|                                                                  |   | Note   |   |   | In millions                     |   |
| Profit for the year                                                   |   |   |   |   |                            | 1,243  |   |                                               |   | 443 |   |   |   | 478 |   |   |   | 128 |   |
| Other comprehensive income  (losses)                        |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Actuarial losses, net on defined benefit plan                         |   |   | 17     |   |                            |   | (8     | )                                                  |   |   | (21 | ) |   |   | (17 | ) |   |   | (4 | ) |
| Income taxes relating to actuarial losses on defined benefit plan     |   |   | 25     |   |                            |   | 2      |                                               |   |   | 5 |   |   |   | 4 |   |   |   | 1 |   |
| Other comprehensive income (losses) for the year, net of income taxes |   |   |   |   |                            |   | (6     | )                                                  |   |   | (16 | ) |   |   | (13 | ) |   |   | (3 | ) |
|                                                                  |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL COMPREHENSIVE INCOME FOR THE YEAR                               |   |   |   |   |                            |   | 1,237  |                                               |   |   | 427 |   |   |   | 465 |   |   |   | 125 |   |

----

OF CHANGES 

|                                                                                                                  |   |   |   |   | Share capital |        |        |                     |   |   |    |   |   |        |   |   |     |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|---------------|-------------|-------------|--------------------------|--------|--------|---------|--------|--------|-------------|--------|--------|----------|--------|
|                                                                                                                  |   |   |   |   | Number of     |        |        |                     |   |   | Capital |   |   | Accumulated |   |   | Treasury |   |   |   |   |
|                                                                                                                  |   |   |   |   | Shares**      |        |        | Amount                   |   |   | surplus |   |   | deficit     |   |   | shares   |   |   | Total |   |
|                                                                                                                  |   | Note   |   |   |          |        |        | I n m i l l i o n s |   |
|                                                                                                                  |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |
| New Israeli  Shekels:                                                                                       |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |
| BALANCE AT JANUARY 1, 2010                                                                                            |   |   |   |   |          | 154,440,136 |        |                     |   | 2      |    |   |   | 2,483       |   |   |     | (172   | ) |   |   | (351 | ) |   |   | 1,962 |   |
|                                                                                                                  |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2010                                                                       |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
|              Total comprehensive income for the year |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     | 1,237  |   |   |   |   |   |   |   | 1,237 |   |
| Exercise of options granted to employees                                                                              |   |   |   |   |          | 809,040     |        |                     |   | *      |    |   |   | 16          |   |   |     |   |   |   |   |   |   |   |   | 16 |   |
| Employee share-based compensation expenses                                                                            |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     | 23     |   |   |   |   |   |   |   | 23 |   |
|              Capital reduction (see note 21(d))      |   |   |   |   |          |        |        |                     |   |   |    |   |   | (1,400      | )      |   |     |   |   |   |   |   |   |   |   | (1,400 | ) |
| Dividend                                                                                                              |   |   | 21     |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | (1,212 | ) |   |   |   |   |   |   | (1,212 | ) |
| BALANCE AT DECEMBER 31, 2010                                                                                          |   |   |   |   |          |        | 155,249,176 |                     |   |   | 2       |   |   |        | 1,099  |   |     |   | (124 | ) |   |   | (351 | ) |   |   | 626 |   |
|                                                                                                                  |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2011                                                                       |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                                               |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | 427 |   |   |   |   |   |   |   | 427 |   |
| Exercise of options granted to employees                                                                              |   |   |   |   |          |        | 396,532     |                     |   |   | *       |   |   |        | 1      |   |     |   |   |   |   |   |   |   |   |   | 1 |   |
| Employee share-based compensation expenses                                                                            |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | 19 |   |   |   |   |   |   |   | 19 |   |
| Dividend                                                                                                              |   |   | 21     |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | (648 | ) |   |   |   |   |   |   | (648 | ) |
| BALANCE AT DECEMBER 31, 2011                                                                                          |   |   |   |   |          |        | 155,645,708 |                     |   |   | 2       |   |   |        | 1,100  |   |     |   | (326 | ) |   |   | (351 | ) |   |   | 425 |   |
|                                                                                                                  |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2012                                                                       |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                                               |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | 465 |   |   |   |   |   |   |   | 465 |   |
| Employee share-based compensation expenses                                                                            |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | 11 |   |   |   |   |   |   |   | 11 |   |
| Dividend                                                                                                              |   |   | 21     |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | (160 | ) |   |   |   |   |   |   | (160 | ) |
| BALANCE AT DECEMBER 31, 2012                                                                                          |   |   |   |   |          |        | 155,645,708 |                     |   |   | 2       |   |   |        | 1,100  |   |     |   | (10 | ) |   |   | (351 | ) |   |   | 741 |   |
|                                                                                                                  |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| Convenience translation into U.S. Dollars (note 2a):                                                                  |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE AT JANUARY 1, 2012                                                                                            |   |   |   |   |          |        | 155,645,708 |                     |   |   | 1       |   |   |        | 295    |   |     |   | (87 | ) |   |   | (94 | ) |   |   | 115 |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2012                                                                       |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                                               |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | 125 |   |   |   |   |   |   |   | 125 |   |
| Employee share-based compensation expenses                                                                            |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | 3 |   |   |   |   |   |   |   | 3 |   |
| Dividend                                                                                                              |   |   |   |   |          |        |        |                     |   |   |    |   |   |        |   |   |     |   | (44 | ) |   |   |   |   |   |   | (44 | ) |
| BALANCE AT DECEMBER 31, 2012                                                                                          |   |   |   |   |          |        | 155,645,708 |                     |   |   | 1       |   |   |        | 295    |   |     |   | (3 | ) |   |   | (94 | ) |   |   | 199 |   |

----

STATEMENTS OF

|                                                                          |   |   |   |   | New Israeli Shekels    |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                          |   |   |   |   | Year ended December 31 |   |
|                                                                          |   |   |   |   | 2010                   |   |   | 2011                                               |   |   | 2012 |   |   | 2012 |   |
|                                                                          |   | Note   |   |   | In millions            |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                         |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |
| Cash generated from operations (Appendix A)                                   |   |   |   |   |                   | 2,384  |   |                                               |   | 1,881 |   |   |   | 1,858 |   |   |   | 499 |   |
| Income tax paid                                                               |   |   | 25     |   |                   |   | (426   | )                                                  |   |   | (311 | ) |   |   | (153 | ) |   |   | (41 | ) |
| Net cash provided by operating activities                                     |   |   |   |   |                   |   | 1,958  |                                               |   |   | 1,570 |   |   |   | 1,705 |   |   |   | 458 |   |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                         |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition of property and equipment                                         |   |   | 10     |   |                   |   | (361   | )                                                  |   |   | (349 | ) |   |   | (367 | ) |   |   | (98 | ) |
| Acquisition of intangible assets                                              |   |   | 11     |   |                   |   | (105   | )                                                  |   |   | (155 | ) |   |   | (133 | ) |   |   | (36 | ) |
| Advance payment in respect of the acquisition of 012 Smile                    |   |   |   |   |                   |   | (30    | )                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition of 012 smile, net of cash acquired of NIS 23 million (Appendix B) |   |   |   |   |                   |   |   |                                               |   |   | (597 | ) |   |   |   |   |   |   |   |   |
| Interest received                                                             |   |   | 24     |   |                   |   | 5      |                                               |   |   | 12 |   |   |   | 9 |   |   |   | 2 |   |
| Proceeds from sale of property and equipment                                  |   |   |   |   |                   |   |   |                                               |   |   | 3 |   |   |   | 2 |   |   |   | 1 |   |
| Proceeds from derivative financial instruments, net                           |   |   | 7      |   |                   |   | 5      |                                               |   |   | 1 |   |   |   | 18 |   |   |   | 5 |   |
| Net cash used in investing activities                                         |   |   |   |   |                   |   | (486   | )                                                  |   |   | (1,085 | ) |   |   | (471 | ) |   |   | (126 | ) |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                         |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from exercise of stock options granted to employees                  |   |   |   |   |                   |   | 16     |                                               |   |   | 1 |   |   |   |   |   |   |   |   |   |
| Non-current bank borrowings received                                          |   |   | 15     |   |                   |   | 1,000  |                                               |   |   | 900 |   |   |   |   |   |   |   |   |   |
| Proceeds from issuance of notes payable, net of issuance costs                |   |   | 16     |   |                   |   | 990    |                                               |   |   | 1,136 |   |   |   |   |   |   |   |   |   |
|   Dividend paid                                                          |   |   | 21     |   |                   |   | (1,209 | )                                                  |   |   | (659 | ) |   |   | (167 | ) |   |   | (45 | ) |
| Capital reduction (see note 21(d))                                            |   |   |   |   |                   |   | (1,400 | )                                             |   |   |   |   |   |   |   |   |   |   |   |   |
| Repayment of finance lease                                                    |   |   |   |   |                   |   | (3     | )                                                  |   |   | (4 | ) |   |   | (2 | ) |   |   | (1 | ) |
|  Interest paid                                                           |   |   | 24     |   |                   |   | (118   | )                                                  |   |   | (235 | ) |   |   | (200 | ) |   |   | (54 | ) |
|  Repayment of current borrowings                                         |   |   | 15     |   |                   |   |   |                                               |   |   | (128 | ) |   |   |   |   |   |   |   |   |
|  Repayment of non-current bank borrowings                                |   |   | 15     |   |                   |   |   |                                               |   |   | (699 | ) |   |   | (455 | ) |   |   | (122 | ) |
|        Repayment of notes payable               |   |   | 16     |   |                   |   | (756   | )                                                  |   |   | (586 | ) |   |   | (394 | ) |   |   | (106 | ) |
| Net cash used in financing activities                                         |   |   |   |   |                   |   | (1,480 | )                                                  |   |   | (274 | ) |   |   | (1,218 | ) |   |   | (328 | ) |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |   |   |   |   |                   |   | (8     | )                                                  |   |   | 211 |   |   |   | 16 |   |   |   | 4 |   |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS ATBEGINNING OF YEAR                                 |   |   |   |   |                   |   | 329    |                                               |   |   | 321 |   |   |   | 532 |   |   |   | 143 |   |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                      |   |   |   |   |                   |   | 321    |                                               |   |   | 532 |   |   |   | 548 |   |   |   | 147 |   |

----

|                                                                                            |   |   |      |   |   New Israeli Shekels |   |   | Convenience translation intoU.S. dollars(note 2a) |   |
|-------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|---------------------------------|--------|--------|---------------------------------------------------|--------|
|                                                                                            |   |   |      |   | Year ended December 31,    |   |
|                                                                                            |   |   |      |   | 2010                            |   |   | 2011                                              |   |   | 2012 |   |   | 2012 |   |
|                                                                                            |   | Note   |      |   | In millions                     |   |
|                                                                                            |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |
| Cash generated from operations:                                                                 |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |
|          Profit for the year                            |   |   |      |   |                            | 1,243  |   |                                              |   | 443 |   |   |   | 478 |   |   |   | 128 |   |
|                                                                                            |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |
|     Adjustments for:                                                        |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |
|         Depreciation and amortization                   |   |   | 10, 11    |   |                            |   | 669    |                                              |   |   | 743 |   |   |   | 700 |   |   |   | 188 |   |
|         Amortization of deferred expenses- Right of use |   |   | 12        |   |                            |   |   |                                              |   |   | 29 |   |   |   | 26 |   |   |   | 7 |   |
|         Impairment of deferred expenses- Right of use   |   |   | 12, 13(a) |   |                            |   |   |                                              |   |   | 148 |   |   |   |   |   |   |   |   |   |
|         Impairment of goodwill                          |   |   | 13(b)     |   |                            |   |   |                                              |   |   | 87 |   |   |   |   |   |   |   |   |   |
| Impairment of intangible assets                                                                 |   |   | 13        |   |                            |   | 16     |                                              |   |   | 114 |   |   |   |   |   |   |   |   |   |
| Employee share based compensation expenses                                                      |   |   | 21        |   |                            |   | 23     |                                              |   |   | 19 |   |   |   | 11 |   |   |   | 3 |   |
| Liability for employee rights upon retirement, net                                              |   |   | 17        |   |                            |   | 8      |                                              |   |   | (26 | ) |   |   | (12 | ) |   |   | (3 | ) |
| Finance costs, net                                                                              |   |   | 24        |   |                            |   | 53     |                                              |   |   | 71 |   |   |   | 38 |   |   |   | 10 |   |
| Gain (loss) from change in fair value of derivative financial instruments                       |   |   | 7         |   |                            |   | 6      |                                              |   |   | (19 | ) |   |   | 15 |   |   |   | 4 |   |
| Interest paid                                                                                   |   |   | 24        |   |                            |   | 118    |                                              |   |   | 235 |   |   |   | 200 |   |   |   | 54 |   |
| Interest received                                                                               |   |   | 24        |   |                            |   | (5     | )                                                 |   |   | (12 | ) |   |   | (9 | ) |   |   | (2 | ) |
| Deferred income taxes                                                                           |   |   | 25        |   |                            |   | 18     |                                              |   |   | 2 |   |   |   | (10 | ) |   |   | (2 | ) |
| Income tax paid                                                                                 |   |   | 25        |   |                            |   | 426    |                                              |   |   | 311 |   |   |   | 153 |   |   |   | 41 |   |
| Capital loss from property and equipment                                                        |   |   | 10        |   |                            |   | 3      |                                              |   |   | 2 |   |   |   | * |   |   |   | * |   |
| Changes in operating assets and liabilities:                                                    |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in accounts receivable:                                                     |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                                                           |   |   | 8         |   |                            |   | (214   | )                                                 |   |   | (190 | ) |   |   | 467 |   |   |   | 125 |   |
| Other                                                                                           |   |   |      |   |                            |   | (40    | )                                                 |   |   | 44 |   |   |   | (5 | ) |   |   | (1 | ) |
| Increase (decrease) in accounts payable and accruals:                                           |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Parent group - trade                                                                            |   |   | 26        |   |                            |   | 38     |                                              |   |   | 70 |   |   |   | (72 | ) |   |   | (19 | ) |
| Trade                                                                                           |   |   |      |   |                            |   | (40    | )                                                 |   |   | (37 | ) |   |   | (107 | ) |   |   | (29 | ) |
| Other payables                                                                                  |   |   |      |   |                            |   | 27     |                                              |   |   | (91 | ) |   |   | (44 | ) |   |   | (12 | ) |
|   Provisions                                                                               |   |   | 14        |   |                            |   | (8     | )                                                 |   |   | 36 |   |   |   | (5 | ) |   |   | (1 | ) |
|   Deferred revenues                                                                        |   |   |      |   |                            |   | (5     | )                                                 |   |   | * |   |   |   | (11 | ) |   |   | (3 | ) |
| Increase in deferred expenses - Right of use                                                    |   |   | 12        |   |                            |   |   |                                              |   |   | (27 | ) |   |   | (25 | ) |   |   | (7 | ) |
| Current income tax liability                                                                    |   |   | 25        |   |                            |   | (9     | )                                                 |   |   | (13 | ) |   |   | 5 |   |   |   | 1 |   |
| Decrease (increase) in inventories                                                              |   |   | 9         |   |                            |   | 57     |                                              |   |   | (58 | ) |   |   | 65 |   |   |   | 17 |   |
| Cash generated from operations:                                                                 |   |   |      |   |                            |   | 2,384  |                                              |   |   | 1,881 |   |   |   | 1,858 |   |   |   | 499 |   |

----

|                                                                      |   | NIS in millions |   |
|---------------------------------------------------------------------------|--------|-----------------|--------|
| Current assets                                                            |   |            | 295    |   |
| Deferred expenses – right of use                                    |   |            | 282    |   |
| Property and equipment                                                    |   |            | 159    |   |
| Intangible assets                                                         |   |            | 408    |   |
| Goodwill                                                                  |   |            | 494    |   |
| Other non-current assets                                                  |   |            | 21     |   |
| Short term bank borrowings and current maturities of long-term borrowings |   |            | (201   | ) |
| Accounts payables and provisions                                          |   |            | (229   | ) |
| Long term bank borrowings                                                 |   |            | (579   | ) |
|                                                                      |   |            | 650    |   |
| Less: Advance payment in respect of the acquisition of 012 Smile          |   |            | (30    | ) |
| Less: cash acquired                                                       |   |            | (23    | ) |
| Net cash used in the acquisition of 012 Smile in 2011                     |   |            | 597    |   |

