----

----

----

----

| 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 For the fiscal year ended December 31, 2013 |
|---|---------------------------------------------------------------------------------------------------------------------------------------|

| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------|

| o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report ___________Commission file number 1-14968 |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 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                                                         | 31  |
| ITEM 4A. UNRESOLVED STAFF COMMENTS                                                         | 72  |
| ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                       | 73  |
| ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                         | 102 |
| ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                  | 122 |
| ITEM 8. FINANCIAL INFORMATION                                                              | 128 |
| ITEM 9. THE OFFER AND LISTING                                                              | 133 |
| ITEM 10. ADDITIONAL INFORMATION                                                            | 134 |
| 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                                   | 149 |
| ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 149 |
| ITEM 15. CONTROLS AND PROCEDURES                                                           | 150 |
| ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                                 | 151 |
| ITEM 16B. CODE OF ETHICS                                                                   | 151 |
| ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                           | 151 |
| ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                       | 152 |
| ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS           | 152 |
| ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACOUNTANT                                | 152 |
| ITEM 16G. CORPORATE GOVERNANCE                                                             | 152 |
| ITEM 17. FINANCIAL STATEMENTS                                                              | 152 |
| ITEM 18. FINANCIAL STATEMENTS                                                              | 152 |
| ITEM 19. EXHIBITS                                                                          | 152 |

----

----

ITEM 1.                      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

ITEM 2.                      OFFER STATISTICS AND EXPECTED TIMETABLE

ITEM 3.                      KEY INFORMATION

|                                                                                      |   | Year ended December 31,                                |    |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                                                      |   | 2009                                                   |    |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2013 |   |   | 2013 |   |
|                                                                                      |   | New Israeli Shekels in millions(except per share data) |    |   | US$ in millions (1) |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated Statement of Income Data                                                     |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                  |   |                                                   | 6,079   |   |   |   | 6,674 |   |   |   | 6,998 |   |   |   | 5,572 |   |   |   | 4,519 |   |   |   | 1,302 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                                                          |   |                                                   | 3,770   |   |   |   | 4,093 |   |   |   | 4,978 |   |   |   | 4,031 |   |   |   | 3,510 |   |   |   | 1,011 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                                              |   |                                                   | 2,309   |   |   |   | 2,581 |   |   |   | 2,020 |   |   |   | 1,541 |   |   |   | 1,009 |   |   |   | 291 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing expenses                                                            |   |                                                   | 387     |   |   |   | 479 |   |   |   | 711 |   |   |   | 551 |   |   |   | 462 |   |   |   | 133 |   |
| General and administrative expenses                                                       |   |                                                   | 290     |   |   |   | 306 |   |   |   | 291 |   |   |   | 236 |   |   |   | 217 |   |   |   | 63 |   |
| Impairment of goodwill                                                                    |   |                                                   |    |   |   |   |   |   |   |   | 87 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income, net                                                                         |   |                                                   | 69      |   |   |   | 64 |   |   |   | 105 |   |   |   | 111 |   |   |   | 79 |   |   |   | 23 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating profit                                                                          |   |                                                   | 1,701   |   |   |   | 1,860 |   |   |   | 1,036 |   |   |   | 865 |   |   |   | 409 |   |   |   | 118 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Finance income                                                                            |   |                                                   | 22      |   |   |   | 22 |   |   |   | 33 |   |   |   | 21 |   |   |   | 29 |   |   |   | 8 |   |
| Finance expenses                                                                          |   |                                                   | 198     |   |   |   | 203 |   |   |   | 327 |   |   |   | 255 |   |   |   | 240 |   |   |   | 69 |   |
| Finance costs, net                                                                        |   |                                                   | 176     |   |   |   | 181 |   |   |   | 294 |   |   |   | 234 |   |   |   | 211 |   |   |   | 61 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit before income tax                                                                  |   |                                                   | 1,525   |   |   |   | 1,679 |   |   |   | 742 |   |   |   | 631 |   |   |   | 198 |   |   |   | 57 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expenses                                                                       |   |                                                   | 384     |   |   |   | 436 |   |   |   | 299 |   |   |   | 153 |   |   |   | 63 |   |   |   | 18 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit for the year                                                                       |   |                                                   | 1,141   |   |   |   | 1,243 |   |   |   | 443 |   |   |   | 478 |   |   |   | 135 |   |   |   | 39 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per ordinary share and per ADS                                                   |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                                                    |   |                                                   | 7.42    |   |   |   | 8.03 |   |   |   | 2.85 |   |   |   | 3.07 |   |   |   | 0.87 |   |   |   | 0.25 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                                                                                   |   |                                                   | 7.37    |   |   |   | 7.95 |   |   |   | 2.84 |   |   |   | 3.07 |   |   |   | 0.86 |   |   |   | 0.25 |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares     outstanding (in thousands) |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                                                    |   |                                                   | 153,809 |   |   |   | 154,866 |   |   |   | 155,542 |   |   |   | 155,646 |   |   |   | 155,687 |   |   |   | 155,687 |   |
| Diluted:                                                                                  |   |                                                   | 154,817 |   |   |   | 156,296 |   |   |   | 155,779 |   |   |   | 155,773 |   |   |   | 156,199 |   |   |   | 156,199 |   |

----

|                                                                          |   | Year ended December 31,                                |    |
|-------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                                          |   | 2009                                                   |    |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2013 |   |   | 2013 |   |
|                                                                          |   | New Israeli Shekels in millions(except per share data) |    |   | US$ in millions (1) |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Financial Data                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures (2)                                                      |   |                                                   | 522     |   |   |   | 435 |   |   |   | 468 |   |   |   | 558 |   |   |   | 413 |   |   |   | 119 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (3)                                                           |   |                                                   | 2,304   |   |   |   | 2,570 |   |   |   | 2,178 |   |   |   | 1,602 |   |   |   | 1,114 |   |   |   | 321 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividend per share (4)                                                        |   |                                                   | 6.86    |   |   |   | 7.85 |   |   |   | 2.25 |   |   |   | 1.03 |   |   |   | — |   |   |   | — |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital reduction                                                             |   |                                                   | — |   |   |   | 9.04 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Statement of Cash Flow Data                                                   |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                     |   |                                                   | 1,753   |   |   |   | 1,958 |   |   |   | 1,570 |   |   |   | 1,705 |   |   |   | 1,539 |   |   |   | 443 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in investing activities                                         |   |                                                   | (732    | ) |   |   | (486 | ) |   |   | (1,085 | ) |   |   | (471 | ) |   |   | (498 | ) |   |   | (143 | ) |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in financing activities                                         |   |                                                   | (876    | ) |   |   | (1,480 | ) |   |   | (274 | ) |   |   | (1,218 | ) |   |   | (1,108 | ) |   |   | (319 | ) |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet Data (at year end)                                              |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                                                                |   |                                                   | 1,807   |   |   |   | 1,830 |   |   |   | 2,308 |   |   |   | 2,120 |   |   |   | 1,703 |   |   |   | 490 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non current assets                                                            |   |                                                   | 3,816   |   |   |   | 3,797 |   |   |   | 4,779 |   |   |   | 4,297 |   |   |   | 3,784 |   |   |   | 1,090 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Advance payment in respect of the     acquisition of 012 smile |   |                                                   | — |   |   |   | 30 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property and equipment                                                        |   |                                                   | 2,064   |   |   |   | 2,058 |   |   |   | 2,051 |   |   |   | 1,990 |   |   |   | 1,791 |   |   |   | 516 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| License and other intangible assets                                           |   |                                                   | 1,260   |   |   |   | 1,077 |   |   |   | 1,290 |   |   |   | 1,217 |   |   |   | 1,167 |   |   |   | 336 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                                                      |   |                                                   | — |   |   |   | — |   |   |   | 407 |   |   |   | 407 |   |   |   | 407 |   |   |   | 117 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred income tax asset                                                     |   |                                                   | 14      |   |   |   | — |   |   |   | 30 |   |   |   | 36 |   |   |   | 12 |   |   |   | 4 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                                  |   |                                                   | 5,623   |   |   |   | 5,627 |   |   |   | 7,087 |   |   |   | 6,417 |   |   |   | 5,487 |   |   |   | 1,580 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities (5)                                                       |   |                                                   | 1,915   |   |   |   | 1,826 |   |   |   | 1,889 |   |   |   | 1,525 |   |   |   | 1,374 |   |   |   | 395 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term liabilities (5)                                                     |   |                                                   | 1,746   |   |   |   | 3,175 |   |   |   | 4,773 |   |   |   | 4,151 |   |   |   | 3,239 |   |   |   | 933 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                                                             |   |                                                   | 3,661   |   |   |   | 5,001 |   |   |   | 6,662 |   |   |   | 5,676 |   |   |   | 4,613 |   |   |   | 1,328 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                                                    |   |                                                   | 1,962   |   |   |   | 626 |   |   |   | 425 |   |   |   | 741 |   |   |   | 874 |   |   |   | 252 |   |
|                                                                          |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity                              |   |                                                   | 5,623   |   |   |   | 5,627 |   |   |   | 7,087 |   |   |   | 6,417 |   |   |   | 5,487 |   |   |   | 1,580 |   |