----

SOL

|   a.      | Reporting entity |
|-----------------------------------------|------------------|

|   b.      | Operating segments |
|-----------------------------------------|--------------------|

|   | (1) | Cellular segment |
|--------|-----|------------------|

----

|   b.      | Operating segments (continued) |
|-----------------------------------------|--------------------------------|

|   |   |
|--------|--------|

|   | (2) | Fixed-line segment |
|--------|-----|--------------------|

|   c.       | Cellular segment licenses |
|-----------------------------------------------|---------------------------|

|   | The Company operates under a license granted by the Israeli Ministry of Communications ("MOC") to operate a cellular telephone network. The license is valid through 2022. The Company is entitled to request an extension of the license for an additional period of six years and then renewal for one or more additional six year periods. Should the license not be renewed, the new license-holder is obliged to purchase the communications network and all the rights and obligations of the subscribers for a fair price, as agreed between the parties or as determined by an arbitrator. Under the terms of the license, the Company provided a bank guarantee in NIS equivalent of USD 10 million to the State of Israel to secure the Company's adherence to the terms of the license. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company was also granted a license from the Israeli Civil Administration, to provide mobile services to the Israeli populated areas in the West Bank. The license is effective until April 7, 2013. The Company has requested an extension to this license and believes that the extension will be granted. The Company provided a bank guarantee in NIS equivalent of USD 0.5 million to the State of Israel to secure the Company's adherence to the terms of the license. See note 2(g)(1) for the accounting policy in respect of the Group's licenses. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   d.      | Fixed-line segment licenses  |
|-----------------------------------------|-----------------------------------|

|   | ISP licenses:  |
|--------|---------------------|

|   | The Company received special licenses granted by the MOC, allowing the Company through its own facilities to provide internet access to land-line network customers: Internet Service Provider (ISP) in Israel and in the West Bank. The licenses are valid until April 2013. The Company has requested extensions to these licenses and believes that the extensions will be granted. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   d.      | Fixed-line segment licenses (continued) |
|-----------------------------------------|-----------------------------------------|

|   | 012 Smile also holds an ISP license to supply internet access and Wi-Fi services which is valid until December 2014. The license may be extended for various periods. The Group believes that it will be able to receive an extension to this license upon request. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ILD license:  |
|--------|--------------------|

|   | 012 Smile also holds a license for the provision of International Long Distance services (ILD). The license is valid until December 2030, with possible extensions for one or more successive periods of ten years. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Partner Land-line Communication Solutions - Limited Partnership, which is fully owned by the Company, holds a license for the provision of Domestic Fixed-line (DFL) telecommunications services including the right to offer VOB services using the infrastructure of Bezeq The Israel Telecommunication corp. Ltd and HOT- Telecommunication Systems Ltd (leading fixed communication infrastructure services providers in Israel) to access customers and to provide them with land-line telephony service and the provision of transmission and data communications services that were previously provided for under a transmission license that was granted in July 2006. The license expires 20 years after it was granted, but may be extended by the MOC for successive periods of 10 years provided that the licensee has complied with the terms of the license and has acted consistently for the enhancement of telecom services. The Company deposited a bank guarantee in the amount of NIS 10 million with the MOC upon receiving the license which shall be used to secure the Company's obligations under the License. In addition it holds a domestic land-line license to provide land-line services to the Israeli populated areas in the West Bank. The last license is effective until March 2019. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 012 Telecom Ltd., which is a wholly-owned subsidiary of 012 Smile, holds a license for the provision of stationary domestic telecommunication services including provision of domestic telecommunication services using VOB technology.  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The license was granted for a period of 20 years since December 2005. At the end of the license period, the MOC may extend the license for one or more successive periods of ten years. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| e.      | Main recent regulatory developments |
|----------------------------------|-------------------------------------|

|   | (1) | During 2012 the Ministry of Communications awarded UMTS frequencies to two additional operators: MIRS and Golan Telecom. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------|

|   | (2) | See note 13(a)(1) in respect of reduction in commitment exit fees. |
|--------|-----|--------------------------------------------------------------------|

|   | (3) | See information in respect of royalty payments in note 18. |
|--------|-----|------------------------------------------------------------|

|   | (4) | See information in respect of corporate tax rates in note 25. |
|--------|-----|---------------------------------------------------------------|

|   | a. | Basis of preparation of the financial statements |
|--------|----|--------------------------------------------------|

|   | (1) | Statement of compliance |
|--------|-----|-------------------------|

----

|   | a. | Basis of preparation of the financial statements (continued) |
|--------|----|--------------------------------------------------------------|

|   | (a) | Derivative financial instruments are measured and presented at their fair values through profit or loss. |
|--------|-----|----------------------------------------------------------------------------------------------------------|

|   | (b) | Property and equipment were revalued to the fair value on the transition date to IFRS as deemed cost, see note 2(f). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------|

|   | (c) | Assets held and liability for employee rights upon retirement, net, is valued based on the present value of the defined benefit obligation less fair value of the plan assets, see note 17. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (d) | Until December 31, 2003 the Israeli economy was considered hyperinflational according to IFRS, therefore the value of non-monetary assets, licenses and equity items have been adjusted for changes in the general purchasing power of the Israeli currency – NIS, based upon changes in the Israeli Consumer Price Index ("CPI") until December 31, 2003. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (e) | Identifiable assets acquired and liabilities and contingent liabilities assumed upon the business combination of acquiring 012 Smile were initially recognized at fair value as of the acquisition date March 3, 2011. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (f) | Goodwill was initially measured as the excess of the aggregate of the consideration transferred over the net fair value of identifiable assets acquired, liabilities and contingent liabilities assumed. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. |  Foreign currency translations |
|--------|----|-------------------------------------|

----

|   | c. |  Principles of consolidation |
|--------|----|-----------------------------------|

|   | d. |  Operating Segments |
|--------|----|--------------------------|

----

|   | e. |  Inventories |
|--------|----|-------------------|

|   | f. |  Property and equipment |
|--------|----|------------------------------|

----

|   | f. |  Property and equipment (continued) |
|--------|----|------------------------------------------|

|                                                                        |   | years                          |   |
|-----------------------------------------------------------------------------|--------|--------------------------------|--------|
| Communications network:                                                     |   |                           |   |
|        Physical layer and infrastructure |   | 10 - 25 (mainly 15, 10)        |   |
|        Other Communication network       |   | 3 - 15 (mainly 5, 10, 15) |   |
|                                                                        |   |                           |   |
| Computers, software and hardware for information systems                    |   | 3-10 (mainly 3-5)              |   |
| Office furniture and equipment                                              |   |                           | 7-15   |   |
| Optic fibers and related assets                                             |   | 7-25 (mainly 20)               |   |
| Property                                                                    |   |                           | 25     |   |

----

|   | g. |  Licenses and other intangible assets |
|--------|----|--------------------------------------------|

|   | (1) | Licenses: |
|--------|-----|-----------|

|   | (a) | The licenses to operate cellular communication services are recognized at cost, adjusted for changes in the CPI until December 31, 2003 (See a (3)(d) above), and are amortized using the straight line method over their contractual period –the period ending in 2022. Borrowing costs which served to finance the license fee - incurred until the commencement of utilization of the license - were capitalized to cost of the license. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | The Company's license for providing fixed-line telephone services is stated at cost and is amortized by the straight-line method over the contractual period of 20 years, starting in 2007. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | 012 Smile and its subsidiaries have been granted various licenses from the Ministry of Communications for the provision of communication services. The licenses to operate international telephony services and local telephony services are recognized at fair value in a business combination as of the acquisition date of 012 Smile (see note 5), and are amortized using the straight line method over their remaining contractual period: License for international telecommunications services until 2030, and the VOB and DFL license until 2025. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | g. |  Licenses and other intangible assets (continued) |
|--------|----|--------------------------------------------------------|

|   | (2) | Computer software: |
|--------|-----|--------------------|

|   | (3) | Customer relationships: |
|--------|-----|-------------------------|

|   | (4) | Trade name: |
|--------|-----|-------------|

----

|   | g. |  Licenses and other intangible assets (continued) |
|--------|----|--------------------------------------------------------|

|   | (5) | Subscriber Acquisition and Retention Costs (SARC): |
|--------|-----|----------------------------------------------------|

|   | h. |  Right of use (ROU) of international fiber optic cables |
|--------|----|--------------------------------------------------------------|

|   | i. |  Goodwill |
|--------|----|----------------|

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|   | i. |  Goodwill (continued) |
|--------|----|----------------------------|

|   | j. |  Impairment of non-financial assets with finite useful economic lives |
|--------|----|----------------------------------------------------------------------------|

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|   | k. | Financial instruments |
|--------|----|-----------------------|

|   | The Group classifies its financial instruments in the following categories: (1) at fair value through profit or loss, (2) loans and receivables, and (3) liabilities at amortized cost. The classification depends on the purpose for which the financial instruments were acquired or assumed. Management determines the classification of its financial instruments at initial recognition. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | l. | Cash and Cash equivalents |
|--------|----|---------------------------|

|   |  m. | Trade Receivables |
|--------|----------|-------------------|

|   | n. | Trade payables |
|--------|----|----------------|

|   | Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. Trade payables are recognized initially at fair value, and subsequently measured at amortized cost. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o. | Share capital |
|--------|----|---------------|

----

|   | p. | Employee benefits |
|--------|----|-------------------|

----

|   | p. |  Employee benefits (continued) |
|--------|----|-------------------------------------|

|   | q. | Share based payment |
|--------|----|---------------------|

----

|   | r. | Provisions |
|--------|----|------------|

|   | (1) | In the ordinary course of business, the Group is involved in a number of lawsuits and litigations. The costs that may result from these lawsuits are only accrued for when it is probable that a liability, resulting from past events, will be incurred and the amount of that liability can be quantified or estimated within a reasonable range. The amount of the provisions recorded is based on a case-by-case assessment of the risk level, and events arising during the course of legal proceedings that may require a reassessment of this risk, and where applicable discounted at a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. The Group's assessment of risk is based both on the advice of legal counsel and on the Group's estimate of the probable settlements amount that are expected to be incurred, if any. See also note 20. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The Company is required to incur certain costs in respect of a liability to dismantle and remove assets and to restore sites on which the assets were located. The dismantling costs are calculated according to best estimate of future expected payments discounted at a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognized as finance costs. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Provisions for handset warranties include obligations to customers in respect of handsets sold. Where there are a number of similar obligations, the likelihood that an outflow will be required in a settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any item included in the same class of obligations may be small. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | s. | Revenues |
|--------|----|----------|

----

|   | s. |  Revenues (continued) |
|--------|----|----------------------------|

----

|   | t. | Leases |
|--------|----|--------|

|   | u. | Advertising expenses |
|--------|----|----------------------|

|   | v. | Tax expenses |
|--------|----|--------------|

----

|   | w. | Dividend distribution |
|--------|----|-----------------------|

|   | x. | Earnings Per Share (EPS) |
|--------|----|--------------------------|

|   | (a) | The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning January 1, 2012 |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   (1)    | In October 2010, an amendment to IFRS 7 Financial instruments: Disclosures was published. The amendment broadens the disclosures requirement regarding financial assets that were transferred to other parties, yet continue to be included in the statement of financial position; and regarding related financial liabilities, including the relation between the assets and the liabilities. In addition the amendment broadens the disclosure requirements regarding derecognized financial assets in respect of which the entity remained exposed to certain risks and rewards. The Group adopted the amendment as of January 1, 2012. The implementation of the amendment did not have a material impact on the consolidated financial statements. |
|------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (b) | The following new standards, amendments to standards or interpretations have been issued, but are not effective for the financial year beginning 1 January 2012, and have not been early adopted |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |    (1) | IFRS 9 Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the Group's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The standard is not applicable until January 1, 2015 but is available for early adoption. The Group is yet to assess the full impact of the standard. |
|--------|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   (2)    | IFRS 13, Fair Value Measurement. IFRS 13 defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. IFRS 13 applies when other IFRSs require or permit fair value measurements. The Group will implement the standard for annual period beginning January 1, 2013. IFRS 13 will be implemented prospectively. Disclosures requirements are not required for periods preceding implementation date. The initial implementation of the standard is not expected to have a material effect on the Company's financial statements. |
|------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   (3)    | In June 2011, the IASB issued an amendment to IAS 19, Employee benefits. The amendment eliminates the corridor approach, and requires companies to recognize all actuarial gains and losses in OCI as they occur; and to immediately recognize all past service costs; and to replace interest costs and expected returns on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (assets). The Group will adopt the amendment annual periods beginning on or after January 1, 2013. The initial implementation of the amendment is not expected to have a material effect on the Company's financial statements. |
|------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   (4)   | In December 2011 the IASB issued amendments to IFRS 7 Disclosures—Offsetting Financial Assets and Financial Liabilities, and amendments to IAS 32 Financial instruments: Presentation on offsetting financial assets and financial liabilities. The amendments clarify the criteria of offsetting financial assets and financial liabilities, and  amended the required disclosures to include information that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity’s recognized financial assets and recognized financial liabilities, on the entity’s financial position. The group will implement the amendment to IAS 32 retrospectively for annual period beginning on January 1, 2014. The Group will implement the amendment to IFRS 7 retrospectively for annual period beginning on January 1, 2013. The initial implementation of the amendments is not expected to have a material effect on the Company's financial statements. |
|------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   a.      |  Critical accounting estimates and assumptions |
|------------------------------------|-----------------------------------------------------|

|   | (1) | Assessing the useful economic lives of assets: |
|--------|-----|------------------------------------------------|

|   | (2) | Assessing the recoverable amount for impairment tests of assets with finite useful economic lives: |
|--------|-----|----------------------------------------------------------------------------------------------------|

----

|      a.      | Critical accounting estimates and assumptions (continued) |
|------------------------------------------------------|-----------------------------------------------------------|

|   | (3) | Assessing the recoverable amount of goodwill for annual impairment tests: |
|--------|-----|---------------------------------------------------------------------------|

| Growth rate             | (negative 0.2%) |   |
|-------------------------|-----------------|--------|
| After-tax discount rate | 11.7%           |   |
| Pre-tax discount rate   | 15.7%           |   |

|   | (4) | Assessing allowance for doubtful accounts: |
|--------|-----|--------------------------------------------|

----

|   a.      | Critical accounting estimates and assumptions (continued) |
|-----------------------------------------|-----------------------------------------------------------|

|   | (5) | Considering uncertain tax positions: |
|--------|-----|--------------------------------------|

|   | (6) | Business combinations – assessing purchase price allocations: |
|--------|-----|---------------------------------------------------------------------|

| b.      | Critical judgments in applying the Group's accounting policies |
|----------------------------------|----------------------------------------------------------------|

----

|   b.       | Critical judgments in applying the Group's accounting policies (continued) |
|-----------------------------------------------|----------------------------------------------------------------------------|

|   | (5)   Determining CGUs for impairment tests of assets with finite useful lives: |
|--------|-------------------------------------------------------------------------------------------|

|   | (6)   Determining CGUs for impairment tests of goodwill: |
|--------|-------------------------------------------------------------------------|

----

|   a.      | Transaction details |
|-----------------------------------------|---------------------|

----

|                                                                      |   | March 3, 2011   |   |
|---------------------------------------------------------------------------|--------|-----------------|--------|
|                                                                      |   | NIS in millions |   |
| Current assets                                                            |   |            | 295    |   |
| Deferred expenses – right of use                                    |   |            | 282    |   |
| Property and equipment                                                    |   |            | 159    |   |
| Intangible assets                                                         |   |            | 408    |   |
| Goodwill                                                                  |   |            | 494    |   |
| Other non-current assets                                                  |   |            | 21     |   |
| Short term bank borrowings and current maturities of long-term borrowings |   |            | (201   | ) |
| Accounts payables and provisions                                          |   |            | (229   | ) |
| Long term bank borrowings                                                 |   |            | (579   | ) |
|                                                                      |   |            | 650    |   |

----

|                                                               |   | New Israeli Shekels               |   |
|--------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                               |   | Year ended December 31, 2012 |   |
|                                                               |   | In millions                       |   |
|                                                               |   | Cellular segment                  |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue - Services                                         |   |                              | 3,564  |   |   |   | 1,076 |   |   |   |   |   |   | 4,640 |   |
| Inter-segment revenue - Services                                   |   |                              | 28     |   |   |   | 134 |   |   |   | (162 | ) |   |   |   |   |
| Segment revenue - Equipment                                        |   |                              | 896    |   |   |   | 36 |   |   |   |   |   |   |   | 932 |   |
| Total revenues                                                     |   |                              | 4,488  |   |   |   | 1,246 |   |   |   | (162 | ) |   |   | 5,572 |   |
|                                                               |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues - Services                                |   |                              | 2,351  |   |   |   | 861 |   |   |   |   |   |   |   | 3,212 |   |
| Inter-segment cost of  revenues- Services                |   |                              | 134    |   |   |   | 28 |   |   |   | (162 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                               |   |                              | 787    |   |   |   | 32 |   |   |   |   |   |   |   | 819 |   |
| Cost of revenues                                                   |   |                              | 3,272  |   |   |   | 921 |   |   |   | (162 | ) |   |   | 4,031 |   |
| Gross profit                                                       |   |                              | 1,216  |   |   |   | 325 |   |   |   |   |   |   |   | 1,541 |   |
|                                                               |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                 |   |                              | 584    |   |   |   | 203 |   |   |   |   |   |   |   | 787 |   |
| Other income, net                                                  |   |                              | 110    |   |   |   | 1 |   |   |   |   |   |   |   | 111 |   |
| Operating profit                                                   |   |                              | 742    |   |   |   | 123 |   |   |   |   |   |   |   | 865 |   |
| Adjustments to presentation of Adjusted EBITDA                     |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization |   |                              | 562    |   |   |   | 164 |   |   |   |   |   |   |   | 726 |   |
|     –Other (1)                           |   |                              | 10     |   |   |   | 1 |   |   |   |   |   |   |   | 11 |   |
| Adjusted EBITDA (2)                                                |   |                              | 1,314  |   |   |   | 288 |   |   |   |   |   |   |   | 1,602 |   |
| Reconciliation of Adjusted EBITDA to profit before income tax      |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization      |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 726 |   |
|     -  Finance costs, net            |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 234 |   |
|     -  Other (1)                     |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 11 |   |
| Profit before income tax                                           |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 631 |   |

----

|                                                                                                                |   | New Israeli Shekels               |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                |   | Year ended December 31, 2011 |   |
|                                                                                                                |   | In millions                       |   |
|                                                                                                                |   | Cellular segment                  |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue - Services                                                                                          |   |                              | 4,219  |   |   |   | 1,005 |   |   |   |   |   |   | 5,224 |   |
| Inter-segment revenue - Services                                                                                    |   |                              | 29     |   |   |   | 122 |   |   |   | (151 | ) |   |   |   |   |
| Segment revenue - Equipment                                                                                         |   |                              | 1,748  |   |   |   | 26 |   |   |   |   |   |   |   | 1,774 |   |
| Total revenues                                                                                                      |   |                              | 5,996  |   |   |   | 1,153 |   |   |   | (151 | ) |   |   | 6,998 |   |
|                                                                                                                |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues – Services                                                                           |   |                              | 2,601  |   |   |   | 969 |   |   |   |   |   |   |   | 3,570 |   |
| Inter-segment cost of  revenues- Services                                                                 |   |                              | 122    |   |   |   | 29 |   |   |   | (151 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                                                                                |   |                              | 1,379  |   |   |   | 29 |   |   |   |   |   |   |   | 1,408 |   |
| Cost of revenues                                                                                                    |   |                              | 4,102  |   |   |   | *1,027 |   |   |   | (151 | ) |   |   | 4,978 |   |
| Gross profit                                                                                                        |   |                              | 1,894  |   |   |   | 126 |   |   |   |   |   |   |   | 2,020 |   |
|                                                                                                                |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                                                                  |   |                              | 712    |   |   |   | *290 |   |   |   |   |   |   |   | 1,002 |   |
| Impairment of goodwill                                                                                              |   |                              |   |   |   |   | 87 |   |   |   |   |   |   |   | 87 |   |
| Other income, net                                                                                                   |   |                              | 105    |   |   |   |   |   |   |   |   |   |   |   | 105 |   |
| Operating profit (loss)                                                                                             |   |                              | 1,287  |   |   |   | (251 | ) |   |   |   |   |   |   | 1,036 |   |
| Adjustments to presentation of Adjusted  EBITDA                                                           |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      – Depreciation and amortization                                                 |   |                              | 590    |   |   |   | 182 |   |   |   |   |   |   |   | 772 |   |
|      – Impairment of intangible assets, deferred expenses and goodwill (see note 13) |   |                              |   |   |   |   | 349 |   |   |   |   |   |   |   | 349 |   |
|      – Other (1)                                                                          |   |                              | 19     |   |   |   | 2 |   |   |   |   |   |   |   | 21 |   |
| Adjusted EBITDA (2)                                                                                                 |   |                              | 1,896  |   |   |   | 282 |   |   |   |   |   |   |   | 2,178 |   |
| Reconciliation of Adjusted EBITDA to profit before income tax                                                       |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization                                                       |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (772 | ) |
|     -  Impairment of intangible assets, deferred expenses and goodwill                     |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (349 | ) |
|     -  Finance costs, net                                                             |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (294 | ) |
|     -  Other (1)                                                                      |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (21 | ) |
| Profit before income tax                                                                                            |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 742 |   |

----

|                                                            |   | New Israeli Shekels               |   |
|-----------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                            |   | Year ended December 31, 2010 |   |
|                                                            |   | In millions                       |   |
|                                                            |   | Cellular segment                  |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Total segment revenue - Services                                |   |                              | 5,555  |   |   |   | 107 |   |   |   |   |   |   | 5,662 |   |
| Inter-segment revenue - Services                                |   |                              | 20     |   |   |   | 57 |   |   |   | (77 | ) |   |   |   |   |
| Segment revenue - Equipment                                     |   |                              | 987    |   |   |   | 25 |   |   |   |   |   |   |   | 1,012 |   |
| Total revenues                                                  |   |                              | 6,562  |   |   |   | 189 |   |   |   | (77 | ) |   |   | 6,674 |   |
| Segment cost of revenues – Services                       |   |                              | 3,174  |   |   |   | 133 |   |   |   |   |   |   |   | 3,307 |   |
| Inter-segment cost of  revenues- Services             |   |                              | 57     |   |   |   | 20 |   |   |   | (77 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                            |   |                              | 751    |   |   |   | 35 |   |   |   |   |   |   |   | 786 |   |
| Cost of revenues                                                |   |                              | 3,982  |   |   |   | 188 |   |   |   | (77 | ) |   |   | 4,093 |   |
| Gross profit                                                    |   |                              | 2,580  |   |   |   | 1 |   |   |   |   |   |   |   | 2,581 |   |
| Operating expenses                                              |   |                              | 760    |   |   |   | 25 |   |   |   |   |   |   |   | 785 |   |
| Other income, net                                               |   |                              | 64     |   |   |   |   |   |   |   |   |   |   |   | 64 |   |
| Operating profit (loss)                                         |   |                              | 1,884  |   |   |   | (24 | ) |   |   |   |   |   |   | 1,860 |   |
| Adjustments to presentation of Adjusted EBITDA                  |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     –Depreciation and amortization    |   |                              | 633    |   |   |   | 36 |   |   |   |   |   |   |   | 669 |   |
|     –Impairment of intangible assets  |   |                              | 16     |   |   |   |   |   |   |   |   |   |   |   | 16 |   |
|     –Other (1)                        |   |                              | 25     |   |   |   |   |   |   |   |   |   |   |   | 25 |   |
| Adjusted EBITDA (2)                                             |   |                              | 2,558  |   |   |   | 12 |   |   |   |   |   |   |   | 2,570 |   |
| Reconciliation of Adjusted EBITDA to profit before income tax   |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization   |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (669 | ) |
|      - Impairment of intangible assets |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (16 | ) |
|     -  Finance costs, net         |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (181 | ) |
|     -  Other (1)                  |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (25 | ) |
| Profit before income tax                                        |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 1,679 |   |

----

|   | a. | Financial risk factors The Group is exposed to a variety of financial risks: credit, liquidity and market risks as part of its normal course of business. The Group's risk management objective is to monitor risks and minimize the possible influence that results from this exposure, according to its evaluations and expectations of the parameters that affect the risks. The Group uses freestanding derivative instruments in order to partially cover its exposure to foreign currency exchange rates. The freestanding derivative instruments are used for economic risk management that does not qualify for hedge accounting under IAS 39. The Group does not hold or issue derivative financial instruments for trading purposes. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | Financial risk factors (continued) |
|--------|----|------------------------------------|

|                                                                                                  |   | December 31, 2012               |   |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                  |   | In or linked to USD             |   |   | In or linked to other foreign currencies (mainly EURO) |   |   | NIS linked to CPI |   |   | NIS unlinked |   |   | Total |   |
|                                                                                                  |   | New Israeli Shekels In millions |   |
| Current assets                                                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Cash and cash equivalents                                                           |   |                            | 3      |   |   |   |   |   |   |   |   |   | 545 |   |   |   | 548 |   |
|    Trade receivables                                                                   |   |                            | 8      |   |   |   | 47 |   |   |   |   |   |   | 1,342 |   |   |   | 1,397 |   |
|    Other receivables                                                                   |   |                            |   |   |   |   |   |   |   |   |   |   |   | 20 |   |   |   | 20 |   |
|    Derivative financial instruments (*)                                                |   |                            | 1      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1 |   |
|                                                                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current assets                                                                                   |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Trade receivables                                                                   |   |                            |   |   |   |   |   |   |   |   |   |   |   | 509 |   |   |   | 509 |   |
|                                                                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                                                          |   |                            | 12     |   |   |   | 47 |   |   |   |   |   |   | 2,416 |   |   |   | 2,475 |   |
|                                                                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                                                                   |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Current maturities of notes payable and of other liabilities and current borrowings |   |                            |   |   |   |   |   |   |   |   |   120 |   |   |   |   186 |   |   |   |   306 |   |
|    Trade payables                                                                      |   |                            | 110    |   |   |   | 61 |   |   |   |   |   |   |   | 695 |   |   |   | 866 |   |
|    Parent group - trade                                                                |   |                            | 45     |   |   |   |   |   |   |   |   |   |   |   | 25 |   |   |   | 70 |   |
|    Payables in respect of employees and other payables (mainly institutions)           |   |                            | 1      |   |   |   |   |   |   |   | 2 |   |   |   | 108 |   |   |   | 111 |   |
|    Derivative financial instruments (*)                                                |   |                            | 14     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 14 |   |
|                                                                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current liabilities                                                                              |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Notes payable                                                                       |   |                            |   |   |   |   |   |   |   |   | 1,046 |   |   |   | 1,275 |   |   |   | 2,321 |   |
|    Bank borrowings                                                                     |   |                            |   |   |   |   |   |   |   |   | 1,007 |   |   |   | 726 |   |   |   | 1,733 |   |
|                                                                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                                                                                     |   |                            | 170    |   |   |   | 61 |   |   |   | 2,175 |   |   |   | 3,015 |   |   |   | 5,421 |   |

| (*) | Relates to freestanding forward derivative financial instruments and embedded derivative financial instruments. |
|-----|-----------------------------------------------------------------------------------------------------------------|

----

|   | a. | Financial risk factors (continued) |
|--------|----|------------------------------------|

|                                                                                                                                           |   | December 31, 2011               |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                                                           |   | In or linked to USD             |   |   | In or linked to other foreign currencies (mainly EURO) |   |   | NIS linked to CPI |   |   | NIS unlinked |   |   | Total |   |
|                                                                                                                                           |   | New Israeli Shekels In millions |   |
| Current assets                                                                                                                                 |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Cash and cash equivalents                                                                                                    |   |                            | 2      |   |   |   | 1 |   |   |   |   |   |   | 529 |   |   |   | 532 |   |
|    Trade receivables                                                                                                            |   |                            | 25     |   |   |   | 15 |   |   |   |   |   |   | 1,478 |   |   |   | 1,518 |   |
|    Other receivables                                                                                                            |   |                            |   |   |   |   |   |   |   |   |   |   |   | 15 |   |   |   | 15 |   |
|    Derivative financial instruments (*)                                                                                         |   |                            | 24     |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 24 |   |
|                                                                                                                                           |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current assets                                                                                                                            |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Trade receivables                                                                                                            |   |                            |   |   |   |   |   |   |   |   |   |   |   | 856 |   |   |   | 856 |   |
|                                                                                                                                           |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                                                                                                   |   |                            | 51     |   |   |   | 16 |   |   |   |   |   |   | 2,878 |   |   |   | 2,945 |   |
|                                                                                                                                           |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                                                                                                            |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Current maturities of notes payable and of other liabilities and       current borrowings |   |                            |   |   |   |   |   |   |   |   | 424 |   |   |   | 74 |   |   |   | 498 |   |
|    Trade payables                                                                                                               |   |                            | 139    |   |   |   | 66 |   |   |   |   |   |   |   | 708 |   |   |   | 913 |   |
|    Parent group - trade                                                                                                         |   |                            | 87     |   |   |   |   |   |   |   |   |   |   |   | 55 |   |   |   | 142 |   |
|    Payables in respect of employees and other payables (mainly institutions)                                               |   |                            | 2      |   |   |   |   |   |   |   | 5 |   |   |   | 207 |   |   |   | 214 |   |
|    Derivative financial instruments (*)                                                                                         |   |                            | 3      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3 |   |
|                                                                                                                                           |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current liabilities                                                                                                                       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Notes payable                                                                                                                |   |                            |   |   |   |   |   |   |   |   | 1,148 |   |   |   | 1,457 |   |   |   | 2,605 |   |
|    Bank borrowings                                                                                                              |   |                            |   |   |   |   |   |   |   |   | 992 |   |   |   | 1,076 |   |   |   | 2,068 |   |
|    Other non-current liabilities                                                                                                |   |                            | 1      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1 |   |
|                                                                                                                                           |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                                                                                                                              |   |                            | 232    |   |   |   | 66 |   |   |   | 2,569 |   |   |   | 3,577 |   |   |   | 6,444 |   |

|   (*)   | Relates to freestanding forward derivative financial instruments and embedded derivative financial instruments. |
|------------------------|-----------------------------------------------------------------------------------------------------------------|

----

|   | a. | Financial risk factors (continued) |
|--------|----|------------------------------------|

|                   |   | Change |   |   | Equity                          |   |   | Profit |   |
|------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|--------|--------|
|                   |   |   |   |   | New Israeli Shekels In millions |   |
|                   |   |   |   |   |                            |   |   |   |   |
| December 31, 2010      |   |   |   |   |                            |   |   |   |   |
| Increase in the CPI of |   |   | 2.0    | %      |                            |   | (40    | )      |   |   | (40 | ) |
| Decrease in the CPI of |   |   | (2.0   | )%     |                            |   | 40     |   |   |   | 40 |   |
|                   |   |   |   |   |                            |   |   |   |   |   |   |   |
| December 31, 2011      |   |   |   |   |                            |   |   |   |   |   |   |   |
| Increase in the CPI of |   |   | 2.0    | %      |                            |   | (51    | )      |   |   | (51 | ) |
| Decrease in the CPI of |   |   | (2.0   | )%     |                            |   | 51     |   |   |   | 51 |   |
|                   |   |   |   |   |                            |   |   |   |   |   |   |   |
| December 31, 2012      |   |   |   |   |                            |   |   |   |   |   |   |   |
| Increase in the CPI of |   |   | 2.0    | %      |                            |   | (44    | )      |   |   | (44 | ) |
| Decrease in the CPI of |   |   | (2.0   | )%     |                            |   | 44     |   |   |   | 44 |   |

|                   |   | Change |   |   | Equity                          |   |   | Profit |   |
|------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|--------|--------|
|                   |   |   |   |   | New Israeli Shekels In millions |   |
|                   |   |   |   |   |                            |   |   |   |   |
| December 31, 2010      |   |   |   |   |                            |   |   |   |   |
| Increase in the USD of |   |   | 5.0    | %      |                            |   | 1      |   |   |   | 1 |   |
| Decrease in the USD of |   |   | (5.0   | )%     |                            |   | (1     | )      |   |   | (1 | ) |
|                   |   |   |   |   |                            |   |   |   |   |   |   |   |
| December 31, 2011      |   |   |   |   |                            |   |   |   |   |   |   |   |
| Increase in the USD of |   |   | 5.0    | %      |                            |   | 6      |   |   |   | 6 |   |
| Decrease in the USD of |   |   | (5.0   | )%     |                            |   | (6     | )      |   |   | (6 | ) |
|                   |   |   |   |   |                            |   |   |   |   |   |   |   |
| December 31, 2012      |   |   |   |   |                            |   |   |   |   |   |   |   |
| Increase in the USD of |   |   | 5.0    | %      |                            |   | 3      |   |   |   | 3 |   |
| Decrease in the USD of |   |   | (5.0   | )%     |                            |   | (3     | )      |   |   | (3 | ) |