| (1)    | The translations of NIS amounts into US dollars appearing throughout this annual report have been made at the exchange rate on December 31, 2013, of NIS 3.471 = 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 Expenditures represent 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 for 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; it 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. For the year ended December 31, 2013, no dividend has been declared by the Company. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (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,         |   |
|-----------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                        |   | 2009                            |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2013 |   |   |   |   |
|                                                                        |   | New Israeli Shekels in millions |   |   | US $ in millions (1) |   |
|                                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation Between Operating Cash flow and Adjusted EBITDA              |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                   |   |                            | 1,753  |   |   |   | 1,958 |   |   |   | 1,570 |   |   |   | 1,705 |   |   |   | 1,539 |   |   |   | 443 |   |
| Liability for employee rights upon retirement                               |   |                            | (1     | ) |   |   | (8 | ) |   |   | 26 |   |   |   | 12 |   |   |   | 14 |   |   |   | 4 |   |
| Accrued interest, exchange and linkage differences on long-term liabilities |   |                            | (167   | ) |   |   | (160 | ) |   |   | (289 | ) |   |   | (222 | ) |   |   | (213 | ) |   |   | (62 | ) |
| Increase (Decrease) in accounts receivable and assets:                      |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                                       |   |                            | 229    |   |   |   | 214 |   |   |   | 190 |   |   |   | (467 | ) |   |   | (566 | ) |   |   | (163 | ) |
| Other (*)                                                                   |   |                            | 16     |   |   |   | 34 |   |   |   | 2 |   |   |   | 16 |   |   |   | 2 |   |   |   | 1 |   |
| Inventories                                                                 |   |                            | 33     |   |   |   | (57 | ) |   |   | 58 |   |   |   | (65 | ) |   |   | (5 | ) |   |   | (1 | ) |
|                                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (Increase) in accounts payable and accruals:                       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                                       |   |                            | (43    | ) |   |   | 40 |   |   |   | 37 |   |   |   | 106 |   |   |   | 114 |   |   |   | 33 |   |
| Parent group-trade                                                          |   |                            | 17     |   |   |   | (38 | ) |   |   | (70 | ) |   |   | 72 |   |   |   |   |   |   |   |   |   |
| Other (*)                                                                   |   |                            | (43    | ) |   |   | (15 | ) |   |   | 54 |   |   |   | 65 |   |   |   | 17 |   |   |   | 5 |   |
| Decrease (Increase) in asset retirement obligation                          |   |                            | 1      |   |   |   | (1 | ) |   |   | (1 | ) |   |   | (1 | ) |   |   | (1 | ) |   |   | *** |   |
| Income tax paid                                                             |   |                            | 339    |   |   |   | 426 |   |   |   | 311 |   |   |   | 153 |   |   |   | 9 |   |   |   | 3 |   |
| Finance costs, net (**)                                                     |   |                            | 170    |   |   |   | 177 |   |   |   | 290 |   |   |   | 228 |   |   |   | 204 |   |   |   | 58 |   |
|                                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (2)                                                         |   |                            | 2,304  |   |   |   | 2,570 |   |   |   | 2,178 |   |   |   | 1,602 |   |   |   | 1,114 |   |   |   | 321 |   |

| (1)    | The translations of NIS amounts into US dollars appearing throughout this annual report have been made at the exchange rate on December 31, 2013, of NIS 3.471 = 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 for 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; it is fully comparable to EBITDA information which has been previously provided for prior periods. |   |

| (*)  | Excluding provision for tax expenses. |
|-----------|---------------------------------------|

| (**)  | Finance costs, net excluding any charge for the amortization of borrowing costs that were capitalized before the launch of the cellular network. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

| (***)  | Representing an amount less than 1 million. |
|-------------|---------------------------------------------|

----

|                                                               |   | At December 31, |   |
|--------------------------------------------------------------------|--------|-----------------|--------|
|                                                               |   | 2011            |   |   | 2012 |   |   | 2013 |   |
|                                                               |   |            |   |   |   |   |   |   |   |
| Cellular Industry Data                                             |   |            |   |   |   |   |   |   |   |
|                                                               |   |            |   |   |   |   |   |   |   |
| Estimated population of Israel (in millions) (1)                   |   |            | 7.8    |   |   |   | 8.0 |   |   |   | 8.1 |   |
| Estimated Israeli cellular telephone subscribers (in millions) (2) |   |            | 10.0   |   |   |   | 10.2 |   |   |   | 10.1 |   |
| Estimated Israeli cellular telephone penetration (3)               |   |            | 128    | % |   |   | 125 | % |   |   | 125 | % |

|                                                                                             |   | Year ended December 31, |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                             |   | 2009                    |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2013 |   |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partner Data                                                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cellular subscribers (000’s) (at period end) (4)                                           |   |                    | 3,042  |   |   |   | 3,160 |   |   |   | 3,176 |   |   |   | 2,976 |   |   |   | 2,956 |   |
| Pre-paid cellular subscribers (000’s) (at period end) (4)                                  |   |                    | 811    |   |   |   | 870 |   |   |   | 894 |   |   |   | 874 |   |   |   | 823 |   |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Post-paid cellular subscribers (000’s) (at period end) (4)                                 |   |                    | 2,231  |   |   |   | 2,290 |   |   |   | 2,282 |   |   |   | 2,102 |   |   |   | 2,133 |   |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share of total Israeli cellular subscribers (at period end) (5)                                  |   |                    | 32     | % |   |   | 32 | % |   |   | 32 | % |   |   | 29 | % |   |   | 29 | % |
| Average monthly usage per cellular subscriber (“MOU”) (mins.) (6)                    |   |                    | 364    |   |   |   | 366 |   |   |   | 397 |   |   |   | 450 |   |   |   | 522 |   |
| Average monthly revenue per cellular subscriber including roaming (“ARPU”) (NIS) (7) |   |                    | 151    |   |   |   | 148 |   |   |   | 111 |   |   |   | 97 |   |   |   | 83 |   |
| Churn rate for cellular subscribers (8)                                                          |   |                    | 18     | % |   |   | 21 | % |   |   | 29 | % |   |   | 38 | % |   |   | 39 | % |
| Number of fixed-lines (000’s) (9,10) (at period end)                                       |   |                    |   |   |   |   | 69 |   |   |   | 292 |   |   |   | 288 |   |   |   | 299 |   |
| ISP subscribers (000’s)(10) (at period end)                                                |   |                    |   |   |   |   | 60 |   |   |   | 632 |   |   |   | 587 |   |   |   | 583 |   |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Estimated cellular coverage of Israeli population (at period end) (11)                           |   |                    | 98     | % |   |   | 99 | % |   |   | 99 | % |   |   | 99 | % |   |   | 99 | % |
|                                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of employees (full time equivalent) (at period end) (12)                                  |   |                    | 5,670  |   |   |   | 6,068 |   |   |   | 7,891 |   |   |   | 5,396 |   |   |   | 4,045 |   |

| (1)    | The population estimates are as published by the Central Bureau of Statistics in Israel as of December 31, 2013.                                                                                                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                  |
| (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. |

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| (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. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (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. MOU data includes total incoming minutes to subscribers of those MVNO operators which Partner hosts on its network.  In view of the continued increase in the proportion of cellular subscribers with bundled packages that include large or unlimited quantities of minutes, the Company believes that reporting MOU is no longer beneficial to understanding the results of operation, and therefore the Company will not be reporting MOU figures in the future.                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (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)   | Due to market developments in 2013, and in particular the increasing prevalence of bundled offerings in the market, we believe that the numbers of fixed-line and ISP subscribers no longer provide any meaningful insight in the results of operation, and we therefore will not be reporting them in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (11)   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (12)   | 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, |   |
|---------------|--------|-------------------------|--------|
|          |   | 2009                    |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2013 |   |
|          |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average (1)   |   |                    | 3.927  |   |   |   | 3.732 |   |   |   | 3.579 |   |   |   | 3.844 |   |   |   | 3.609 |   |
| High          |   |                    | 4.256  |   |   |   | 3.894 |   |   |   | 3.821 |   |   |   | 4.084 |   |   |   | 3.791 |   |
| Low           |   |                    | 3.690  |   |   |   | 3.549 |   |   |   | 3.363 |   |   |   | 3.700 |   |   |   | 3.471 |   |
| End of period |   |                    | 3.775  |   |   |   | 3.549 |   |   |   | 3.821 |   |   |   | 3.733 |   |   |   | 3.471 |   |

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

|                                                                                                                   |   | September2013 |   |   | October2013 |   |   | November2013 |   |   | December2013 |   |   | January2014 |   |   | February2014 |   | March 2014(throughMarch 6) |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------|--------|--------|-------------|--------|--------|--------------|--------|--------|--------------|--------|--------|-------------|--------|--------|--------------|--------|----------------------------|--------|
|                                                                                                                   |   |          |   |   |        |   |   |         |   |   |         |   |   |        |   |   |         |   |                       |   |   |
| High                    |   |          | 3.632  |   |        |   | 3.567  |         |   |   | 3.569        |   |   |        | 3.53   |   |         |   | 3.507                      |   |   |   | 3.496 |   |   | 3.492 |   |
| Low                     |   |          | 3.504  |   |        |   | 3.518  |         |   |   | 3.519        |   |   |        | 3.471  |   |         |   | 3.483                      |   |   |   | 3.549 |   |   | 3.475 |   |