----

|   | a. | Financial risk factors (continued) |
|--------|----|------------------------------------|

|                                 |   | Exchange    |   |   | Exchange    |   |   |          |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|---------------|--------|
|                                 |   | rate of one |   |   | rate of one |   |   | Israeli       |   |
|                                 |   | Dollar      |   |   | Euro        |   |   | CPI*          |   |
| At December 31:                      |   |        |   |   |        |   |   |          |   |
|      2012   |   | NIS 3.733   |   |   | NIS 4.921   |   |   | 219.80 points |   |
|      2011   |   | NIS 3.821   |   |   | NIS 4.938   |   |   | 216.27 points |   |
|      2010   |   | NIS 3.549   |   |   | NIS 4.738   |   |   | 211.67 points |   |
| Increase (decrease) during the year: |   |        |   |   |        |   |   |          |   |
|      2012   |   |        | (2.3   | )%     |        |   | (0.35  | )%            |   |   | 1.6 | % |
|      2011        |   |        | 7.7    | %      |        |   | 4.2    | %             |   |   | 2.2 | % |
|      2010   |   |        | (6     | )%     |        |   | (12.9  | )%            |   |   | 2.7 | % |

|   |    (d)  Details regarding the derivative financial instruments - foreign exchange and CPI risk management |
|--------|-------------------------------------------------------------------------------------------------------------------------------|

|                                                            |   | New Israeli Shekels |   |
|-----------------------------------------------------------------|--------|---------------------|--------|
|                                                            |   | December 31         |   |
|                                                            |   | 2010                |   |   | 2011 |   |   | 2012 |   |
|                                                            |   | In millions         |   |
| Forward transactions pay NIS, receive NIS linked to Israeli CPI |   |                | 80     |   |   |   | - |   |   |   | - |   |
| Forward transactions pay NIS, receive USD                       |   |                | 334    |   |   |   | 382 |   |   |   | 373 |   |
| Forward transactions pay Euro, receive USD                      |   |                | -      |   |   |   | 100 |   |   |   | 247 |   |
| Embedded derivatives pay USD, receive NIS                       |   |                | 144    |   |   |   | 56 |   |   |   | 64 |   |

----

|   | a. |  Financial risk factors (continued) |
|--------|----|------------------------------------------|

|                                             |   |  New Israeli Shekels |   |
|--------------------------------------------------|--------|---------------------------|--------|
|                                             |   | December 31               |   |
|                                             |   | 2011                      |   |   | 2012 |   |
|                                             |   | In millions               |   |
| Cash and cash equivalents                        |   |                      | 532    |   |   |   | 548 |   |
| Trade receivables including non-current amounts  |   |                      | 2,374  |   |   |   | 1,906 |   |
| Forward exchange contracts on foreign currencies |   |                      | 24     |   |   |   | - |   |
| Other receivables                                |   |                      | 15     |   |   |   | 20 |   |
|                                             |   |                      | 2,945  |   |   |   | 2,474 |   |

----

|   | a. | Financial risk factors (continued) |
|--------|----|------------------------------------|

| December 31, 2012                |   | 1st year                        |   |   | 2nd year |   |   | 3rd year |   |   | 4 to 5 years |   |   | More than5 years |   |   | Total  |   |
|----------------------------------|--------|---------------------------------|--------|--------|----------|--------|--------|----------|--------|--------|--------------|--------|--------|------------------|--------|--------|--------|--------|
|                             |   | New Israeli Shekels In millions |   |
| Notes payable series B           |   |                            | 136    |   |     |   | 132    |     |   |   | 128          |   |   |             | 124    |   |   |   |   |   |   | 520 |   |
| Notes payable series C           |   |                            | 23     |   |     |   | 23     |     |   |   | 23           |   |   |             | 499    |   |   |   | 238 |   |   |   | 806 |   |
| Notes payable series D           |   |                            | 16     |   |     |   | 16     |     |   |   | 16           |   |   |             | 141    |   |   |   | 469 |   |   |   | 658 |   |
| Notes payable series E           |   |                            | 238    |   |     |   | 228    |     |   |   | 218          |   |   |             | 405    |   |   |   |   |   |   |   | 1,089 |   |
| Bank borrowings                  |   |                            | 63     |   |     |   | 367    |     |   |   | 357          |   |   |             | 520    |   |   |   | 715 |   |   |   | 2,022 |   |
| Trade and other payables         |   |                            | 962    |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 962 |   |
| Parent group  - trade  |   |                            | 70     |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 70 |   |
| Derivative financial instruments |   |                            | 14     |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 14 |   |
|                             |   |                            | 1,522  |   |     |   | 766    |     |   |   | 742          |   |   |             | 1,689  |   |   |   | 1,422 |   |   |   | 6,141 |   |

|   | See note 15(3) regarding financial covenants. |
|--------|-----------------------------------------------|

----

|   c.       | Fair values of financial instruments |
|-----------------------------------------------|--------------------------------------|

|                                                       |         |   | December 31, 2011               |   |   | December 31, 2012 |   |
|------------------------------------------------------------|--------------|--------|---------------------------------|--------|--------|-------------------|--------|
|                                                       | Category     |   | Carrying amount                 |   |   | Fair value        |   |   | Interest rate used (**) |   |   | Carrying amount |   |   | Fair value |   |   | Interest rate used (**) |   |
|                                                       |         |   | New Israeli Shekels In millions |   |
| Assets                                                     |         |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                  | L&R      |   |                            | 532    |   |              |   | 532 |   |   |   |   |   |   | 548 |   |   |   | 548 |   |   |   |   |
| Trade receivables                                          | L&R      |   |                            | 2,374  |   |              |   | 2,395 |   |   |   | 7.55 | % |   |   | 1,906 |   |   |   | 1,907 |   |   |   | 6.77 | % |
| Other receivables (*)                                      | L&R      |   |                            | 15     |   |              |   | 15 |   |   |   |   |   |   |   | 20 |   |   |   | 20 |   |   |   |   |   |
| Derivative financial instruments                           | FVTPLLevel 2 |   |                            | 24     |   |              |   | 24 |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |   |   |   |   |
| Liabilities                                                |         |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable series A                                     | AC           |   |                            | 393    |   |              |   | 394 |   |   | Market quote |   |   |   | - |   |   |   | - |   |   |   |   |   |
| Notes payable series B                                     | AC           |   |                            | 470    |   |              |   | 475 |   |   | Market quote |   |   |   | 478 |   |   |   | 503 |   |   | Market quote |   |
| Notes payable series C                                     | AC           |   |                            | 678    |   |              |   | 666 |   |   | Market quote |   |   |   | 688 |   |   |   | 741 |   |   | Market quote |   |
| Notes payable series D                                     | AC           |   |                            | 540    |   |              |   | 473 |   |   | Market quote |   |   |   | 540 |   |   |   | 515 |   |   | Market quote |   |
| Notes payable series E                                     | AC           |   |                            | 917    |   |              |   | 944 |   |   | Market quote |   |   |   | 921 |   |   |   | 987 |   |   | Market quote |   |
| Trade payables (*)                                         | AC           |   |                            | 913    |   |              |   | 913 |   |   |   |   |   |   |   | 866 |   |   |   | 866 |   |   |   |   |   |
| Bank borrowing bearing variable interest (*)               | AC           |   |                            | 700    |   |              |   | 700 |   |   |   |   |   |   |   | 376 |   |   |   | 376 |   |   |   |   |   |
| Bank borrowings bearing fixed interest- unlinked           | AC           |   |                            | 450    |   |              |   | 470 |   |   |   | 5.29 | % |   |   | 350 |   |   |   | 388 |   |   |   | 3.51 | % |
| Bank borrowings bearing fixed interest - linked to the CPI | AC           |   |                            | 514    |   |              |   | 487 |   |   |   | 3.80 | % |   |   | 522 |   |   |   | 545 |   |   |   | 1.83 | % |
| Bank borrowings bearing fixed interest - linked to the CPI | AC           |   |                            | 509    |   |              |   | 504 |   |   |   | 3.64 | % |   |   | 485 |   |   |   | 519 |   |   |   | 1.71 | % |
| Parent group – trade (*)                             | AC           |   |                            | 142    |   |              |   | 142 |   |   |   |   |   |   |   | 70 |   |   |   | 70 |   |   |   |   |   |
| Finance lease obligation (*)                               | AC           |   |                            | 3      |   |              |   | 3 |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |   |   |   |   |
| Derivative financial instruments                           | FVTPLLevel 2 |   |                            | 3      |   |              |   | 3 |   |   |   |   |   |   |   | 14 |   |   |   | 14 |   |   |   |   |   |

|  (*) | The fair value of this current financial instrument does not differ significantly from its carrying amount, as the impact of discounting is not significant. |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (**) | Weighted average of interest rate used to calculate the fair value based on discounted cash flows. |
|------|----------------------------------------------------------------------------------------------------|

----

|   | (a) | Composition: |
|--------|-----|--------------|

|                            |   | New Israeli Shekels |   |
|---------------------------------|--------|---------------------|--------|
|                            |   | December 31         |   |
|                            |   | 2011                |   |   | 2012 |   |
|                            |   | In millions         |   |
| Trade (current and non-current) |   |                | 2,743  |   |   |   | 2,212 |   |
| Deferred interest income        |   |                | (125   | ) |   |   | (84 | ) |
| Allowance for doubtful accounts |   |                | (244   | ) |   |   | (222 | ) |
|                            |   |                | 2,374  |   |   |   | 1,906 |   |
| Current                         |   |                | 1,518  |   |   |   | 1,397 |   |
| Non – current             |   |                | 856    |   |   |   | 509 |   |

|   | (b) | Allowance for doubtful accounts: |
|--------|-----|----------------------------------|

|                                                     |   | New Israeli Shekels |   |
|----------------------------------------------------------|--------|---------------------|--------|
|                                                     |   | Year ended          |   |
|                                                     |   | 2010                |   |   | 2011 |   |   | 2012 |   |
|                                                     |   | In millions         |   |
| Balance at beginning of year                             |   |                | 249    |   |   |   | 256 |   |   |   | 244 |   |
| Receivables written-off during the year as uncollectible |   |                | (43    | ) |   |   | (55 | ) |   |   | (69 | ) |
| Charge or expense during the year                        |   |                | 50     |   |   |   | 43 |   |   |   | 47 |   |
| Balance at end of year                                   |   |                | 256    |   |   |   | 244 |   |   |   | 222 |   |

----

|                        |   | Gross                           |   |   | Allowance |   |   | Gross  |   |   | Allowance |   |
|-----------------------------|--------|---------------------------------|--------|--------|-----------|--------|--------|--------|--------|--------|-----------|--------|
|                        |   | New Israeli Shekels In millions |   |
|                        |   | December 31                     |   |
|                        |   | 2011                            |   |   | 2012      |   |
| Not past due                |   |                            | 2,350  |   |      |   | 41     |   |   |   | 1,867     |   |   |   | 31 |   |
| Past due less than one year |   |                            | 211    |   |      |   | 68     |   |   |   | 163       |   |   |   | 60 |   |
| Past due more than one year |   |                            | 182    |   |      |   | 135    |   |   |   | 182       |   |   |   | 131 |   |
|                        |   |                            | 2,743  |   |      |   | 244    |   |   |   | 2,212     |   |   |   | 222 |   |

----

|                                     |   |  New Israeli Shekels |   |
|------------------------------------------|--------|---------------------------|--------|
|                                     |   | December 31               |   |
|                                     |   | 2011                      |   |   | 2012 |   |
|                                     |   | In millions               |   |
| Handsets                                 |   |                      | 129    |   |   |   | 67 |   |
| Accessories and other                    |   |                      | 14     |   |   |   | 12 |   |
| Spare parts                              |   |                      | 12     |   |   |   | 12 |   |
| ISP modems, routers, servers and related |   |                      |   |   |   |   |   |   |
|     equipment        |   |                      | 7      |   |   |   | 7 |   |
|                                     |   |                      | 162    |   |   |   | 98 |   |

|   | b.   Inventories at December 31, 2012, are presented net of write offs due to decline in value in the amount of NIS 2 million (December 31, 2011 - NIS 5 million). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                         |   | Communication network (**)(*)   |   |   | Computers and information systems(*) |   |   | Optic fibers and related assets |   |   | Office furniture and equipment |   |   | Property and leaseholdimprovements |   |   | Total  |   |
|------------------------------|--------|---------------------------------|--------|--------|--------------------------------------|--------|--------|---------------------------------|--------|--------|--------------------------------|--------|--------|------------------------------------|--------|--------|--------|--------|
|                         |   | New Israeli Shekels In millions |   |
| Cost                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |
| Balance at January 1, 2010   |   |                            | 1,931  |   |                                 |   | 222    |                            |   |   | 301                            |   |   |                               | 27     |   |   |   | 200 |   |   |   | 2,681 |   |
| Additions                    |   |                            | 224    |   |                                 |   | 99     |                            |   |   | 27                             |   |   |                               | 4      |   |   |   | 28 |   |   |   | 382 |   |
| Disposals                    |   |                            | 26     |   |                                 |   | 4      |                            |   |   | -                              |   |   |                               | 10     |   |   |   | - |   |   |   | 40 |   |
| Balance at December 31, 2010 |   |                            | 2,129  |   |                                 |   | 317    |                            |   |   | 328                            |   |   |                               | 21     |   |   |   | 228 |   |   |   | 3,023 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Acquisition of 012 Smile     |   |                            | 101    |   |                                 |   | 27     |                            |   |   |                           |   |   |                               | 7      |   |   |   | 24 |   |   |   | 159 |   |
| Additions                    |   |                            | 217    |   |                                 |   | 45     |                            |   |   | 37                             |   |   |                               | 5      |   |   |   | 37 |   |   |   | 341 |   |
| Disposals                    |   |                            | 57     |   |                                 |   | 35     |                            |   |   | 1                              |   |   |                               | 3      |   |   |   | 24 |   |   |   | 120 |   |
| Balance at December 31, 2011 |   |                            | 2,390  |   |                                 |   | 354    |                            |   |   | 364                            |   |   |                               | 30     |   |   |   | 265 |   |   |   | 3,403 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Additions                    |   |                            | 295    |   |                                 |   | 61     |                            |   |   | 48                             |   |   |                               | 3      |   |   |   | 17 |   |   |   | 424 |   |
| Disposals                    |   |                            | 184    |   |                                 |   | 14     |                            |   |   |                           |   |   |                               | 2      |   |   |   | 4 |   |   |   | 204 |   |
| Balance at December 31, 2012 |   |                            | 2,501  |   |                                 |   | 401    |                            |   |   | 412                            |   |   |                               | 31     |   |   |   | 278 |   |   |   | 3,623 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Accumulated Depreciation     |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2010   |   |                            | 459    |   |                                 |   | 64     |                            |   |   | 25                             |   |   |                               | 14     |   |   |   | 55 |   |   |   | 617 |   |
| Depreciation for the year    |   |                            | 278    |   |                                 |   | 50     |                            |   |   | 19                             |   |   |                               | 9      |   |   |   | 29 |   |   |   | 385 |   |
| Disposals                    |   |                            | 23     |   |                                 |   | 4      |                            |   |   | -                              |   |   |                               | 10     |   |   |   | - |   |   |   | 37 |   |
| Balance at December 31, 2010 |   |                            | 714    |   |                                 |   | 110    |                            |   |   | 44                             |   |   |                               | 13     |   |   |   | 84 |   |   |   | 965 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Depreciation for the year    |   |                            | 369    |   |                                 |   | 66     |                            |   |   | 26                             |   |   |                               | 6      |   |   |   | 35 |   |   |   | 502 |   |
| Disposals                    |   |                            | 55     |   |                                 |   | 35     |                            |   |   |                           |   |   |                               | 2      |   |   |   | 23 |   |   |   | 115 |   |
| Balance at December 31, 2011 |   |                            | 1,028  |   |                                 |   | 141    |                            |   |   | 70                             |   |   |                               | 17     |   |   |   | 96 |   |   |   | 1,352 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Depreciation for the year    |   |                            | 352    |   |                                 |   | 62     |                            |   |   | 23                             |   |   |                               | 5      |   |   |   | 42 |   |   |   | 484 |   |
| Disposals                    |   |                            | 183    |   |                                 |   | 14     |                            |   |   |                           |   |   |                               | 2      |   |   |   | 4 |   |   |   | 203 |   |
| Balance at December 31, 2012 |   |                            | 1,197  |   |                                 |   | 189    |                            |   |   | 93                             |   |   |                               | 20     |   |   |   | 134 |   |   |   | 1,633 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Carrying amounts, net        |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2010         |   |                            | 1,415  |   |                                 |   | 207    |                            |   |   | 284                            |   |   |                               | 8      |   |   |   | 144 |   |   |   | 2,058 |   |
| At December 31, 2011         |   |                            | 1,362  |   |                                 |   | 213    |                            |   |   | 294                            |   |   |                               | 13     |   |   |   | 169 |   |   |   | 2,051 |   |
| At December 31, 2012         |   |                            | 1,304  |   |                                 |   | 212    |                            |   |   | 319                            |   |   |                               | 11     |   |   |   | 144 |   |   |   | 1,990 |   |

| (**)   | Cost additions in 2011 and 2012 include capitalization of salary expenses an amount of approximately NIS 16 million and NIS 24 million, respectively. |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                    |   | Licenses                        |   |   | Trade name |   |   | Customer relationships |   |   | Subscriber acquisition and retention costs |   |   | Computer software(*) |   |   | Total  |   |
|-----------------------------------------|--------|---------------------------------|--------|--------|------------|--------|--------|------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------|--------|--------|--------|--------|
|                                    |   | New Israeli Shekels In millions |   |
| Cost                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |
| Balance at January 1, 2010              |   |                            | 2,092  |   |       |   |   |                   |   | 18     |                                       |   |   | 181                  |   |   |   | 407    |   |   |   | 2,698 |   |
| Additions                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   | 72                   |   |   |   | 52     |   |   |   | 124 |   |
| Disposals                               |   |                            | 7      |   |       |   |   |                   |   |   |                                       |   |   | 187                  |   |   |   | 45     |   |   |   | 239 |   |
| Balance at December 31, 2010            |   |                            | 2,085  |   |       |   |   |                   |   | 18     |                                       |   |   | 66                   |   |   |   | 414    |   |   |   | 2,583 |   |
| Acquisition of 012 Smile                |   |                            | 3      |   |       |   | 73     |                   |   |   | 258                                        |   |   |                 | 35     |   |   |   | 39 |   |   |   | 408 |   |
| Additions                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 33     |   |   |   | 127 |   |   |   | 160 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 51     |   |   |   | 112 |   |   |   | 163 |   |
| Balance at December 31, 2011            |   |                            | 2,088  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 83     |   |   |   | 468 |   |   |   | 2,988 |   |
| Additions                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 9      |   |   |   | 134 |   |   |   | 143 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 20     |   |   |   | 139 |   |   |   | 159 |   |
| Balance at December 31, 2012            |   |                            | 2,088  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 72     |   |   |   | 463 |   |   |   | 2,972 |   |
|                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Accumulated amortization and impairment |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2010              |   |                            | 1,093  |   |       |   |   |                   |   |   | 10                                         |   |   |                 | 70     |   |   |   | 265 |   |   |   | 1,438 |   |
| Amortization for the year               |   |                            | 80     |   |       |   |   |                   |   |   | 3                                          |   |   |                 | 141    |   |   |   | 60 |   |   |   | 284 |   |
| Impairment charge                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 16     |   |   |   |   |   |   |   | 16 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 187    |   |   |   | 45 |   |   |   | 232 |   |
| Balance at December 31, 2010            |   |                            | 1,173  |   |       |   |   |                   |   |   | 13                                         |   |   |                 | 40     |   |   |   | 280 |   |   |   | 1,506 |   |
| Amortization for the year               |   |                            | 81     |   |       |   | 4      |                   |   |   | 29                                         |   |   |                 | 52     |   |   |   | 75 |   |   |   | 241 |   |
| Impairment charge                       |   |                            |   |   |       |   | 14     |                   |   |   | 73                                         |   |   |                 | 27     |   |   |   |   |   |   |   | 114 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 51     |   |   |   | 112 |   |   |   | 163 |   |
| Balance at December 31, 2011            |   |                            | 1,254  |   |       |   | 18     |                   |   |   | 115                                        |   |   |                 | 68     |   |   |   | 243 |   |   |   | 1,698 |   |
| Amortization for the year               |   |                            | 82     |   |       |   | 5      |                   |   |   | 25                                         |   |   |                 | 19     |   |   |   | 85 |   |   |   | 216 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 20     |   |   |   | 139 |   |   |   | 159 |   |
| Balance at December 31, 2012            |   |                            | 1,336  |   |       |   | 23     |                   |   |   | 140                                        |   |   |                 | 67     |   |   |   | 189 |   |   |   | 1,755 |   |
|                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Carrying amounts, net                   |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2010                    |   |                            | 912    |   |       |   |   |                   |   |   | 5                                          |   |   |                 | 26     |   |   |   | 134 |   |   |   | 1,077 |   |
| At December 31, 2011                    |   |                            | 834    |   |       |   | 55     |                   |   |   | 161                                        |   |   |                 | 15     |   |   |   | 225 |   |   |   | 1,290 |   |
| At December 31, 2012                    |   |                            | 752    |   |       |   | 50     |                   |   |   | 136                                        |   |   |                 | 5      |   |   |   | 274 |   |   |   | 1,217 |   |

|  (*)  | Cost additions in 2010, 2011, and 2012 include capitalization of salary expenses of approximately NIS 15 million, NIS 29 million and NIS 37, respectively. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                    |   | New Israeli Shekels in millions |   |
|-----------------------------------------|--------|---------------------------------|--------|
| Cost                                    |   |                            |   |
| Balance at January 1, 2011              |   |                            | -      |   |
| Acquisition of 012 Smile                |   |                            | 311    |   |
| Additional payments during the year     |   |                            | 27     |   |
| Balance at December 31, 2011            |   |                            | 338    |   |
| Additional payments during the year     |   |                            | 25     |   |
| Balance at December 31, 2012            |   |                            | 363    |   |
|                                    |   |                            |   |   |
| Accumulated amortization and impairment |   |                            |   |   |
| Balance at January 1, 2011              |   |                            | -      |   |
| Amortization during the period (*)      |   |                            | 29     |   |
| Impairment charge (see note 13(a))      |   |                            | 148    |   |
| Balance at December 31, 2011            |   |                            | 177    |   |
| Amortization during the period          |   |                            | 26     |   |
| Balance at December 31, 2012            |   |                            | 203    |   |
|                                    |   |                            |   |   |
| Carrying amount, net                    |   |                            |   |   |
| At December 31, 2011                    |   |                            | 161    |   |
| Current                                 |   |                            | 19     |   |
| Non-current                             |   |                            | 142    |   |
|                                    |   |                            |   |   |
| Carrying amount, net                    |   |                            |   |   |
| At December 31, 2012                    |   |                            | 160    |   |
| Current                                 |   |                            | 22     |   |
| Non-current                             |   |                            | 138    |   |

----

|   a.      |  Impairment tests of assets with finite useful economic lives |
|-----------------------------------------|--------------------------------------------------------------------|

|   | (1) | Subscriber acquisition and retention costs |
|--------|-----|--------------------------------------------|

|   | (2) | Assets of the VOB/ISP CGU During December 2011, Bezeq International Ltd. completed the installation of an underwater cable between Israel and Italy and began commercial use thereafter. In addition, Tamares Telecom Ltd. was in the final stages of laying another underwater cable which was completed in January 2012, allowing new communication channels between Israel and Western Europe. The additional capacity significantly increased the level of competition in the market for international connectivity services that, until December 2011, had been comprised of a sole monopoly supplier. The increased competition in the market for international connectivity services during the fourth quarter of 2011 led to a sharp decline in prices and the Company's expectations for increased competition in the retail ISP market that would lead to a decrease in prices and market share, indicated the need to perform an impairment test to certain assets of the fixed-line segment as at December 31, 2011. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   a.      | Impairment tests of assets with finite useful economic lives (continued) |
|-----------------------------------------|--------------------------------------------------------------------------|

|   (2)     | Assets of the VOB/ISP CGU (continued) |
|------------------------------------|---------------------------------------|

----

|   b.      | Goodwill impairment tests |
|-----------------------------------------|---------------------------|

|   | (1) | ISP/VOB, and ILD group of CGUs NIS 426 million, |
|--------|-----|-------------------------------------------------|

|   | (2) | Transmission and PRI CGU NIS 68 million. |
|--------|-----|------------------------------------------|

|                    | ISP/VOB and ILD group of CGUs | Transmission and PRI CGU |
|-------------------------|-------------------------------|--------------------------|
| Growth rate             | (0.4)%                        | 1%                       |
| After-tax discount rate | 12.1%                         | 11.5%                    |
| Pre-tax discount rate   | 14.9%                         | 15%                      |

----

|   b.      | Goodwill impairment tests (continued) |
|-----------------------------------------|---------------------------------------|

|   | Goodwill impairment test as of December 31, 2012 |
|--------|--------------------------------------------------|

| Growth rate             | (negative 0.2%) |   |
|-------------------------|-----------------|--------|
| After-tax discount rate | 11.7%           |   |
| Pre-tax discount rate   | 15.7%           |   |

----

|                            |   | Dismantling and restoring sites obligation |   |   |  Legal claims* |   |   | Handset warranty |   |
|---------------------------------|--------|--------------------------------------------|--------|--------|---------------------|--------|--------|------------------|--------|
|                            |   | New Israeli Shekels In millions            |   |
| Balance as at January 1, 2012   |   |                                       | 25     |   |                |   | 54     |             |   |   | 11 |   |
| Additions during the year       |   |                                       | 3      |   |                |   | 10     |             |   |   | 14 |   |
| Reductions during the year      |   |                                       | (1     | )      |                |   | (9     | )                |   |   | (20 | ) |
| Unwind of discount              |   |                                       | 1      |   |                |   |   |             |   |   |   |   |
| Balance as at December 31, 2012 |   |                                       | 28     |   |                |   | 55     |             |   |   | 5 |   |
| Non-current                     |   |                                       | 28     |   |                |   | -      |             |   |   | - |   |
| Current                         |   |                                       | -      |   |                |   | 55     |             |   |   | 5 |   |
|                            |   |                                       |   |   |                |   |   |             |   |   |   |   |
| Balance as at December 31, 2011 |   |                                       | 25     |   |                |   | 54     |             |   |   | 11 |   |
| Non-current                     |   |                                       | 25     |   |                |   | -      |             |   |   | - |   |
| Current                         |   |                                       | -      |   |                |   | 54     |             |   |   | 11 |   |

----

|   | (a) | Facility D received by the Company on November 24, 2009, in the amount of NIS 700 million. No amounts were drawn under this facility as of December 31, 2011. In July 2012, the Group initiated a reduction of credit Facility D to NIS 25 million. The Company was charged a commitment fee of 0.4% per year for undrawn amounts.  |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | 012 Smile also had a credit facility in the amount of NIS 80 million. This facility was partially used as of December 31, 2011 to secure bank guarantees. In July 2012, the credit facility was reduced to NIS 35 million. 012 Smile was charged a commitment fee of 0.4% per year for undrawn amounts.  |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|       |   | Total principal (**) |   | Date originally received |         | Linkage terms |   | Annual interest rate |
|------------|--------|----------------------|--------|--------------------------|--------------|---------------|--------|----------------------|
|       |   | (NIS m)              |   |                     |         |          |   |                 |
| Loan A (*) |   |                 | 522    |                     | Nov 11, 2010 |          | CPI    |                 | 2.75% CPI adj. |
| Loan C     |   |                 | 175    |                     | Jun 8, 2010  |          |   |                 | 5.7% fixed |
| Loan D     |   |                 | 175    |                     | Jun 9, 2010  |          |   |                 | 5.7% fixed |
| Loan E     |   |                 | 376    |                     | May 8, 2011  |          |   |                 | Prime minus 0.025% |
| Loan F (*) |   |                 | 485    |                     | Apr 10, 2011 |          | CPI    |                 | 3.42% CPI adj. |
|       |   |                 | 1,733  |                     |         |          |   |                 |   |

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|   | (3) | Financial covenants: |
|--------|-----|----------------------|

|   | (1) | The ratio of (a) the amount of all financial obligations of the Company including bank guarantees that the Company has undertaken ("Total Debt") to (b) EBITDA less Capital Expenditures shall not exceed 6.5 (the ratio as of December 31, 2011 and 2012 was 3.1 and 4.3, respectively); and |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The ratio of (a) Total Debt to (b) the EBITDA of the Company shall not exceed 4 (the ratio as of December 31, 2011 and 2012 was 2.4 and 2.8, respectively). |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4)  | Negative pledge: |
|--------|-----------|------------------|

----

|   | Notes payable series A |
|--------|------------------------|

|                                |   | New Israeli Shekels |   |
|-------------------------------------|--------|---------------------|--------|
|                                |   | December 31         |   |
|                                |   | 2011                |   |   | 2012 |   |
|                                |   | In millions         |   |
| Year ending December 31:            |   |                |   |   |   |   |
| 2012                                |   |                | 393    |   |   |   | - |   |
|                                |   |                | 393    |   |   |   | - |   |
| Less - offering expenses            |   |                | *      |   |   |   | - |   |
| Less - current maturities           |   |                | 393    |   |   |   | - |   |
| Included in non-current liabilities |   |                | -      |   |   |   | - |   |

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|                                |   | New Israeli Shekels |   |
|-------------------------------------|--------|---------------------|--------|
|                                |   | December 31         |   |
|                                |   | 2011                |   |   | 2012 |   |
|                                |   | In millions         |   |
| Year ending December 31:            |   |                |   |   |   |   |
| 2013                                |   |                | 118    |   |   |   | 120 |   |
| 2014                                |   |                | 118    |   |   |   | 120 |   |
| 2015                                |   |                | 118    |   |   |   | 120 |   |
| 2016                                |   |                | 118    |   |   |   | 120 |   |
|                                |   |                | 472    |   |   |   | 480 |   |
| Less - offering expenses            |   |                | 2      |   |   |   | 2 |   |
| Less - current maturities           |   |                | -      |   |   |   | 120 |   |
| Included in non-current liabilities |   |                | 470    |   |   |   | 358 |   |

----

|                                |   | New Israeli Shekels |   |
|-------------------------------------|--------|---------------------|--------|
|                                |   | December 31         |   |
|                                |   | 2011                |   |   | 2012 |   |
|                                |   | In millions         |   |
| Year ending December 31:            |   |                |   |   |   |   |
| 2016                                |   |                | 227    |   |   |   | 230 |   |
| 2017                                |   |                | 227    |   |   |   | 230 |   |
| 2018                                |   |                | 227    |   |   |   | 230 |   |
|                                |   |                | 681    |   |   |   | 690 |   |
| Less - offering expenses            |   |                | 3      |   |   |   | 2 |   |
| Included in non-current liabilities |   |                | 678    |   |   |   | 688 |   |

----

|   | · | From the issuance date to June 30, 2010: 3.4% |
|--------|--------|-----------------------------------------------|

|   | · | From July 1, 2010 to September 30, 2010: 3.29% |
|--------|--------|------------------------------------------------|

|   | · | From October 1, 2010 to December 30, 2010: 3.62% |
|--------|--------|--------------------------------------------------|

|   | · | From December 31, 2010 to March 30, 2011: 3.67% |
|--------|--------|-------------------------------------------------|

|   | · | From March 31, 2011 to June 30, 2011: 4.47% |
|--------|--------|---------------------------------------------|

|   | · | From July 1, 2011 to September 30, 2011: 4.72% |
|--------|--------|------------------------------------------------|

|   | · | From October 1, 2011 to December 30, 2011: 4.15% |
|--------|--------|--------------------------------------------------|

|   | · | From December 31, 2011 to March 30, 2012: 3.73% |
|--------|--------|-------------------------------------------------|

|   | · | From March 31, 2012 to June 30, 2012: 3.80% |
|--------|--------|---------------------------------------------|

|   | · | From July 1, 2012 to September 30, 2012: 3.39% |
|--------|--------|------------------------------------------------|

|   | · | From October 1, 2012 to December 30, 2012 : 3.41% |
|--------|--------|---------------------------------------------------|

|                                  |   | New Israeli Shekels |   |
|---------------------------------------|--------|---------------------|--------|
|                                  |   | December 31         |   |
|                                  |   | 2011                |   |   | 2012 |   |
|                                  |   | In millions         |   |
| Year ending December 31:              |   |                |   |   |   |   |
| 2017                                  |   |                | 109    |   |   |   | 109 |   |
| 2018                                  |   |                | 109    |   |   |   | 109 |   |
| 2019                                  |   |                | 109    |   |   |   | 109 |   |
| 2020                                  |   |                | 109    |   |   |   | 109 |   |
| 2021                                  |   |                | 109    |   |   |   | 109 |   |
|                                  |   |                | 545    |   |   |   | 545 |   |
| Less - offering expenses and discount |   |                | 5      |   |   |   | 5 |   |
| Included in non-current liabilities   |   |                | 540    |   |   |   | 540 |   |