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|   | · | Granting licenses and frequencies to two facility-based competitors (HOT Mobile Ltd. ("HOT Mobile") and Golan Telecom).  In April 2011, UMTS frequencies were awarded to Mirs Communications Ltd ("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 fees 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 two  competitors, have launched aggressive tariff plans which include unlimited use packages; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Facilitating entry of MVNOs into the market.  Since 2010, the Ministry of Communications has adopted regulations to enable Mobile Virtual Network Operators (“MVNOs”) to offer telecommunications services, and it has granted licenses to 11 MVNOs, 5 of which had entered the market as of December 31, 2013; and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Facilitating migration of customers between cellular companies.  On January 1, 2013, an amendment to the Communications Law (Telecommunications and Broadcasting), 1982 (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 tariffs and margin protection. For us to compete effectively in the fixed-line market, the regulated wholesale tariffs would need to be set by the Ministry of Communications at a level which allows us to earn a reasonable profit from our business. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Technical and Operational implementation. For New Entrants to offer services of adequate quality and respond in a competitive manner to retail market demand in the fixed-line market, the Ministry of Communications must ensure that the relevant wholesale services provided by Bezeq and HOT Telecom are of sufficient technical and operational standards. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Proposed premium services regulation. In July 2013, the Ministry of Communications published a hearing that is intended to regulate how premium services are provided.  All premium services will be provided through only three local prefixes, two of which shall be blocked as a default. The Ministry of Communications would ban the current practice according to which some premium calls are routed abroad and charged accordingly. The revenues of the Company may be adversely affected by the results of this hearing. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Unified license hearing. In August 2013, the Ministry of Communications published a hearing regarding the obligation of all existing telecommunications licensees except Bezeq and HOT Telecom to be regulated by a unified general license. The Ministry proposed that existing licensees be required to conform to the unified license which would cover international Long Distance ("ILD") services, special fixed-line services, ISP and network termination point ("NTP") services. Existing licensees would have to conform to the terms of the unified license within a set period of time to be determined and afterwards to merge all relevant activities into a single corporate entity. Since the provisions of the draft unified license vary from those of the relevant existing licenses (and in many cases are more stringent), such an obligation may impose additional constraints on the Company’s business and operations in the relevant segments, have accounting implications and have an adverse effect on our financial results.  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Proposed new regulations for the ILD market. In October 2013, the Ministry of Communications published a hearing regarding proposed new regulations for the ILD market. The Ministry proposed allowing all general telecommunications licensees (including MVNOs) to provide international call services to international destinations included in their subscribers’ tariff plans as well as to international destinations for which the tariff is lower or equal to the tariff for a domestic call on the licensee's network. The Ministry of Communications also proposed that general licensees would no longer be allowed to charge interconnect fees for outgoing international calls. The revenues of the Company would be adversely affected if these proposed new regulations are adopted. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Requiring the maintenance of network neutrality. A new draft bill is aimed at requiring ISP and fixed-line broadband providers to maintain "network neutrality". This bill may significantly limit our ability to manage traffic on our fixed line and ISP services and as a result would increase our expenses and reduce our profits. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Potential increased costs for our fixed-line services. The Ministry of Communications is considering providing new company protections for Tamares Telecom Ltd. (“Tamares”), a company which laid an underwater cable in early 2012. Such protections are intended to support Tamares’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. Such measures may oblige us to purchase international fixed-line service capacity at higher prices than we currently pay. 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 international fixed-line telecommunications market may be reduced. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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.  If we were required to ensure compliance with such laws and regulations, we would incur increased operating costs and face additional legal risks, which could negatively impact our results of operations. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | increasing the likelihood of a downgrade in the rating of our Notes by the rating company; |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | increasing our vulnerability to adverse economic, industry or business conditions or increases in the consumer price index (“CPI”), particularly because a 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 in the economy generally; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

|   | · | requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, thereby reducing the funds available for financing ongoing operating expenses and future business development; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | increasing the risk of a substantial impairment in the value of our telecommunications assets; and |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | · | limiting our ability to obtain the additional financing we may need to operate, develop and expand our business on acceptable terms or at all. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | either of the parties to the agreement experiences credit or payment difficulties and cannot contribute effectively to the financing of the joint venture; |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | the elimination of network sites results in lower operational savings than expected; |
|--------|---|--------------------------------------------------------------------------------------|

|   | - | Israeli authorities do not approve the network sharing agreement or require changes which would render the agreement unattractive from the Company’s perspective or would negatively affect the commercial interest of the agreement; |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | the joint venture experiences management deadlock; or |
|--------|---|-------------------------------------------------------|

|   | - | the parties' existing agreements with other Israeli telecommunications companies limit the parties' ability to realize their objectives. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------|

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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 been deployed to support up to 21 Mbps on the downlink and 5.76 Mbps on the uplink.                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · | 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 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. |

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| · | 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 ILD, 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. |
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| · | 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”.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
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| · | On November 8, 2013, we entered into a 15-year network sharing agreement with HOT Mobile pursuant to which, subject to the approval by the Israeli authorities, the parties would create a 50-50 joint venture, which would operate and develop a cellular network to be shared by both companies (inter alia, as a result of pooling both companies' radio access network infrastructures to create a single radio access network).  See "Item ‎4B.9 Our Network"                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

|   | -      | 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, (including WIFI only tablets) laptops, datacards, modems including built-in modems in laptops and related equipment and accessories. On December 31, 2013, we had approximately 2,956 thousand cellular subscribers, representing an estimated 29% of total Israeli cellular telephone subscribers at that date. As of that date, approximately 72% of our subscriber base (approximately 2,133,000 subscribers) was represented by subscribers who subscribe to post-paid tariff plans and 28% (approximately 823,000 subscribers) by subscribers who subscribe to pre-paid tariff plans.  (For a definition of “subscriber”, see “Item ‎‎3A Selected Financial Data”); and |
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|   | -      | the fixed-line business segment, which includes a number of services provided over fixed-line networks including (1) ISP services that provides access to the internet  as well as home WiFi networks, including VAS such as anti-virus and anti-spam filtering; and fixed-line voice communication services provided through VOB; (2) Transmission services and PRI; and (3) ILD services,  outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. In addition, this segment includes sales of related equipment such as domestic routers, smartboxes and related equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

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| · | 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.                                                                                                                                                                                                                                                                                                                                                   |
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | 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 any contract periods, are prohibited from selling locked handsets and are not allowed to charge exit fees or link the sale of handsets to services.  In addition, there is full number portability.                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | 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, 2013, of 125%, representing approximately 10.1 million subscribers out of an estimated population of approximately 8.1 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 Additional Operators. The regulatory changes in the telecommunications industry, particularly with respect to additional entrants that include 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. Our high quality network enables our customers to benefit from advanced and high quality services. 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.  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. Upon the establishment of a wholesale market in the fixed-line telecommunications market, we will strive to compete in the infrastructure market so that we may be able to provide our customers with a comprehensive package of services including television services. |
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|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | · | Drive Customer Satisfaction through Customer Centric Strategy. We have always believed that customer satisfaction is a key concern. We place a priority on and wish to lead the market in striving for excellence in the customer experience. We do so by differentiating ourselves from our competitors through continuous examination of our customers' needs, requirements and experience so that we may offer tailored packages to the various sectors. We provide our customers with a high level of accessible customer service at our service centers, call centers and digital services.  In order to further provide high quality services to our customers and meet their needs, we have established a retail division that focuses on all of the retail interfaces with the customers. Internally, we seek to improve and align all company business model elements to deliver consistent satisfaction at each step of the customer’s experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | · | 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 LTE, while ensuring smooth migration from existing networks to next generation networks. We are at an advanced stage of LTE deployment. Following the network sharing agreement with HOT Mobile, we expect to improve the coverage and quality and to accelerate the development of our cellular network infrastructure, while reducing operating costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | · | Improve Efficiency. We place a premium on improving operational efficiency, adjusting costs and workforce to a level appropriate for evolving market conditions. The intense competition in the Israeli telecom market requires us to further reduce costs to align them with reduced revenues. The network sharing agreement with HOT Mobile marks an additional step in the adjustment of Partner's operational structure to the changing market conditions, while continuing to allocate resources to improve the advanced services that the Company provides its customers. In order to increase efficiency, we are reorganizing and consolidating Company real estate including by adjusting the size of some of our service centers and their deployment in a manner that will enable us to provide our customers with a full range of services in accessible locations. See "Item ‎4B.9 Our Network".                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