----

|                                  |   | New Israeli Shekels |   |
|---------------------------------------|--------|---------------------|--------|
|                                  |   | December 31         |   |
|                                  |   | 2011                |   |   | 2012 |   |
|                                  |   | In millions         |   |
| Year ending December 31:              |   |                |   |   |   |   |
| 2013                                  |   |                | 186    |   |   |   | 186 |   |
| 2014                                  |   |                | 187    |   |   |   | 187 |   |
| 2015                                  |   |                | 187    |   |   |   | 187 |   |
| 2016                                  |   |                | 187    |   |   |   | 187 |   |
| 2017                                  |   |                | 187    |   |   |   | 187 |   |
|                                  |   |                | 934    |   |   |   | 934 |   |
| Less - offering expenses and discount |   |                | 17     |   |   |   | 13 |   |
| Less - current maturities             |   |                | -      |   |   |   | 186 |   |
| Included in non-current liabilities   |   |                | 917    |   |   |   | 735 |   |

----

|   |  (1) |   Defined contribution plan: |
|--------|-----------|-----------------------------------|

|   | The Group had contributed NIS 5 million, NIS 14 million, NIS 17 million for the years 2010, 2011 and 2012 respectively, in accordance with section 14. The contributions in accordance with the aforementioned section 14 commenced in 2009 (see note 2p(i)(1)). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (2) |   Defined benefit plan: |
|--------|-----------|------------------------------|

|   | The amounts recognized in the statement of financial position, in respect of a defined benefit plan (see note 2p(i)(2)) include the following: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                             |   | New Israeli Shekels |   |
|--------------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                             |   | December 31         |   |
|                                                                                             |   | 2011                |   |   | 2012 |   |
|                                                                                             |   | In millions         |   |
| Present value of funded obligations                                                              |   |                | 177    |   |   |   | 190 |   |
| Less: fair value of plan assets                                                                  |   |                | 132    |   |   |   | 140 |   |
| Liability for employee rights upon retirement, net                                               |   |                | 45     |   |   |   | 50 |   |
| Assets held for employee rights upon retirement, net                                             |   |                | 3      |   |   |   | - |   |
| Liability in the statement of financial position, net – presented as non-current liability |   |                | 48     |   |   |   | 50 |   |

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|                          |   | New Israeli Shekels |   |
|-------------------------------|--------|---------------------|--------|
|                          |   | December 31         |   |
|                          |   | 2011                |   |   | 2012 |   |
|                          |   | In millions         |   |
| Balance at January 1st        |   |                | 178    |   |   |   | 177 |   |
| Acquisition of subsidiary     |   |                | 19     |   |   |   | - |   |
| Current service cost     |   |                | 31     |   |   |   | 33 |   |
| Interest cost            |   |                | 9      |   |   |   | 8 |   |
| Actuarial losses              |   |                | 10     |   |   |   | 28 |   |
| Benefits paid                 |   |                | (70    | ) |   |   | (56 | ) |
| Balance at December 31st |   |                | 177    |   |   |   | 190 |   |

|                           |   |  New Israeli Shekels |   |
|--------------------------------|--------|---------------------------|--------|
|                           |   | December 31               |   |
|                           |   | 2011                      |   |   | 2012 |   |
|                           |   | In millions               |   |
| Balance at January 1st         |   |                      | 124    |   |   |   | 132 |   |
| Acquisition of subsidiary      |   |                      | 23     |   |   |   | - |   |
| Expected return on plan assets |   |                      | 6      |   |   |   | 6 |   |
| Actuarial gains (losses)       |   |                      | (11    | ) |   |   | 11 |   |
| Employer contributions         |   |                      | 29     |   |   |   | 26 |   |
| Benefits paid                  |   |                      | (39    | ) |   |   | (35 | ) |
| Balance at December 31st  |   |                      | 132    |   |   |   | 140 |   |

|   | The Group expects to contribute NIS 18 million in respect of liability for severance pay under a defined benefit plan in 2013. |
|--------|--------------------------------------------------------------------------------------------------------------------------------|

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|                                                                                      |   | New Israeli Shekels    |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                      |   | Year ended December 31 |   |
|                                                                                      |   | 2010                   |   |   | 2011 |   |   | 2012 |   |
|                                                                                      |   | In millions            |   |
| Current service cost                                                                 |   |                   | 41     |   |   |   | 31 |   |   |   | 33 |   |
| Interest cost                                                                        |   |                   | 7      |   |   |   | 9 |   |   |   | 8 |   |
| Expected return on plan assets                                                            |   |                   | (6     | ) |   |   | (6 | ) |   |   | (6 | ) |
| Total expenses recognized in the income statement                                         |   |                   | 42     |   |   |   | 34 |   |   |   | 35 |   |
| Charged to the statement of income as follows:                                            |   |                   |   |   |   |   |   |   |   |   |   |   |
|          Cost of revenues                    |   |                   | 25     |   |   |   | 19 |   |   |   | 20 |   |
|          Selling and marketing expenses      |   |                   | 10     |   |   |   | 9 |   |   |   | 10 |   |
|          General and administrative expenses |   |                   | 6      |   |   |   | 3 |   |   |   | 3 |   |
|          Finance costs, net                  |   |                   | 1      |   |   |   | 3 |   |   |   | 2 |   |
|                                                                                      |   |                   | 42     |   |   |   | 34 |   |   |   | 35 |   |
| Actuarial losses net, recognized in the statement of comprehensive income, before tax     |   |                   | 8      |   |   |   | 21 |   |   |   | 17 |   |
| Actual return on plan assets                                                              |   |                   | 6      |   |   |   | (5 | ) |   |   | 6 |   |

|                               |   | December 31 |        |
|------------------------------------|--------|-------------|-------------|
|                               |   | 2011        |        |   | 2012 |   |
|                               |   | %           |        |   | % |   |
|                               |   |        |        |   |   |   |
| Interest rate (*)                  |   |        | 4.76%, 5.02 | % |   |   | 4.24 | % |
| Inflation rate (*)                 |   |        | 2.2%, 2.49  | % |   |   | 2.57 | % |
| Expected return on plan assets (*) |   |        | 3.08%, 5.02 | % |   |   | 4.24 | % |
| Expected turnover rate             |   |        | 1% - 60     | % |   |   | 8% - 55 | % |
| Future salary increases            |   |        | 1% - 6      | % |   |   | 1% - 26 | % |

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|   | (1) | Royalty Commitments |
|--------|-----|---------------------|

|   | (2) | Under the Telegraph Regulations the Company is committed to pay an annual fixed fee for each frequency used. The Company paid a total amount of approximately NIS 59 million for the year 2010. For the year 2011, the Company paid an amount of NIS 11 million which is after a deduction of amounts the Company was eligible to receive in accordance with the High Court of Justice's decision; the amount due before the reduction was approximately NIS 58 million. For the year 2012, the company paid a total amount of approximately NIS 59 million. See also note 20(b)(1). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|   | (3) | At December 31, 2012, the Group is committed to acquire property and equipment and software elements for approximately NIS 156 million, including future payments in respect of the Ericsson contract. (See note 2(f)). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | At December 31, 2012, the Group is committed to acquire inventory in amount of approximately NIS 1,388 million; of which an amount of NIS 21 million is from Scailex, a related party. This includes the following: The Company has entered into a new agreement with Apple Distribution International for the purchase and resale of iPhone handsets and accessories in Israel (the "Apple Agreement"). The term of the Apple Agreement is three years, during which Partner has agreed to purchase a minimum quantity of iPhone handsets per year, which will represent a significant portion of the Company's expected handset purchases over that period. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | Right of Use (ROU) |
|--------|-----|--------------------|

|                |   | New Israeli Shekels in millions |   |
|---------------------|--------|---------------------------------|--------|
| 2013                |   |                            | 18     |   |
| 2014                |   |                            | 18     |   |
| 2015                |   |                            | 18     |   |
| 2016                |   |                            | 24     |   |
| 2017 and thereafter |   |                            | 156    |   |
|                |   |                            | 234    |   |

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|   | (6) | In April 2012 - the Company has entered into a five-year agreement with Bezeq - The Israel Telecommunication Corp., Ltd. ("Bezeq"), effective as of January 1, 2012, for the supply of transmission services for use in Partner's mobile network ("the Bezeq Agreement"). According to the Bezeq Agreement, the minimum annual commitment is NIS 55 million for the year 2012 and will gradually increase to NIS 71 million for the year 2016 due to the increase in the scope of the capacity to be purchased in accordance with the layout agreed upon by the parties. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | Liens and guarantees |
|--------|-----|----------------------|

|   | (8) | License for the use of the orange brand |
|--------|-----|-----------------------------------------|

|   | (9) | See note 15(3) regarding financial covenants and note 15(4) regarding negative pledge. |
|--------|-----|----------------------------------------------------------------------------------------|

|   | (10) |  See note 19 in respect of operating leases. |
|--------|------|---------------------------------------------------|

----

|   |  (1) | In the beginning of 2010 an amendment to the lease agreements for the Company's headquarters facility in Rosh Ha'ayin was signed, according to which the lease term is until the end of 2016, and the Company has an option to shorten the lease period to end in 2014. The rental payments are linked to the Israeli CPI. |
|--------|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (2) | 012 Smile leases an office facility in Petach Tikva for its headquarter. In July 2012, the lease was extended until the end of February 2013, by which time most of the facility will be vacated. The remaining area of the facility which will not be vacated has been leased under an agreement until the end of July 2013, with an option to extend the lease for an additional year. |
|--------|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (3) | Lease agreements for service centers and retail stores for a period of two to five years. The Group has options to extend some lease contract periods for up to twenty years (including the original lease periods). The rental payments are linked to the dollar or to the Israeli CPI. Some of the extension options include an increase of the lease payment in a range of 2%-10%. |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (4) | Lease agreements in respect of cell sites and switching stations throughout Israel are for periods of two to five years. The Company has an option to extend some of the lease contract periods for up to ten years (including the original lease periods). The rental payments fees are linked to the dollar or linked to the Israeli CPI. Some of the extension options include an increase of the lease payment in a range of 2%-10%. |
|--------|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (5) | As of December 31, 2012 operating lease agreements in respect of vehicles are for periods of up to three years. The rental payments are linked to the Israeli CPI. |
|--------|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (6) | Non-cancelable minimum operating lease rentals in respect of all the above leases are payable including option periods which are reasonably certain are as follows: |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                |   | New Israeli Shekels |   |
|---------------------|--------|---------------------|--------|
|                |   | December 31, 2012   |   |
|                |   | In millions         |   |
| 2013                |   |                | 234    |   |
| 2014                |   |                | 201    |   |
| 2015                |   |                | 171    |   |
| 2016                |   |                | 154    |   |
| 2017                |   |                | 109    |   |
| 2018 and thereafter |   |                | 291    |   |
|                |   |                | 1,160  |   |

|   |  (7) | The rental expenses for the years ended December 31, 2010, 2011 and 2012 were approximately NIS 268 million, NIS 296 million, and NIS 290 million, respectively. |
|--------|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | A. | Claims |
|--------|----|--------|

|   | 1. | Consumer claims |
|--------|----|-----------------|

|   | a. | Alleged illegal collection of charges, claims or breach of the Consumer Protection Law and Customer agreement claims |
|--------|----|----------------------------------------------------------------------------------------------------------------------|

| Claim amount                   |   | Number of claims |   |   | Total claims amount (NIS million) |   |
|--------------------------------|--------|------------------|--------|--------|----------------------------------------|--------|
| Up to NIS 100 million          |   |             | 17     |   |                                   |   | 689 |   |
| NIS 100- 400 million           |   |             | 10     |   |                                   |   | 2,155 |   |
| NIS 400 million -NIS 1 billion |   |             | 3      |   |                                   |   | 1,580 |   |
| Over NIS 1 billion             |   |             | 1      |   |                                   |   | 2,700 |   |
| Unquantified claims            |   |             | 2      |   |                                   |   | - |   |
| Total                          |   |             | 33     |   |                                   |   | 7,124 |   |

|   | 1. | During 2008, several claims and motions to certify the claims as class actions were filed against several international telephony companies including 012 Smile. The plaintiffs allege that with respect to prepaid calling card services, the defendants misled the consumers regarding certain issues, charged consumers in excess, and formed a cartel that arranged and raised the prices of calling cards. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 2. | During 2010, a claim and a motion to certify the claim as a class action were filed against Partner Communications Company Ltd. ("Partner"). The claim alleges that in the process of generating bills to its customers, Partner wrongfully miscalculates the number of minutes consumed by a customer multiplied by the tariff per minute, in Partner's favor. The total amount of damages claimed by the plaintiffs is approximately NIS 2 million. On August 18, 2011, the court granted the plaintiff's request and certified the lawsuit as a class action. On January 10, 2012, the parties filed an agreed request for the court's approval of a compromise settlement reached by the parties. On January 31, 2013 the court approved the settlement agreement which the parties are implementing. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  b. | Alleged breach of license, Telecom law |
|--------|----------|----------------------------------------|

| Claim amount                   |   | Number of claims |   |   | Total claims amount (NIS million) |   |
|--------------------------------|--------|------------------|--------|--------|-----------------------------------|--------|
| Up to NIS 100 million          |   |             | 14     |   |                              |   | 510 |   |
| NIS 100-400 million            |   |             | 2      |   |                              |   | 294 |   |
| NIS 400 million -NIS 1 billion |   |             | 1      |   |                              |   | 560 |   |
| Over NIS 1 billion             |   |             | 1      |   |                              |   | 8,089 |   |
| Unquantified  claims |   |             | 4      |   |                              |   | - |   |
| Total                          |   |             | 22     |   |                              |   | 9,453 |   |

----

|   | 1. | On July 14, 2010, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that during the period between September 3, 2007 and December 31, 2008, Partner charged some of its subscribers for a time unit which is longer than 12 seconds while this charge was inconsistent with Partner's license. The total amount claimed from Partner is estimated by the plaintiffs to be more than the minimum amount for the authority of the District Court in Israel, which is NIS 2.5 million. On September 6, 2012, the court certified the claim as a class action. In light of the fact that Partner has already credited the relevant customers, Partner does not anticipate that it will be required to pay any additional amounts to the said customers. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | On September 26, 2011, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner unlawfully charged payments from costumers who requested to port-in their phone number from another cellular operator for services which were given to them prior to the completion of the port-in. The amount claimed in the lawsuit was estimated by the plaintiffs to be approximately NIS 25 million. On March 3, 2013, The Tel-Aviv District Court approved the motion and recognized the lawsuit as a class action. At this stage, the trial will begin to be heard as an ordinary civil claim. Partner estimates that even if the claim will be decided in favor of the relevant costumers, the damages that Partner will be required to pay for are immaterial. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Environmental clais |
|--------|----|---------------------|

|   | 3. | Employees and suppliers claims |
|--------|----|--------------------------------|

|   | 4. | Other claims |
|--------|----|--------------|

----

|   | B. | Contingencies in respect of regulatory demands and building and planning procedures |
|--------|----|-------------------------------------------------------------------------------------|

|   |  (1) | Under the Telegraph Regulations the Company is committed to pay an annual fixed fee for each frequency used. Under the above Regulations should the Company choose to return a frequency, such payment is no longer due. Cost of revenue was reduced by approximately NIS 50 million in 2010 following a Supreme Court decision in December 2010 to fully accept the Company's petition against the MOC regarding the amount of frequency fees that the Company should have paid for frequencies allocated to the Company. In addition, an amount of approximately NIS 10 million was recorded in other income in the financial statement. In December 28, 2011, the Company received an amount of approximately NIS 11 million as a final payment according to the Court's decision. This payment was recorded as a reduction of frequency fees and as other income (approximately NIS 6 million and NIS 5 million, respectively). See also note 18(2). |
|--------|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (2) | Section 197 of the Building and Planning Law states that a property owner has the right to be compensated by a local planning committee for reductions in property value as a result of a new building plan. |
|--------|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. |  Share capital: |
|--------|----|----------------------|