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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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|   | · | Company Culture. We believe that our employees are the Company's main and most significant asset and that each individual should be a key advocate of the Company's services and products. The successful execution of the Company's strategy depends on the motivation, loyalty and capabilities of our employees. Therefore we place great importance on forums that allow us to learn from our employees about their experience with the customer. Part of the Company's culture is to encourage an open discussion among all levels of employees including an "open door" policy of the CEO and a direct access to management.  We allocate resources for the training of our employees in order to meet the continuous and changing requirements of our business and invest in their welfare by addressing their needs through various forums and modes of communication. |

| · | 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”. |
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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 identities in Israel to represent quality, innovation and customer service. Our marketing activities have resulted in wide-scale recognition of our brands for cellular and fixed-line services in Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
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| · | Focus on Customer Experience. Since we believe that customer satisfaction is a key concern, 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, offering tailored packages to the various sectors, launching a new portfolio of smartphones and tablets, and new communications products as well as training of customer service skills.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | Variety of communication products. We believe that our fixed-line telephony,  ISP services, transmission 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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| · | 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 as well as additional value added 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.   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · | 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.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · | 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. |

|   | ● | A team of representatives and customer account managers that support small to medium-sized businesses.                                                                                                   |
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|   | ● | A team of corporate representatives and customer account managers who support large corporate customers.                                                                                                 |
|   |    |                                                                                                                                                                                                     |
|   | ● | A Small Medium Enterprises ("SME") sales-force team located in regional offices focuses on individual and small business customers.                                                                      |
|   |    |                                                                                                                                                                                                     |
|   | ● | 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              |
|   |                                                                          |
| · | permits from the Israeli Defense Forces.                                      |

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| Estimated Market Shares* |   | 2009   |   |   | 2010   |   |   | 2011   |   |   | 2012   |   |   | 2013   |   |
|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partner                  |   |   | 32     | %      |   |   | 32     | %      |   |   | 32     | %      |   |   | 29     | % |   |   | 29 | % |
| Cellcom                  |   |   | 34     | %      |   |   | 34     | %      |   |   | 34     | %      |   |   | 32     | % |   |   | 31 | % |
| Pelephone                |   |   | 29     | %      |   |   | 29     | %      |   |   | 29     | %      |   |   | 28     | % |   |   | 26 | % |
| HOT Mobile               |   |   | 5      | %      |   |   | 5      | %      |   |   | 5      | %      |   |   | 8      | % |   |   | 8 | % |
| Golan Telecom and others |   |   | -      |   |   |   | -      |   |   |   | -      |   |   |   | 3      | % |   |   | 6 | % |

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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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|   | · | Roaming fees. 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. Because we consider roaming charges to be a significant source of revenue, such regulatory limits could adversely affect our revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
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|   | · | Internet video services. 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. In February 2014, the Minister of Communications appointed a public committee for the evaluation of the regulation of commercial broadcasting in Israel. The committee's scope of evaluation includes, inter alia, future regulation of new entrants that shall distribute audio-visual content over the internet. The committee is expected to submit its recommendations by August 2014. Such internet video regulation may affect the Company's launch of television services.                                                                                                      |
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|   | · | Frequency fees. 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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|   | · | Pricing of international calls. 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. The revenues of the Company would be adversely affected if these proposed new regulations are adopted.                                                                                                                                                                                                                                                                                                                                                               |
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|   | · | Underwater cable services. 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. 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 international fixed-line telecommunications market may be reduced. |

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|   | · | ISP access fees. 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 Telecom) - 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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|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · | Roaming services during emergencies. 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. The revenues of the Company would be adversely affected if these proposed new regulations are adopted. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · | WLAN permit exemptions. 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

|   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                        |
|   | iii.   | To determine that the erection and operation of the said access points shall be exempt from the need to obtain a permit.                                                                                                                                                                                                    |

|   | · | Premium services. In July 2013, the Ministry of Communications published a hearing that is intended to regulate the manner of provision of premium services so that all of the services will be provided through only three prefixes, two of which shall be blocked as a default. An international operator will be able to provide premium services without having to route the call abroad as long as the services will be provided through the prefixes designated for the provision of premium services. The revenues of the Company may be adversely affected by the results of this hearing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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|   | · | Unified license. In August 2013, the Ministry of Communications published a hearing regarding the obligation of all existing Licensees, except Bezeq and HOT Telecom to be regulated by a unified general license. In the hearing, it is proposed by the Ministry that existing licensees be obliged to conform to the unified license, under which ILD services, special fixed-line services, ISP services, MVNO and NTP services shall be provided. Existing Licensees shall be obliged to conform to the terms of the unified license within a set period of time to be determined and afterwards to merge all relevant activities into a single corporate entity. Since the provisions of the draft unified license vary from those of the relevant existing licenses (and in many cases are more stringent compared to those of the existing licenses), such an obligation might burden the Company's activity in the relevant segments and may have adverse effect on our financial results. The Company submitted its response to the hearing in October 2013. |

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|   | · | Intervention in international call market. In October 2013, the Ministry of Communications published a hearing regarding new regulation of the international call market. In the hearing, it is proposed by the Ministry to allow all General Licensees (including MVNOs) to provide international call services to their subscribers, with respect to the international destinations which are included in the subscriber's tariff plan and to international destinations for which the tariff is lower or equal to the tariff of a call on the Licensee's network. The Ministry of Communications also proposes in the hearing that the General Licensees (such as cellular operators) would not be allowed to collect an interconnect fee for outgoing international calls. The revenues of the Company may be adversely affected by the results of the hearing. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | · | Imposition of financial sanctions. The Ministry of Communications' supervision department has served the Company with a number of supervision reports for alleged claims of breach of our license or the Telecommunications Law to which the Company has submitted its responses. If the Ministry of Communications imposes financial sanctions for the alleged breaches of the license or the Telecommunications Law, this could have an adverse effect on our financial condition or results of operations.                                                                                                                                                                                                                                                                                                                                                  |

|   | A. | Sale of wholesale services: |
|--------|----|-----------------------------|

|   | 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.                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | 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.                                                                                |

|   | B. | Structural Separation |
|--------|----|-----------------------|

|   | 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. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 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. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 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.                                                                                      |

|   | C. | Supervision over Bezeq Tariffs |
|--------|----|--------------------------------|

|   | 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. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | Television Broadcasts |
|--------|----|-----------------------|

|   | 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. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
|   | 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.                                                                           |

----

| · | 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.                                                                                                                            |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · | 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. |

----

| · | 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.                                                                                                                                    |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · | 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. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · | 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.                                                                                                                                                                                                                                                                                        |

| · | observing the provisions of the Telecommunications Law, the Wireless Telegraphy Ordinance, the regulations and the provisions of our license;                                                                                                                               |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                        |
| · | 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;                                           |
|   |                                                                                                                                                                                                                                                                        |
| · | 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 |
|   |                                                                                                                                                                                                                                                                        |
| · | using the spectrum allocated to us efficiently, compared to alternative applications.                                                                                                                                                                                       |

----

| · | voting rights in Partner;                                                                               |
|--------|---------------------------------------------------------------------------------------------------------|
|   |                                                                                                    |
| · | the right to appoint a director or managing director of Partner;                                        |
|   |                                                                                                    |
| · | the right to participate in Partner’s profits; or                                                 |
|   |                                                                                                    |
| · | the right to share in Partner’s remaining assets after payment of debts when Partner is wound up. |

----

| · | 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;                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                   |
| · | our Articles of Association include the provisions described in this paragraph;                                                                                                                        |
|   |                                                                                                                                                                                                   |
| · | we act in accordance with such provisions;                                                                                                                                                             |
|   |                                                                                                                                                                                                   |
| · | 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. |

| · | Founding shareholders or their approved substitutes must hold at least 26% of the means of control of Partner. |
|--------|----------------------------------------------------------------------------------------------------------------|

----

| · | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | The majority of our directors, and our general manager, must be citizens and residents of Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | 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. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | 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.                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | 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.                                                                                                                                                                                                                                                                                                                                                                  |

| · | We have illegally ceased, limited or delayed any one of our services;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | Any means of control in Partner or control of Partner has been transferred in contravention of our license;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | 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;                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | We have harmed or limited competition in the area of mobile radio telephone services;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | 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.13e-Our Mobile Telephone License-Our Permit Regarding Cross Ownership.” |

----

| · | A change has occurred in the suitability of Partner to implement the actions and services that are the subject of our license.      |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                |
| · | A change in our license is required in order to ensure effective and fair competition in the telecommunications sector.             |
|   |                                                                                                                                |
| · | A change in our license is required in order to ensure the standards of availability and grade of service required of Partner.      |
|   |                                                                                                                                |
| · | A change in telecommunications technology justifies a modification of our license.                                                  |
|   |                                                                                                                                |
| · | A change in the electromagnetic spectrum needs justifies, in the opinion of the Ministry of Communications, changes in our license. |
|   |                                                                                                                                |
| · | Considerations of public interest justify modifying our license.                                                                    |
|   |                                                                                                                                |
| · | A change in government policy in the telecommunications sector justifies a modification of our license.                             |
|   |                                                                                                                                |
| · | A change in our license is required due to its breach by Partner.                                                                   |

| · | “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

----

ITEM 5.                      OPERATING AND FINANCIAL REVIEW AND PROSPECTS

|                                                                                  |   | Year ended December 31, |   |
|---------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                  |   | 2011                    |   |   | 2012 |   |   | 2013 |   |
|                                                                                  |   |                    |   |   |   |   |   |   |   |
| Revenues (NIS million)                                                                |   |                    | 6,998  |   |   |   | 5,572 |   |   |   | 4,519 |   |
| Operating profit (NIS million)                                                        |   |                    | 1,036  |   |   |   | 865 |   |   |   | 409 |   |
| Income before taxes (NIS million)                                                     |   |                    | 742    |   |   |   | 631 |   |   |   | 198 |   |
| Profit for the Year (NIS million)                                                     |   |                    | 443    |   |   |   | 478 |   |   |   | 135 |   |
| Capital expenditures (NIS million)                                                    |   |                    | 468    |   |   |   | 558 |   |   |   | 413 |   |
| Cash flow provided by operating activities net of investment activities (NIS million) |   |                    | 485    |   |   |   | 1,234 |   |   |   | 1,041 |   |
| Cellular Subscribers (end of period, thousands)                                       |   |                    | 3,176  |   |   |   | 2,976 |   |   |   | 2,956 |   |
| Annual cellular churn rate (%)                                                        |   |                    | 29     | % |   |   | 38 | % |   |   | 39 | % |
| Average monthly usage per cellular subscriber (MOU) (in minutes)                      |   |                    | 397    |   |   |   | 450 |   |   |   | 522 |   |
| Average monthly revenue per cellular subscriber (ARPU) (NIS)                          |   |                    | 111    |   |   |   | 97 |   |   |   | 83 |   |

----

----

----

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

| Terminal growth rate    |   | (negative 0.3%) |   |
|-------------------------|--------|-----------------|--------|
| After-tax discount rate |   |            | 11.7%  |   |
| Pre-tax discount rate   |   |            | 15.8%  |   |

----

----

----

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

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

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

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

|   | · | Operating lease, rent and overhead expenses |
|--------|--------|---------------------------------------------|
|   |   |                                        |
|   | · | Network and cable maintenance               |

|   | · | Cost of handling, replacing or repairing handsets              |
|--------|--------|----------------------------------------------------------------|
|   |   |                                                           |
|   | · | Car kit installation, IT support, and other operating expenses |

|   | · | Payments to internet service providers (“ISPs”) |
|--------|--------|-------------------------------------------------------------|
|   |   |                                                        |
|   | · | Amortization of rights of use                               |

|   | · | Wages, employee benefits expenses and car maintenance |
|--------|--------|-------------------------------------------------------|
|   |   |                                                  |
|   | · | Selling commissions, net                              |
|   |   |                                                  |
|   | · | Advertising and marketing                             |

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

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

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

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

|   | · | Professional fees                 |
|--------|--------|-----------------------------------|
|   |   |                              |
|   | · | Credit card and other commissions |
|   |   |                              |
|   | · | Depreciation                      |

----

|   | · | Unwinding of trade receivables                          |
|--------|--------|---------------------------------------------------------|
|   |   |                                                    |
|   | · | Capital gain (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 gains |
|--------|--------|---------------------------------|

|   | · | Interest income from cash equivalents                     |
|--------|--------|-----------------------------------------------------------|
|   |   |                                                      |
|   | · | Fair value gain from derivative financial instrument, net |

|   | · | Number of subscribers |
|--------|--------|-----------------------|

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

|   | · | Churn rate. |
|--------|--------|-------------|

----

|   | (1) | Estimating service revenues earned but not yet billed |
|--------|-----|-------------------------------------------------------|

|   | (2) | Assessing the useful lives of assets |
|--------|-----|--------------------------------------|
|   | (3) | Assessing the recoverable amount for impairment tests of assets with finite useful economic lives |
|--------|-----|---------------------------------------------------------------------------------------------------|

|   | (4) | Assessing the recoverable amount of goodwill for annual impairment tests |
|--------|-----|--------------------------------------------------------------------------|

| Terminal growth rate    |   | (negative 0.3%) |   |
|-------------------------|--------|-----------------|--------|
| After-tax discount rate |   |            | 11.7%  |   |
| Pre-tax discount rate   |   |            | 15.8%  |   |

----

|   | (5) | Assessing allowance for doubtful accounts |
|--------|-----|-------------------------------------------|

|   | (6) | Considering uncertain tax positions |
|--------|-----|-------------------------------------|

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

|   | (2) | Considering sales with multiple deliverables |
|--------|-----|----------------------------------------------|

|   | (3) | Determining probability of future utilization of deferred tax assets |
|--------|-----|----------------------------------------------------------------------|

----

|                                                               |   | New Israeli Shekels          |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|
|                                                               |   | Year ended December 31, 2013 |   |
|                                                               |   | In millions                  |   |
|                                                               |   | Cellular segment             |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue - Services                                         |   |                         | 2,876  |   |   |   | 908 |   |   |   |   |   |   | 3,784 |   |
| Inter-segment revenue - Services                                   |   |                         | 31     |   |   |   | 177 |   |   |   | (208 | ) |   |   |   |   |
| Segment revenue - Equipment                                        |   |                         | 703    |   |   |   | 32 |   |   |   |   |   |   |   | 735 |   |
| Total revenues                                                     |   |                         | 3,610  |   |   |   | 1,117 |   |   |   | (208 | ) |   |   | 4,519 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues - Services                                |   |                         | 2,070  |   |   |   | 747 |   |   |   |   |   |   |   | 2,817 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Inter-segment cost of  revenues- Services                |   |                         | 175    |   |   |   | 33 |   |   |   | (208 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                               |   |                         | 664    |   |   |   | 29 |   |   |   |   |   |   |   | 693 |   |
| Cost of revenues                                                   |   |                         | 2,909  |   |   |   | 809 |   |   |   | (208 | ) |   |   | 3,510 |   |
| Gross profit                                                       |   |                         | 701    |   |   |   | 308 |   |   |   |   |   |   |   | 1,009 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                 |   |                         | 544    |   |   |   | 135 |   |   |   |   |   |   |   | 679 |   |
| Other income, net                                                  |   |                         | 77     |   |   |   | 2 |   |   |   |   |   |   |   | 79 |   |
| Operating profit                                                   |   |                         | 234    |   |   |   | 175 |   |   |   |   |   |   |   | 409 |   |
| Adjustments to presentation of Adjusted EBITDA                     |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization |   |                         | 545    |   |   |   | 155 |   |   |   |   |   |   |   | 700 |   |
|     –Other                               |   |                         | 5      |   |   |   | * |   |   |   |   |   |   |   | 5 |   |
| Adjusted EBITDA                                                    |   |                         | 784    |   |   |   | 330 |   |   |   |   |   |   |   | 1,114 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of Adjusted EBITDA to profit before income tax      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 700 |   |
|     -  Finance costs, net            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 211 |   |
|     -  Other                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 5 |   |
| Profit before income tax                                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 198 |   |

----

|                                                               |   | 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                               |   |                         | 10     |   |   |   | 1 |   |   |   |   |   |   |   | 11 |   |
| Adjusted EBITDA                                                    |   |                         | 1,314  |   |   |   | 288 |   |   |   |   |   |   |   | 1,602 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of Adjusted EBITDA to profit before income tax      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 726 |   |
|     -  Finance costs, net            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 234 |   |
|     -  Other                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 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 |   |

----

----

----

----

----

|             |   | Three months ended |   |
|------------------|--------|--------------------|--------|
| NIS in millions  |   | March 31           |   |   | June 30 |   |   | Sept. 30 |   |   | Dec. 31 |   |
|             |   |               |   |   |   |   |   |   |   |   |   |   |
| Service Revenues |   |               |   |   |   |   |   |   |   |   |   |   |
|             |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2011             |   |               | 1,212  |   |   |   | 1,360 |   |   |   | 1,366 |   |   |   | 1,286 |   |
| 2012             |   |               | 1,241  |   |   |   | 1,213 |   |   |   | 1,150 |   |   |   | 1,036 |   |
| 2013             |   |               | 961    |   |   |   | 950 |   |   |   | 951 |   |   |   | 922 |   |

----

|                       |   | NIS in millions |   |
|----------------------------|--------|-----------------|--------|
|                       |   |            |   |
| Principal payments due in: |   |            |   |
|                       |   |            |   |
| 2014                       |   |            | 122    |   |
| 2015                       |   |            | 122    |   |
| 2016                       |   |            | 122    |   |
|                       |   |            |   |   |
| Total                      |   |            | 366    |   |

----

|                       |   | NIS in millions |   |
|----------------------------|--------|-----------------|--------|
|                       |   |            |   |
| Principal payments due in: |   |            |   |
|                       |   |            |   |
| 2016                       |   |            | 235    |   |
| 2017                       |   |            | 234.5  |   |
| 2018                       |   |            | 234.5  |   |
|                       |   |            |   |   |
| Total                      |   |            | 704    |   |

----

|                       |   | 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: |   |            |   |
|                       |   |            |   |
| 2014                       |   |            | 187    |   |
| 2015                       |   |            | 187    |   |
| 2016                       |   |            | 187    |   |
| 2017                       |   |            | 187    |   |
|                       |   |            |   |   |
| Total                      |   |            | 748    |   |