----

|   | b. |  Share based compensation to employees – share options |
|--------|----|-------------------------------------------------------------------|

|   | (1) | Description of the option plan |
|--------|-----|--------------------------------|

|   | - | Granting, exercise and tax treatment:  Options under the 2004 Plan may be granted without consideration to employees, directors, officers and advisors. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Vesting:  Vesting periods are between 1 to 4 years, as determined by the Board of Directors at the time of granting the options. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Acceleration of vesting and adjustment: In the event of a change of control or voluntary winding up, option vesting and exercisability of outstanding options shall be accelerated. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Exercise price adjustment: In the event of a dividend distribution other than in the ordinary course, the exercise price of outstanding options shall be reduced by an amount which the Board of Directors considers such distribution will have or will be likely to have on the trading price of the ordinary shares. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   b.    | Share based compensation to employees – share options (continued) |
|-----------------------------|-------------------------------------------------------------------------|

|   | - | Cashless exercise:  The exercise price of the options is based on the fair market value of the Company’s shares at the time of grant, defined as of any date as the average of the closing sale price of ordinary shares published by the Tel-Aviv Stock Exchange during the immediately preceding 30 trading days. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Information in respect of options granted |
|--------|-----|-------------------------------------------|

----

|   |  (3) | Options status summary as of December 31, 2010, 2011 and 2012 and the changes therein during the years ended on those dates: |
|--------|-----------|------------------------------------------------------------------------------------------------------------------------------|

|                                       |   | Year ended December 31 |       |
|--------------------------------------------|--------|------------------------|------------|
|                                       |   | 2010                   |       |   | 2011 |   |   | 2012 |   |
|                                       |   | Number                 |       |   | Weighted averageexercise price |   |   | Number |   |   | Weighted averageexercise price** |   |   | Number |   |   | Weighted averageexercise price** |   |
|                                       |   |                   |       |   | NIS |   |   |   |   |   | NIS |   |   |   |   |   | NIS |   |
| Balance outstanding at the                 |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| beginning of the year                      |   |                   | 5,315,945  |   |   |   | *56.47 |   |   |   | 6,826,275 |   |   |   | 55.88 |   |   |   | 6,452,891 |   |   |   | 52.98 |   |
| Changes during the year:                   |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                    |   |                   | 3,310,500  |   |   |   | **62.40 |   |   |   | 2,977,275 |   |   |   | 50.87 |   |   |   | 1,795,340 |   |   |   | 18.42 |   |
| Exercised ***                              |   |                   | (1,529,795 | ) |   |   | *44.82 |   |   |   | (1,454,250 | ) |   |   | 47.57 |   |   |   | - |   |   |   |   |   |
| Forfeited                                  |   |                   | (270,375   | ) |   |   | *58.48 |   |   |   | (1,896,409 | ) |   |   | 56.59 |   |   |   | (449,266 | ) |   |   | 54.97 |   |
| Expired                                    |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (275,217 | ) |   |   | 56.07 |   |
| Balance outstanding at the end of the year |   |                   | 6,826,275  |   |   |   | **55.88 |   |   |   | 6,452,891 |   |   |   | 52.98 |   |   |   | 7,523,748 |   |   |   | 44.02 |   |
| Balance exercisable at the end of the year |   |                   | 2,243,022  |   |   |   | **47.91 |   |   |   | 2,145,389 |   |   |   | 53.49 |   |   |   | 3,723,702 |   |   |   | 53.61 |   |

|   **   | After taking into account the dividend benefit and the exercise price amendment on July 2010, see (b)(2) above. |
|-----------------------|-----------------------------------------------------------------------------------------------------------------|

|   ***   | The number of shares issued as a result of the 1,454,250 options that were exercised during 2011 is 396,532 due to the Cashless mechanism. The number of shares issued as a result of the 1,529,795 options that were exercised during 2010 is 809,040 due to the Cashless mechanism. |
|------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                 |   | Options granted in 2010 |   |   | Options granted in 2011 |   |   | Options granted in 2012 |   |
|----------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------|-------------------------|--------|--------|-------------------------|--------|
|                                                                                                                 |   |                    |   |   | NIS                     |   |   |                    |   |
| Weighted average fair value of options granted using the Black & Scholes option-pricing model – per option |   |                    | 9.68   |   |                    |   | 6.28   |                    |   |   | 3.74 |   |
| The above fair value is estimated on the grant date based on the following weighted average assumptions:             |   |                    |   |   |                    |   |   |                    |   |   |   |   |
| Expected volatility                                                                                                  |   |                    | 29     | %      |                    |   | 27     | %                       |   |   | 30.46 | % |
| Risk-free interest rate                                                                                              |   |                    | 2.9    | %      |                    |   | 3.65   | %                       |   |   | 2.52 | % |
| Expected life (years)                                                                                                |   |                    | 3      |   |                    |   | 3      |                    |   |   | 3 |   |
| Dividend yield                                                                                                       |   |                    | 5.08   | %      |                    |   | 5.01   | %                       |   |   | * |   |

----

|  Expire in |   | Number of options |      |   | Weighted average exercise price in NIS* |   |
|-----------------|--------|-------------------|-----------|--------|-----------------------------------------|--------|
| 2013            |   |              | 275,000   |   |                                    |   | 58.75 |   |
| 2014            |   |              | 410,116   |   |                                    |   | 48.85 |   |
| 2015            |   |              | 13,375    |   |                                    |   | 26.21 |   |
| 2016            |   |              | 32,500    |   |                                    |   | 29.45 |   |
| 2017            |   |              | 71,000    |   |                                    |   | 53.44 |   |
| 2019            |   |              | 1,304,042 |   |                                    |   | 51.16 |   |
| 2020            |   |              | 1,317,600 |   |                                    |   | 59.96 |   |
| 2021            |   |              | 2,310,175 |   |                                    |   | 48.77 |   |
| 2022            |   |              | 1,789,940 |   |                                    |   | 17.60 |   |
|            |   |              | 7,523,748 |   |                                    |   | 44.02 |   |

|  Expire in |   | Number of options |      |   | Weighted average exercise price in NIS* |   |
|-----------------|--------|-------------------|-----------|--------|-----------------------------------------|--------|
|            |   |              |      |   |                                    |   |
| 2012            |   |              | 205,700   |   |                                    |   | 57.64 |   |
| 2014            |   |              | 399,191   |   |                                    |   | 48.70 |   |
| 2015            |   |              | 13,375    |   |                                    |   | 26.21 |   |
| 2016            |   |              | 32,500    |   |                                    |   | 29.45 |   |
| 2017            |   |              | 81,000    |   |                                    |   | 53.44 |   |
| 2018            |   |              | 12,500    |   |                                    |   | 61.53 |   |
| 2019            |   |              | 1,513,750 |   |                                    |   | 51.16 |   |
| 2020            |   |              | 1,433,700 |   |                                    |   | 60.81 |   |
| 2021            |   |              | 2,761,175 |   |                                    |   | 50.54 |   |
|            |   |              | 6,452,891 |   |                                    |   | 52.98 |   |

|  Expire in |   | Number of options |      |   | Weighted average exercise price in NIS* |   |
|-----------------|--------|-------------------|-----------|--------|-----------------------------------------|--------|
| 2011            |   |              | 8,750     |   |                                    |   | 21.72 |   |
| 2014            |   |              | 403,316   |   |                                    |   | 49.95 |   |
| 2015            |   |              | 283,542   |   |                                    |   | 61.90 |   |
| 2016            |   |              | 299,167   |   |                                    |   | 60.39 |   |
| 2017            |   |              | 133,250   |   |                                    |   | 55.07 |   |
| 2018            |   |              | 12,500    |   |                                    |   | 61.53 |   |
| 2019            |   |              | 3,317,750 |   |                                    |   | 51.44 |   |
| 2020            |   |              | 2,368,000 |   |                                    |   | 61.95 |   |
|            |   |              | 6,826,275 |   |                                    |   | 55.88 |   |

|   *   | After taking into account the dividend benefit and the exercise price amendment on July 2010, see (b)(2) above. |
|----------------------|-----------------------------------------------------------------------------------------------------------------|

----

|   | c. | Dividends |
|--------|----|-----------|

|                                                  |   | For the year ended December 31, |   |
|-------------------------------------------------------|--------|---------------------------------|--------|
|                                                  |   | 2010                            |   |   | 2011 |   |   | 2012 |   |
|                                                  |   | Per sharein NIS                 |   |   | NIS in millions |   |   | Per sharein NIS |   |   | NIS in millions |   |   | Per sharein NIS |   |   | NIS in millions |   |
| Dividends declared during the year                    |   |                            | 7.82   |   |   |   | 1,212 |   |   |   | 4.17 |   |   |   | 648 |   |   |   | 1.03 |   |   |   | 160 |   |
| Tax withheld                                          |   |                            |   |   |   |   | (17 | ) |   |   |   |   |   |   | (6 | ) |   |   |   |   |   |   |   |   |
| Previously withheld tax - paid during the year        |   |                            |   |   |   |   | 14 |   |   |   |   |   |   |   | 17 |   |   |   |   |   |   |   | 7 |   |
| Net Cash flow in respect of dividends during the year |   |                            |   |   |   |   | 1,209 |   |   |   |   |   |   |   | 659 |   |   |   |   |   |   |   | 167 |   |

|   | d.    Capital reduction |
|--------|---------------------------------------------|

----

| (a)  Cost of revenues                                         |   | New Israeli Shekels     |   |
|-------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                    |   | Year ended December 31, |   |
|                                                                    |   | 2010                    |   |   | 2011 |   |   | 2012 |   |
|                                                                    |   | In millions             |   |
| Payments to transmission, communication and content providers           |   |                    | 1,342  |   |   |   | *1,098 |   |   |   | 1,153 |   |
| Cost of handsets, accessories and ISP related  equipment      |   |                    | 746    |   |   |   | 1,368 |   |   |   | 788 |   |
| Wages, employee benefits expenses and car maintenance                   |   |                    | 575    |   |   |   | 705 |   |   |   | 614 |   |
| Depreciation, amortization and impairment charges                       |   |                    | 663    |   |   |   | 708 |   |   |   | 641 |   |
| Costs of handling, replacing or repairing handsets                      |   |                    | 199    |   |   |   | 152 |   |   |   | 140 |   |
| Operating lease, rent and overhead expenses                             |   |                    | 301    |   |   |   | 308 |   |   |   | 303 |   |
| Network and cable maintenance                                           |   |                    | 63     |   |   |   | *133 |   |   |   | 133 |   |
| Payments to internet service providers (ISP)                            |   |                    |   |   |   |   | *94 |   |   |   | 69 |   |
| Carkit installation, IT support, and other operating expenses           |   |                    | 86     |   |   |   | *96 |   |   |   | 80 |   |
| Royalty expenses                                                        |   |                    | 43     |   |   |   | 63 |   |   |   | 39 |   |
| Amortization of rights of use                                           |   |                    |   |   |   |   | 29 |   |   |   | 26 |   |
| Impairment of deferred expenses – right of use (see note 13) |   |                    |   |   |   |   | 148 |   |   |   |   |   |
| Other                                                                   |   |                    | 75     |   |   |   | *76 |   |   |   | 45 |   |
| Total cost of revenues                                                  |   |                    | 4,093  |   |   |   | 4,978 |   |   |   | 4,031 |   |

| (b)  Selling and marketing expenses            |   | New Israeli Shekels     |   |
|----------------------------------------------------------|--------|-------------------------|--------|
|                                                     |   | Year ended December 31, |   |
|                                                     |   | 2010                    |   |   | 2011 |   |   | 2012 |   |
|                                                     |   | In millions             |   |
| Wages, employee benefits expenses and car maintenance    |   |                    | 228    |   |   |   | 335 |   |   |   | 299 |   |
| Advertising and marketing                                |   |                    | 142    |   |   |   | 82 |   |   |   | 64 |   |
| Selling commissions, net                                 |   |                    | 25     |   |   |   | 82 |   |   |   | 59 |   |
| Depreciation and amortization                            |   |                    | 10     |   |   |   | 45 |   |   |   | 42 |   |
| Impairment of intangible assets (see  note 13) |   |                    |   |   |   |   | 87 |   |   |   |   |   |
| Operating lease, rent and overhead expenses              |   |                    | 35     |   |   |   | 44 |   |   |   | 45 |   |
| Other                                                    |   |                    | 39     |   |   |   | 36 |   |   |   | 42 |   |
| Total selling and marketing expenses                     |   |                    | 479    |   |   |   | 711 |   |   |   | 551 |   |

| (c)  General and administrative expenses    |   | New Israeli Shekels     |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   | Year ended December 31, |   |
|                                                  |   | 2010                    |   |   | 2011 |   |   | 2012 |   |
|                                                  |   | In millions             |   |
| Wages, employee benefits expenses and car maintenance |   |                    | 122    |   |   |   | 100 |   |   |   | 89 |   |
| Bad debts and allowance for doubtful accounts         |   |                    | 50     |   |   |   | 42 |   |   |   | 40 |   |
| Professional fees                                     |   |                    | 45     |   |   |   | 41 |   |   |   | 29 |   |
| Credit card and other commissions                     |   |                    | 33     |   |   |   | 42 |   |   |   | 33 |   |
| Depreciation                                          |   |                    | 12     |   |   |   | 17 |   |   |   | 17 |   |
| Other                                                 |   |                    | 44     |   |   |   | 49 |   |   |   | 28 |   |
| Total general and administrative expenses             |   |                    | 306    |   |   |   | 291 |   |   |   | 236 |   |

----

| (d)  Employee benefit expense                                                                                                                        |   | New Israeli Shekels     |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                           |   | Year ended December 31, |   |
|                                                                                                                                                           |   | 2010                    |   |   | 2011 |   |   | 2012 |   |
|                                                                                                                                                           |   | In millions             |   |
| Wages and salaries including social benefits, social security costs and pension costs,     defined contribution plans and defined benefit plans |   |                    | 823    |   |   |   | 1,028 |   |   |   | 908 |   |
| Expenses in respect of share options that were granted to employees                                                                                            |   |                    | 23     |   |   |   | 19 |   |   |   | 11 |   |
|                                                                                                                                                           |   |                    | 846    |   |   |   | 1,047 |   |   |   | 919 |   |

|                                     |   | New Israeli Shekels     |   |
|------------------------------------------|--------|-------------------------|--------|
|                                     |   | Year ended December 31, |   |
|                                     |   | 2010                    |   |   | 2011 |   |   | 2012 |   |
|                                     |   | In millions             |   |
| Unwinding of trade receivables           |   |                    | 63     |   |   |   | 104 |   |   |   | 108 |   |
| Other income, net                        |   |                    | 4      |   |   |   | 3 |   |   |   | 3 |   |
| Capital loss from property and equipment |   |                    | (3     | ) |   |   | (2 | ) |   |   | (* | ) |
|                                     |   |                    | 64     |   |   |   | 105 |   |   |   | 111 |   |

|                                                                        |   | New Israeli Shekels     |   |
|-----------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                        |   | Year ended December 31, |   |
|                                                                        |   | 2010                    |   |   | 2011 |   |   | 2012 |   |
|                                                                        |   | In millions             |   |
| Net foreign exchange rate gains                                             |   |                    | 16     |   |   |   | - |   |   |   | 8 |   |
| Interest income from cash equivalents                                       |   |                    | 3      |   |   |   | 10 |   |   |   | 7 |   |
| Expected return on plan assets                                              |   |                    | 6      |   |   |   | 6 |   |   |   | 6 |   |
| Fair value gain from derivative financial instruments, net                  |   |                    | -      |   |   |   | 18 |   |   |   | - |   |
| Other                                                                       |   |                    | 3      |   |   |   | 5 |   |   |   | 6 |   |
| Finance income                                                              |   |                    | 28     |   |   |   | 39 |   |   |   | 27 |   |
|                                                                        |   |                    |   |   |   |   |   |   |   |   |   |   |
| Interest expenses                                                           |   |                    | 127    |   |   |   | 205 |   |   |   | 188 |   |
| Linkage expenses to CPI                                                     |   |                    | 54     |   |   |   | 77 |   |   |   | 35 |   |
| Interest costs in respect of liability for employees rights upon retirement |   |                    | 7      |   |   |   | 9 |   |   |   | 9 |   |
| Fair value loss from derivative financial instruments, net                  |   |                    | 6      |   |   |   | - |   |   |   | 15 |   |
| Net foreign exchange rate losses                                            |   |                    | -      |   |   |   | 18 |   |   |   | - |   |
| Factoring costs, net                                                        |   |                    | 1      |   |   |   | 2 |   |   |   | * |   |
| Other finance costs                                                         |   |                    | 14     |   |   |   | 22 |   |   |   | 14 |   |
| Finance expense                                                             |   |                    | 209    |   |   |   | 333 |   |   |   | 261 |   |
|                                                                        |   |                    | 181    |   |   |   | 294 |   |   |   | 234 |   |