----

|                                                                                                                                                                                                   |   | Date originally received |   | Linkage terms |   | Interest payment schedule |   | Annual interest rate |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|---------------|--------|---------------------------|--------|----------------------|
|                                                                                                                                                                                                   |   |                     |   |          |   |                      |   |                 |
| Loan A                                 |   | Nov. 11, 2010            |   | CPI           |   | Semi annual               |   | 2.75% CPI adj.       |
|                                                                                                                                                                                                   |   |                     |   |          |   |                      |   |                 |
| Loan C                                 |   | June 8, 2010             |   |          |   | Annual                    |   | 5.7% fixed           |
|                                                                                                                                                                                                   |   |                     |   |          |   |                      |   |                 |
| Loan D                                 |   | June 9, 2010             |   |          |   | Annual                    |   | 5.7% fixed           |
|                                                                                                                                                                                                   |   |                     |   |          |   |                      |   |                 |
| Loan E                                 |   | May 8, 2011              |   |          |   | Quarterly                 |   | Prime minus 0.025%   |
|                                                                                                                                                                                                   |   |                     |   |          |   |                      |   |                 |
| Loan F                                 |   | April 10, 2011           |   | CPI           |   | Quarterly                 |   | 3.42% CPI adj.       |

|                 |   | 2014                            |   |   | 2015   |   |   | 2016   |   |   | 2017 to 2018 |   |   | 2019to 2020 |   |   |  Total |   |
|----------------------|--------|---------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------------|--------|--------|-------------|--------|--------|-------------|--------|
|                 |   | New Israeli Shekels in millions |   |
| Bank borrowing A (*) |   |                            |   |   |   |   |   |   | 177    |   |         |   | 355    |        |   |   |        |   |   | 532 |   |
| Bank borrowing C     |   |                            |   |   |   |   |   |   |   |   |         |   | 25     |        |   |   | 50          |   |   |   | 75 |   |
| Bank borrowing D     |   |                            | 25     |   |   |   | 25     |   |   |   | 25           |   |   |        | 50     |   |        |   | 50 |   |   |   | 175 |   |
| Bank borrowing E     |   |                            |   |   |   |   |   |   |   |   |         |   |   |        |   |   |        |   | 152 |   |   |   | 152 |   |
| Bank borrowing F (*) |   |                            |   |   |   |   |   |   |   |   |         |   |   |        |   |   |        |   | 200 |   |   |   | 200 |   |
|                 |   |                            | 25     |   |   |   | 25     |   |   |   | 202          |   |   |        | 430    |   |        |   | 452 |   |   |   | 1,134 |   |

----

|   | Principal prepayments made during 2013:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | Loan C: On May 9, 2013, 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, 2014. On June 18, 2013, the Company prepaid the current portion of principal outstanding of the Loan in the amount of NIS 25 million, which was due originally on June 8, 2015. On December 19, 2013, the Company prepaid the current portion of principal outstanding of the Loan in the amount of NIS 50 million, which was due originally on June 8, 2016 and 2017. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | Loan E: On May 9, 2013, the Company prepaid the current portion of principal outstanding of the Loan in the amount of NIS 112 million, which was due originally in May 8, 2014. On June 18, 2013, the Company prepaid current portion of principal outstanding of the Loan in the amount of NIS 112 million, which was due originally in May 8, 2015..                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | Loan F: On June 19, 2013, the Group prepaid the current portion of linked principal outstanding of the loan in the amount of NIS 145 million, which was due originally in December 31, 2014. On November 20, 2013, the Group prepaid the current portion of linked principal outstanding of the loan in the amount of NIS 148 million, which was due originally in December 31, 2015. The Company paid prepayment fees in 2013 in a total amount of NIS 17 million, recorded in interest costs.                                             |

|   | (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, 2012 and 2013, was 4.3 and 5.2, 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, 2012 and 2013, was 2.8 and 3.2, respectively). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Current Portion Payable in 2014 as of December 31, 2013 |   | NIS in millions |   |
|---------------------------------------------------------|--------|-----------------|--------|
|                                                    |   |            |   |
| Principal on notes payable                              |   |            | 334    |   |
|                                                    |   |            |   |   |
| Accrued interest on notes payables                      |   |            | 89     |   |
| Accrued interest on long term bank loans                |   |            | 40     |   |
| Total                                                   |   |            | 463    |   |

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

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

----

----

|                                                                                                        |   | Payments Due by Period (NIS in millions) |   |
|-------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
| Contractual Obligations                                                                                     |   | Total                                    |   |   | 2014 |   |   | 2015-2016 |   |   | 2017-2018 |   |   | 2019 and thereafter |   |
|                                                                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt*                                                                                             |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes Series B                                                                                              |   |                                     | 390    |   |   |   | 134 |   |   |   | 256 |   |   |   | - |   |   |   | - |   |
| Notes Series C                                                                                              |   |                                     | 800    |   |   |   | 24 |   |   |   | 283 |   |   |   | 493 |   |   |   | - |   |
| Notes Series D                                                                                              |   |                                     | 616    |   |   |   | 12 |   |   |   | 24 |   |   |   | 239 |   |   |   | 341 |   |
| Notes Series E                                                                                              |   |                                     | 851    |   |   |   | 228 |   |   |   | 426 |   |   |   | 197 |   |   |   | - |   |
| Long term bank borrowing                                                                                    |   |                                     | 1,323  |   |   |   | 65 |   |   |   | 303 |   |   |   | 486 |   |   |   | 469 |   |
|                                                                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Leases                                                                                            |   |                                     | 1,282  |   |   |   | 232 |   |   |   | 386 |   |   |   | 287 |   |   |   | 377 |   |
| Trade payables                                                                                              |   |                                     | 761    |   |   |   | 761 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Payables in respect of employees                                                                            |   |                                     | 78     |   |   |   | 78 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other payables                                                                                              |   |                                     | 35     |   |   |   | 35 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Contribution to defined benefit plan                                                                        |   |                                     | 17     |   |   |   | 17 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Commitments to pay for inventory purchases                                                                  |   |                                     | 1,077  |   |   |   | 661 |   |   |   | 416 |   |   |   | - |   |   |   | – |   |
| Commitments to pay for property, equipment purchases and software elements purchases (capital expenditures) |   |                                     | 59     |   |   |   | 59 |   |   |   | - |   |   |   | - |   |   |   | – |   |
| Commitments to pay for rights of use                                                                        |   |                                     | 259    |   |   |   | 16 |   |   |   | 48 |   |   |   | 75 |   |   |   | 120 |   |
| Commitments to pay for transmission services (See note 18(6) to the consolidated financial statements)      |   |                                     | 203    |   |   |   | 63 |   |   |   | 140 |   |   |   | - |   |   |   | - |   |
|                                                                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations                                                                          |   |                                     | 7,751  |   |   |   | 2,385 |   |   |   | 2,282 |   |   |   | 1,777 |   |   |   | 1,307 |   |

----

ITEM 6.                      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

| Name of Director                         |   | Age    |   | Position                                |
|------------------------------------------|--------|--------|--------|-----------------------------------------|
|                                     |   |   |   |                                    |
| Adam Chesnoff**                          |   | 48     |   | Chairman of the Board of Directors      |
| Elon Shalev**                            |   | 62     |   | Vice-Chairman of the Board of Directors |
| Dr. Michael J. Anghel (1)(2)(3)(4)  |   | 75     |   | Director                                |
| Ilan Ben-Dov*                            |   | 57     |   | Director                                |
| Barry Ben Zeev (1)(2)(3)(4)         |   | 62     |   | Director                                |
| Fred Gluckman**                          |   | 43     |   | Director                                |
| Sumeet Jaisinghani**                     |   | 29     |   | Director                                |
| Osnat Ronen (4)                     |   | 51     |   | Director                                |
| Yoav Rubinstein**                        |   | 40     |   | Director                                |
| Arieh Saban**                            |   | 67     |   | Director                                |
| Yahel Shachar*                           |   | 51     |   | Director                                |
| Arik Steinberg (1)(2)(4)            |   | 49     |   | 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 Israeli Companies Law. |
|--------|-----|------------------------------------------------------------------------------|

----

----

----

----

| Name of Officer     |   | Age    |   | Position                                                                                     |
|---------------------|--------|--------|--------|----------------------------------------------------------------------------------------------|
|                |   |   |   |                                                                                         |
| Haim Romano         |   | 59     |   | Chief Executive Officer                                                                      |
| Ziv Leitman         |   | 55     |   | Chief Financial Officer                                                                      |
| Roly Klinger        |   | 54     |   | Vice President, Legal & Regulatory Affairs, Business Development and Corporate Secretary |
| Einat Rom           |   | 48     |   | Vice President, Human Resources & Administration                                         |
| Avi Cohen           |   | 48     |   | Vice President, Customers Division                                                           |
| Menahem Tirosh      |   | 62     |   | Chief Operating Officer                                                                      |
| Guy Emodi           |   | 50     |   | Vice President, Economics & Planning, Corporate Strategy and Operator Relations          |
| Ronit Rubin         |   | 49     |   | Vice President, Information Technology Division                                              |
| Ori Watermann       |   | 39     |   | Vice President, Fixed-Line Division & CEO of 012 Smile                                   |
| Zvika Shenfeld1     |   | 41     |   | Vice President, Retail Division                                                              |
| Igal Bareket2  |   | 44     |   | Vice President Marketing and Growth Engines Division                                         |
| Amalia Glaser       |   | 49     |   | 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 orthe 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                                                                                         |   |                           | 2,396                                                                                                                     |   |   | ­-              | (1)    |   |   | 1,370 | (2) |   |   | 182 | (3) |   |   | 3,948 |   |
| Menahem Tirosh                        |   | Chief Operating Officer                                                                                         |   |                           | 1,384                                                                                                                     |   |   |                 | 670    | (4) |   |   | 252 | (5) |   |   | 1,089 | (6) |   |   | 3,395 |   |
| Ronit Robin                           |   | Vice President, Information Technology                                                                          |   |                           | 1,131                                                                                                                     |   |   |                 | 94     |   |   |   | 507 | (7) |   |   | 728 | (8) |   |   | 2,460 |   |
| Avi Cohen                             |   | Vice President, Customers Division                                                                              |   |                           | 1,114                                                                                                                     |   |   |                 | 102    |   |   |   | 126 | (9) |   |   | 923 | (10) |   |   | 2,265 |   |
| Guy Emodi                             |   | Vice President, Economics & Planning, Corporate Strategy and Operator Relations                             |   |                           | 988                                                                                                                       |   |   |                 | 92     |   |   |   | 347 | (11) |   |   | 715 | (12) |   |   | 2,142 |   |

| (1)    | On December 29, 2013 and February 18, 2014, the CEO, Mr. Haim Romano, notified the Company that he irrevocably waives any right to the annual bonus that he was entitled to under the management agreement with the Company according to which he provides his management services as the Company's CEO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    | 800,000 share options were granted to Mr. Haim Romano upon the commencement of his position in 2011 with a vesting period over three years. The theoretical 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 6, 2014, the share price was NIS 30.83, whereas the option exercise price (dividend adjusted) is NIS 37.16. As long as the option exercise price is higher than the market share price, the grant has no actual value for Mr. Haim Romano.In May 2013, an additional 150,000 share options were granted to Mr. Haim Romano with a vesting period over three years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 1 million. As of March 6, 2014, the share price was NIS 30.83 whereas the option exercise price (dividend adjusted) is NIS 23.61. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    | “Other compensation” includes expenses for retirement that were accumulated during the reporting period of this annual report and will be paid only upon retirement. In 2012, the Company adopted a retention plan for Mr. Haim Romano, according to which he will receive an amount of NIS 1.8 million, provided that he 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. On December 29, 2013, Mr. Haim Romano notified the Company that he irrevocably waives any right to the said retention bonus.                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (4)    | The bonus includes an annual bonus as well as a special bonus granted to Mr. Menahem Tirosh in the amount of NIS 528,000, for his outstanding achievements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (5)    | In 2012, 220,000 share options were granted to Mr. Menahem Tirosh with a vesting period over three years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.7 million. As of March 6, 2014, the share price was NIS 30.83 whereas the option exercise price (dividend adjusted) is NIS 33.5. As long as the option exercise price is higher than the market share price, the grant has no actual value for Mr. Menahem Tirosh.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (6)    | “Other compensation” includes expenses for retirement that were accumulated during the reporting period of this annual report and will be paid only upon retirement, as well as retention expenses in the amount of NIS 1,000,000, out of which NIS 500,000 were accumulated during the reporting period of this annual report and were paid on February 1, 2014, and an additional amount of NIS 500,000 which will be paid in February 2015 (subject to provisions of his retention plan) and will be accumulated during 2014.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (7)    |  In 2010, 300,000 share options were granted to Ms. Ronit Rubin with a vesting period over four years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 5.9 million. As of March 6, 2014, the share price was NIS 30.83 whereas the option exercise price (dividend adjusted) is NIS 57.47. As long as the option exercise price is higher than the market share price, the grant has no actual value for Ms. Ronit Rubin. In 2012, an additional 50,000 share options were granted to Ms. Ronit Rubin with a vesting period of two years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.2 million. As of March 6, 2014, the share price was NIS 30.83 whereas the option exercise price (dividend adjusted) is NIS 13.23.                                   |

----

| (8)    | “Other compensation” includes expenses for retirement that were accumulated during the reporting period of this annual report and will be paid only upon retirement, as well as retention expenses in the amount of NIS 700,000, out of which NIS 350,000 were accumulated during the reporting period of this annual report and were paid on February 1, 2014 and an additional amount of NIS 350,000 which will be paid in February 2015 (subject to provisions of her retention plan) and will be accumulated during 2014.  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (9)    | In 2012, 142,500 share options were granted to Mr. Avi Cohen with a vesting period over two years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.3 million. As of March 6, 2014, the share price was NIS 30.83 whereas the option exercise price (dividend adjusted) is NIS 25.23.                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (10)   | “Other compensation” includes expenses for retirement that were accumulated during the reporting period of this annual report and will be paid only upon retirement, as well as retention expenses in the amount of NIS 700,000, out of which NIS 350,000 were accumulated during the reporting period of this annual report and were paid on February 1, 2014, and an additional amount of NIS 350,000 which will be paid in February 2015 (subject to provisions of his retention plan) and will be accumulated during 2014. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (11)   | In 2012, 142,500 share options were granted to Mr. Guy Emodi with a vesting period over one year. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.7 million. As of March 6, 2014, the share price was NIS 30.83 whereas the option exercise price (dividend adjusted) is NIS 22.32.                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (12)   | “Other compensation” includes expenses for retirement that were accumulated during the reporting period of this annual report and will be paid only upon retirement, as well as retention expenses in the amount of NIS 700,000, out of which NIS 350,000 were accumulated during the reporting period of this annual report and were paid on February 1, 2014, and an additional amount of NIS 350,000 which will be paid in February 2015 (subject to provisions of his retention plan) and will be accumulated during 2014. |

----

----

|   | – | In order to comply with the conditions and restrictions imposed on us by the Ministry of Communications, including in our mobile 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 the Chief Executive Officer, directors or controlling partners. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | – | In compliance with the Israeli Companies Law, which requires that at least two members of the Board of Directors satisfy the conditions of “external directors”, two of our twelve directors are external directors.  Such external directors also satisfy the NASDAQ criteria for “independent directors”.  However, the requirement of NASDAQ Rule 5605(b), that a majority of the Board of Directors be comprised of independent directors, is thus not satisfied.                                                                                                                                                                                                                |

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|   | 1) | 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 an investigation or proceeding conducted against him by an authority authorized to conduct such investigation and which 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.*                                                                                                                                                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | * As permitted by the Israeli Companies Law and the Israeli Securities Law, amendments to the Company’s Articles of Association will be submitted for shareholder approval, to include an amendment to clause (3) above by adding at its end “or in connection with a financial sanction (“itzum caspi”),” and by adding the following clauses: (4) payment to an injured party as a result of a violation set forth in Section 52.54(a)(1)(a) of the Israeli Securities Law, including by indemnification in advance. (5) expenses incurred in connection with a proceeding (“halich”) under Chapters H3, H4 or I1 of the Israeli Securities Law, or under Chapter 4 of Part 9 of the Israeli Companies Law, in connection with any affairs, including reasonable legal expenses, which term includes attorney fees, including by indemnification in advance.” |

| (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 in favor of another person;                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | (4)    | A payment which the office holder is obligated to pay to an injured party as set forth in section 52.54(a)(1)(a) of the Securities Law and expenses that the Office Holder incurred in connection with a proceeding under Chapters H3, H4 or I1 of the Securities Law, or under Chapter 4 of Part 9 of the Israeli Companies Law, in connection with any affairs, including reasonable legal expenses, which term includes attorney fees. |

|   | (5) | 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 |   |
|----------------------------|--------|----------------|--------|
|                       |   | 2011           |   |   | 2012 |   |   | 2013 |   |
|                       |   |           |   |   |   |   |   |   |   |
| Customer service*          |   |           | 5,092  |   |   |   | 3,107 |   |   |   | 2,115 |   |
| Engineering                |   |           | 548    |   |   |   | 387 |   |   |   | 315 |   |
| Sales and sales support*   |   |           | 792    |   |   |   | 808 |   |   |   | 653 |   |
| Information technology     |   |           | 399    |   |   |   | 372 |   |   |   | 315 |   |
| Marketing and Content      |   |           | 158    |   |   |   | 82 |   |   |   | 65 |   |
| Finance                    |   |           | 209    |   |   |   | 135 |   |   |   | 95 |   |
| Human resources            |   |           | 178    |   |   |   | 143 |   |   |   | 115 |   |
| Operations & Logistics |   |           | 376    |   |   |   | 266 |   |   |   | 298 |   |
| Remaining operations       |   |           | 138    |   |   |   | 95 |   |   |   | 74 |   |
| TOTAL                      |   |           | 7,891  |   |   |   | 5,396 |   |   |   | 4,045 |   |

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| 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                                                                                                                                                                                                  |
|--------------------------------------|--------|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  53.44                          |   | 5,000                 |   | 2017                                                                                                                                                                                                                    |
|  47.39                          |   | 230,000               |   | 2019                                                                                                                                                                                                                    |
|  61.64                          |   | 513,750               |   | 2020                                                                                                                                                                                                                    |
|  43.01                          |   | 1,088,750             |   | 2021                                                                                                                                                                                                                    |
|  22.77                          |   | 830,000               |   | 2022                                                                                                                                                                                                                    |
|  23.61                          |   | 150,000               |   | 2023                                                                                                                                                                                                                    |
| 39.79                                |   | 2,817,500             |   |                                    TOTAL |