----

|   | a. |  Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985 |
|--------|----|---------------------------------------------------------------------------------------------------------|

|   | b. |  Corporate income tax rates applicable to the Group |
|--------|----|----------------------------------------------------------|

|   | c. |  Losses carried forward to future years and other temporary differences |
|--------|----|------------------------------------------------------------------------------|

----

| Balance of deferred tax asset (liability) in respect of |   | As at January 1, 2010 |   |   | Charged to the income statement |   |   | Charged to other comprehensive income |   |   | As at December 31, 2010 |   |   | Acquisition of subsidiary |   |   | Charged to the income statement |     |      | Charged to other comprehensive income |   |   |   Effect of change in corporate tax rate |   |   | As at December 31, 2011 |   |   | Charged to the income statement |   |     | Charged to other comprehensive income |   |   | As at December 31, 2012 |   |
|---------------------------------------------------------|--------|-----------------------|--------|--------|---------------------------------|--------|--------|---------------------------------------|--------|--------|-------------------------|--------|--------|---------------------------|--------|--------|---------------------------------|----------|-----------|--------------------------------------------|--------|--------|----------------------------------------------------|--------|--------|-------------------------|--------|--------|---------------------------------|--------|----------|--------------------------------------------|--------|--------|-------------------------|--------|
| Allowance for doubtful accounts                         |   |                  | 61     |   |                            |   | (1     | )                                     |   |   |                    |   |   | 60                        |   |   |                            |   * |      |                                       |   | (5     | )                                                  |   |   |                    |   |   |   6                        |   |     |                                       | 61     |   |                    |   | (5 | ) |   |   |   |   |   | 56 |   |
| Provisions for employee rights                          |   |                  | 14     |   |                            |   | 1      |                                  |   |   | 2                       |   |   |                      | 17     |   |                            |     | 1         |                                       |   |   | (8                                                 | )      |   |                    | 5      |   |                            |   | 2        |                                       |   |   | 17                      |   |   |   | (6 | ) |   |   | 4 |   |   |   | 15 |   |
| Subscriber acquisition costs                            |   |                  | 10     |   |                            |   | (10    | )                                     |   |   |                    |   |   |                      |   |   |                            |     | 1         |                                       |   |   | (1                                                 | )      |   |                    |   |   |                            |   | *        |                                       |   |   | *                       |   |   |   | * |   |   |   |   |   |   |   | - |   |
| Depreciable fixed assets and software                   |   |                  | (99    | )      |                            |   | (6     | )                                     |   |   |                    |   |   |                      | (105   | )      |                            |     | (2        | )                                          |   |   | 10                                                 |   |   |                    |   |   |                            |   | (26      | )                                          |   |   | (123                    | )      |   |   | 23 |   |   |   |   |   |   |   | (100 | ) |
| Intangibles, deferred expenses and carry forward losses |   |                  | 15     |   |                            |   | (2     | )                                     |   |   |                    |   |   |                      | 13     |   |                            |     |   13 |                                       |   |   | 15                                                 |   |   |                    |   |   |                            |   |   7 |                                       |   |   | 48                      |   |   |   | (1 | ) |   |   |   |   |   |   | 47 |   |
| Options granted to employees                            |   |                  | 4      |   |                            |   | (2     | )                                     |   |   |                    |   |   |                      | 2      |   |                            |     |      |                                       |   |   | (1                                                 | )      |   |                    |   |   |                            |   | *        |                                       |   |   | 1                       |   |   |   | (1 | ) |   |   |   |   |   |   | * |   |
| Financial instruments                                   |   |                  | 4      |   |                            |   | (4     | )                                     |   |   |                    |   |   |                      | *      |   |                            |     |      |                                       |   |   | *                                                  |   |   |                    |   |   |                            |   | *        |                                       |   |   | *                       |   |   |   | * |   |   |   |   |   |   |   | - |   |
| Other                                                   |   |                  | 5      |   |                            |   | 6      |                                  |   |   |                    |   |   |                      | 11     |   |                            |     | (1        | )                                          |   |   |                                               |   |   |                    |   |   |                            |   | (1       | )                                          |   |   | 9                       |   |   |   | * |   |   |   |   |   |   |   | 9 |   |
| Total                                                   |   |                  | 14     |   |                            |   | (18    | )                                     |   |   | 2                       |   |   |                      | (2     | )      |                            |     | 12        |                                       |   |   | 10                                                 |   |   |                    | 5      |   |                            |   | (12      | )                                          |   |   | 13                      |   |   |   | 10 |   |   |   | 4 |   |   |   | 27 |   |

----

|                                                               |   | New Israeli Shekels |   |
|--------------------------------------------------------------------|--------|---------------------|--------|
|                                                               |   | December 31,        |   |
|                                                               |   | 2010                |   |   | 2011 |   |   | 2012 |   |
|                                                               |   | In millions         |   |
| Deferred tax assets                                                |   |                |   |   |   |   |   |   |   |
| Deferred tax assets to be recovered after more than 12 months      |   |                | 59     |   |   |   | 104 |   |   |   | 90 |   |
| Deferred tax assets to be recovered within 12 months               |   |                | 44     |   |   |   | 43 |   |   |   | 38 |   |
|                                                               |   |                | 103    |   |   |   | 147 |   |   |   | 128 |   |
| Deferred tax liabilities                                           |   |                |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |                |   |   |   |   |   |   |   |   |   |   |
| Deferred tax liabilities to be recovered after more than 12 months |   |                | 105    |   |   |   | 115 |   |   |   | 86 |   |
| Deferred tax liabilities to be recovered within 12 months          |   |                | *      |   |   |   | 19 |   |   |   | 15 |   |
|                                                               |   |                | 105    |   |   |   | 134 |   |   |   | 101 |   |
| Deferred tax assets (liability), net                               |   |                | (2     | ) |   |   | 13 |   |   |   | 27 |   |

| *    | Representing an amount of less than NIS 1 million. |
|---------------------|----------------------------------------------------|

|   | e. | Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel (see b above), and the actual tax expense: |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                |   | New Israeli Shekels    |   |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                |   | Year ended December 31 |   |
|                                                                                                                |   | 2010                   |   |   | 2011 |   |   | 2012 |   |
|                                                                                                                |   | In millions            |   |
| Profit before taxes on income,                                                                                      |   |                   |   |   |   |   |   |   |   |
| as reported in the income statements                                                                                |   |                   | 1,679  |   |   |   | 742 |   |   |   | 631 |   |
| Theoretical tax expense                                                                                             |   |                   | 420    |   |   |   | 178 |   |   |   | 158 |   |
| Increase in tax resulting from disallowable deductions                                                              |   |                   |   |   |   |   |   |   |   |   | 5 |   |
|      for the current year mainly relating to impairment charges                            |   |                   | 8      |   |   |   | 18 |   |   |   |   |   |
| Decrease (increase) in tax resulting from deferred taxes     calculated based on different tax rates |   |                   | (3     | ) |   |   | 7 |   |   |   |   |   |
| Income not subject to tax                                                                                           |   |                   |   |   |   |   |   |   |   |   | (1 | ) |
| Temporary differences and tax losses for which no                                                                   |   |                   |   |   |   |   |   |   |   |   |   |   |
|      deferred income tax asset was recognized                                              |   |                   |   |   |   |   | 63 |   |   |   | (2 | ) |
| Utilization of previously unrecognized tax losses and                                                               |   |                   |   |   |   |   |   |   |   |   |   |   |
| other temporary differences                                                                                         |   |                   |   |   |   |   |   |   |   |   | (11 | ) |
| Taxes on income in respect of previous years                                                                        |   |                   | 5      |   |   |   | 14 |   |   |   | 2 |   |
| Expenses deductible according to different tax rates                                                                |   |                   | 1      |   |   |   | * |   |   |   |   |   |
| Change in corporate tax rate, see b above                                                                           |   |                   |   |   |   |   | 12 |   |   |   |   |   |
| Other                                                                                                               |   |                   | 5      |   |   |   | 7 |   |   |   | 2 |   |
| Income tax expenses                                                                                                 |   |                   | 436    |   |   |   | 299 |   |   |   | 153 |   |

|  *    |  Representing an amount of less than NIS 1 million. |
|---------------------------|----------------------------------------------------------|

----

| PARTNER COMMUNICATIONS COMPANY LTD. |
|-------------------------------------|

|   | f. | Taxes on income included in the income statements: |
|--------|----|----------------------------------------------------|

|   | 1) | As follows: |
|--------|----|-------------|

|                                                     |   | New Israeli Shekels    |   |
|----------------------------------------------------------|--------|------------------------|--------|
|                                                     |   | Year ended December 31 |   |
|                                                     |   | 2010                   |   |   | 2011 |   |   | 2012 |   |
|                                                     |   | In millions            |   |
| For the reported year:                                   |   |                   |   |   |   |   |   |   |   |
| Current                                                  |   |                   | 413    |   |   |   | 288 |   |   |   | 161 |   |
| Deferred, see d above                                    |   |                   | 14     |   |   |   | (15 | ) |   |   | (10 | ) |
| Effect of change in corporate tax rate on deferred taxes |   |                   |   |   |   |   | 12 |   |   |   |   |   |
| In respect of previous year:                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Current                                                  |   |                   | 5      |   |   |   | 9 |   |   |   | 2 |   |
| Deferred, see d above                                    |   |                   | 4      |   |   |   | 5 |   |   |   |   |   |
|                                                     |   |                   | 436    |   |   |   | 299 |   |   |   | 153 |   |

|   | g. | Tax assessments: |
|--------|----|------------------|

|   | 1) | The Company has received final corporate tax assessments through the year ended December 31, 2008. |
|--------|----|----------------------------------------------------------------------------------------------------|

|   | 2) | As general rule, tax self-assessments filed by a subsidiary through the year ended December 31, 2008, and another subsidiary through the year ended December 31, 2007 are, by law, now regarded as final. However, the manager of the tax authority may direct that the abovementioned last tax self-assessment will not be regarded as final until December 31, 2013. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3) | All income before taxes and income tax expenses for all of the reporting periods are local in Israel.  |
|--------|----|-------------------------------------------------------------------------------------------------------------|

----

|   | a. |  Transactions with Scailex group |
|--------|----|---------------------------------------|

|   | On May 5, 2011, the shareholders of the Company approved and ratified an amendment to the Samsung Products Agreement according to which: (a) the total volume of the annual procurement from Scailex shall not exceed NIS 550 million and will not exceed 40% of the total cost of the products purchased by the Company in a calendar year (b) if an auditor agreed upon by both parties should confirm that the annual gross profit margin of any group of products exceeds Scailex’s average gross profit margin, from the same group of products with any entity in which Scailex is not an interested party therein, Scailex shall credit the difference to the Company; and (c) The term of the Samsung Products Agreement is for a period of two years instead of three years, commencing on January 1, 2011. On January 23, 2013, the Board of Directors approved an extension of the Samsung Products Agreement for an additional period of two years, commencing on January 1, 2013, under the same terms and conditions, including that the total volume of the annual procurement from Scailex shall remain unchanged. The resolution is subject to the approval of the shareholders. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                           |   | New Israeli Shekels          |   |
|----------------------------------------------------------------|--------|------------------------------|--------|
|                                                           |   | Year ended December 31, 2010 |   |   | Year ended December 31, 2011 |   |   | Year ended December 31, 2012 |   |
| Transactions with Scailex group                                |   | In millions                  |   |
| Service revenues                                               |   |                         | 1.5    |   |   |   | 0.8 |   |   |   | 0.6 |   |
| Acquisition of handsets                                        |   |                         | 143    |   |   |   | 478 |   |   |   | 288 |   |
| Selling commissions, maintenance and other expenses (revenues) |   |                         | 3.8    |   |   |   | (4 | ) |   |   | (10 | ) |

|                                                  |   | New Israeli Shekels |   |
|-------------------------------------------------------|--------|---------------------|--------|
|                                                  |   | December 31,        |   |
|                                                  |   | 2011                |   |   | 2012 |   |
| Statement of financial position items - Scailex group |   | In millions         |   |
| Current liabilities: Scailex group                    |   |                | 142    |   |   |   | 70 |   |

----

|   b.     | Key management compensation |
|-----------------------------------|-----------------------------|

|                                           |   | New Israeli Shekels    |     |
|------------------------------------------------|--------|------------------------|----------|
|                                           |   | Year ended December 31 |     |
|                                           |   | 2010                   |     |   | 2011 |   |   | 2012 |   |
| Key management compensation expenses comprised |   | In millions            |     |
| Salaries and short-term employee benefits      |   |                   |  31 |   |   |   | 18 |   |   |   | 21 |   |
| Long term employment benefits                  |   |                   | 37       |   |   |   | 13 |   |   |   | 6 |   |
| Employee share-based compensation expenses     |   |                   | 16       |   |   |   | 12 |   |   |   | 7 |   |
|                                           |   |                   | 84       |   |   |   | 43 |   |   |   | 34 |   |

|                                                        |   | New Israeli Shekels |   |
|-------------------------------------------------------------|--------|---------------------|--------|
|                                                        |   | December 31,        |   |
|                                                        |   | 2011                |   |   | 2012 |   |
| Statement of financial position items - key management |   | In millions         |   |
| Current liabilities:                                        |   |                | 5      |   |   |   | - |   |
| Non-current liabilities:                                    |   |                | 13     |   |   |   | 13 |   |

|   | c. | In the ordinary course of business, key management or their relatives may have engaged with the Company with immaterial transactions that are under normal market conditions. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d. | Principal shareholder: On January 29, 2013, S.B. Israel Telecom Ltd. completed the acquisition of 48,050,000 ordinary shares of the Company and became the Company's principal shareholder. See also note 1(a) |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e. | In order to encourage the Company’s executive officers to remain with the Company following the acquisition by S.B. Israel Telecom of 30.87% of our issued and outstanding shares, principally from Scailex, the Company’s Board of Directors, upon the recommendation and approval of its compensation committee, adopted a two-year retention plan on December 17, 2012 that became effective upon change of control on January 29, 2013. According to the terms of the plan, retention payments will be made to each of the Company’s eligible executive officers at the first and second anniversaries of the date of adoption of the retention plan, provided the executive officer has not resigned for reasons other than for certain justified reasons, as specified in the retention plan or in case of termination by the Company. The amounts of the first and second potential retention payments are the same, and the maximum aggregate amount of all retention payments together is NIS 6.7 million.  On May 22, 2012, the Company's Board of Directors, upon the recommendation and approval of its compensation committee, adopted a retention plan for the CEO according to which the CEO will receive an amount of NIS 1.8 million, provided that the CEO does not resign during the first year of the change of control or his employment is terminated by the Company under circumstances other than those that would deny his lawful right to severance payments and advanced notice. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                      |   |                   |    |   |   |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|---------|--------|--------|--------|
|                                                                                      |   | New Israeli Shekels    |    |
|                                                                                      |   | Year ended December 31 |    |
|                                                                                      |   | 2010                   |    |   | 2011   |   |   | 2012 |   |
| Profit used for the computation of                                                   |   |                   |    |   |   |   |   |   |   |
| basic and diluted EPS:                                                                    |   |                   |    |   |   |   |   |   |   |
| Profit (in millions)                                                                      |   |                   | 1,243   |   |   |   | 443 |   |   |   | 478 |   |
| Weighted average number of shares used                                               |   |                   |    |   |   |   |   |   |   |   |   |   |
| in computation of basic EPS (in thousands)                                           |   |                   | 154,866 |   |   |   | 155,542 |   |   |   | 155,646 |   |
| Add - net additional shares from assumed                                             |   |                   |    |   |   |   |   |   |   |   |   |   |
| exercise of employee stock options (in      thousands) |   |                   | 1,430   |   |   |   | 237 |   |   |   | 127 |   |
| Weighted average number of shares used in                                            |   |                   |    |   |   |   |   |   |   |   |   |   |
| computation of diluted EPS (in thousands)                                                 |   |                   | 156,296 |   |   |   | 155,779 |   |   |   | 155,773 |   |

----

----