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|                                                             |   | Through December 31, 2013   |       |
|------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                             |   | Number of options or shares |       |
| Options granted                                                  |   |                        | 19,688,115 |   |
| Shares issued upon exercises                                     |   |                        | (5,669,407 | ) |
| Options cancelled upon net exercises, expiration and forfeitures |   |                        | (7,090,326 | ) |
| Outstanding                                                      |   |                        | 6,928,382  |   |
| Of which:                                                        |   |                        |       |   |
|      Exercisable                        |   |                        | 4,818,696  |   |
|     Vest in 2014                             |   |                        | 1,865,103  |   |
|     Vest in 2015                             |   |                        | 194,583    |   |
|     Vest in 2016                             |   |                        | 50,000     |   |
|                                                             |   |                        |       |   |
| Ungranted                                                        |   |                        | 1,319,211  |   |

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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                |        |   | 30.00              |   |   | 30.87                              |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Scailex Corporation Ltd., together with Suny Electronics Ltd. (3) |   |                      | 21,723,413  |   |               |   | 13.56  |                               |   |   | 13.95 |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Phoenix-Excellence Group (4)                                      |   |                      | 9,234,663   |   |               |   | 5.77   |                               |   |   | 5.93 |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Treasury shares (5)                                               |   |                      | 4,467,990   |   |               |   | 2.79   |                               |   |   | – |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Public (6)                                                        |   |                      | 76,678,926  |   |               |   | 47.88  |                               |   |   | 49.25 |   |
|                                                              |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Total                                                             |   |                      | 160,154,992 |   |               |   | 100.00 |                               |   |   | 100.00 |   |

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| (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 January 31, 2014, 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 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 13.95% 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 at that time 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 January 31, 2014, approximately 12.55% 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, one of our directors. 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 13.95% of our Issued and Outstanding shares and total voting rights as of January 31, 2014.  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 at that time 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 9,234,663 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. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| (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 Israeli 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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | 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; |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | 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). |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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ITEM 8.                  FINANCIAL INFORMATION

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|   | 1.     | On April 22, 2009, 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 certain subscribers for certain calls not according to their rate plan. 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 187 million. The parties filed a request to approve a settlement agreement which was submitted for the court's approval on December 13, 2011 and on February 17, 2014 the parties filed a request to approve a revised settlement agreement in light of changes in the telecommunications market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 2.     | 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 court's 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, however due to the objection of the Attorney General to the revised agreement, the proceedings have resumed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 3.     | 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.  On November 7, 2013 the parties filed a request to approve a settlement agreement and on February 5, 2014 the parties filed a request to approve a revised settlement agreement. The settlement agreements also include a claim and a motion to certify the claim as a class action that was filed in a similar matter as set forth in section 7 below. |

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|   | 4.     | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 5.     | 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 was approved by the court on August 20, 2013.                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 6.     | On March 2, 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 increased tariffs for its business subscribers not in accordance with their agreements. If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiff to be approximately NIS 193 million. On September 3, 2013, a settlement agreement was signed which was submitted for the court's approval. On November 11, 2013, the plaintiff filed an objection to the settlement agreement and the parties are waiting for the court's decision on this matter.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 7.     | 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.  On November 7, 2013, the parties filed a request to approve a settlement agreement and on February 5, 2014, the parties filed a request to approve a revised settlement agreement. The settlement agreements also include a claim and a motion to certify the claim as a class action that was filed in a similar matter as set forth in section 3 above. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 8.     | On October 5, 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 enables its customers to subscribe to a content back up service for cellular handsets without informing them in cases in which the handset does not support the service or only partially supports such service. 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 117 million. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

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|   | 9.     | 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.                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 10.    | On February 6, 2012, a claim and a motion to certify the claim as a class action were filed against the Company and other cellular operators. The claim alleges that the Company, as well as the other defendants do not comply with the requirements set by the Equal Rights for People with Disabilities (Accessibility to Telecommunications Services and Telecommunications Devices) Regulations of 2009. 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 361 million. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 11.    | In February 7, 2012, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged 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 would have been recognized as a class action the total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 475 million. The claim was dismissed on July 28, 2013.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 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 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 26, 2013, the court approved a settlement agreement filed by the parties and regarding an additional lawsuit, dealing with similar issues, as set forth in section 12 above. On February 19, 2014, the parties requested the approval of the court to amend the settlement agreement. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 13.    | On July 1, 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 charges subscribers that are enrolled in a certain tariff plan for call minutes not in accordance with the terms of the plan. 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 123 million. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 14.    | 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 alleged that 012 Smile’s advertisements regarding certain tariffs did not include correct and complete information as to possible additional tariffs charged of third parties. The claim was dismissed on June 19, 2013.                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 15.    | 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 alleged 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 would  have been recognized as a class action the total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 8,089 million. The claim was dismissed on April 29, 2013.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 16.    | On October 16, 2012, a claim and a motion to certify the claim as a class action was filed against the Company. The claim alleged that the Company unlawfully charges the Company’s Pre-Paid subscribers for services of various content providers. If the claim would have been recognized as a class action the total amount claimed against the Company was estimated by the plaintiffs to be approximately NIS 700 million. The claim was dismissed on October 21, 2013.                                                                                                                                                                                                                                                                                                                  |

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|   | 17.    | 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 alleged 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 Smile telecom services. The claim was dismissed on January 2, 2014.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 18.    | 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. The total amount of damages claimed by the plaintiff against 012 Smile is approximately NIS 354 million. On November 3, 2010, the court granted the plaintiffs' request and certified the lawsuit as a class action against all of the defendants. On May 26, 2013, the court approved a settlement agreement filed by the parties regarding an amended request and regarding an additional lawsuit, dealing with similar issues in an amount of NIS 2.7 billion, as set forth in section 13 below. On February 19, 2014, the parties requested the approval of the court to amend the settlement agreement. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 19.    | On June 23, 2013, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company acted unlawfully by not offering its customers discounted cellular tariff plans which are offered under the  012 mobile brand and by charging its customers that transferred to a plan under the 012 mobile brand a payment for a new SIM card. If the claim is recognized as a class action, the total amount claimed from Partner is estimated by the plaintiff to be NIS 232 million.  The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 20.    | On November 13, 2013, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company increased tariffs for its subscribers not in accordance with their agreements. If the claim is recognized as a class action, the total amount claimed from Partner is estimated by the plaintiff to be NIS 150 million. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 21.    | On December 2, 2013, 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 fulfill its commitment regarding the grant of refunds for cellular equipment starting from the first month of the customer agreement and that the Company unlawfully charged its customers for the Orange2 service, and thereby breached the agreements with its customers and the provisions of its license, and profited unlawfully. If the claim is recognized as a class action, the total amount claimed from Partner is estimated by the plaintiff to be NIS 603 million. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                                                                                                                                                                     |

|   | 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. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | 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. On September 6, 2012, the court certified the claim as a class action. On March 24, 2013, the parties filed a settlement agreement which was approved by the court on August 5, 2013. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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, 2012 the plaintiff submitted an appeal to the Supreme Court in Jerusalem. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | 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. The Company is unable, to evaluate, with any degree of certainty, the probability of success of the lawsuit or the range of potential exposure, if any. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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ITEM 9.                      THE OFFER AND LISTING

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|                                                                                                                                                                                                                                                                                                                                                           |   | NASDAQ      |   |   | Tel Aviv Stock Exchange  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------|--------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                           |   | ($ per ADS) |   |   | (NIS per ordinary share) |   |
|                                                                                                                                                                                                                                                                                                                                                           |   | High        |   |   | Low                      |   |   | High |   |   | Low |   |
|                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   |
|                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   |
|                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2013                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter                                                                                                                                                                                                                                                                                                                                                  |   |        | 6.30   |   |                     |   | 5.46 |   |   |   | 23.26 |   |   |   | 20.30 |   |
| Second Quarter                                                                                                                                                                                                                                                                                                                                                 |   |        | 7.16   |   |                     |   | 6.06 |   |   |   | 25.53 |   |   |   | 21.99 |   |
| Third Quarter                                                                                                                                                                                                                                                                                                                                                  |   |        | 8.11   |   |                     |   | 6.18 |   |   |   | 29.15 |   |   |   | 22.61 |   |
| Fourth Quarter                                                                                                                                                                                                                                                                                                                                                 |   |        | 9.75   |   |                     |   | 7.82 |   |   |   | 35.00 |   |   |   | 22.87 |   |
|                                                                                                                                                                                                                                                                                                                                                           |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| September 2013                                                                                                                                                                                                                                                                                                                                                 |   |        | 7.89   |   |                     |   | 6.91 |   |   |   | 28.02 |   |   |   | 25.05 |   |
| October 2013                                                                                                                                                                                                                                                                                                                                                   |   |        | 8.58   |   |                     |   | 8.09 |   |   |   | 30.30 |   |   |   | 28.73 |   |
| November 2013                                                                                                                                                                                                                                                                                                                                                  |   |        | 9.58   |   |                     |   | 7.82 |   |   |   | 34.22 |   |   |   | 27.87 |   |
| December 2013                                                                                                                                                                                                                                                                                                                                                  |   |        | 9.75   |   |                     |   | 8.75 |   |   |   | 35.00 |   |   |   | 30.92 |   |
| January 2014                                                                                                                                                                                                                                                                                                                                                   |   |        | 9.41   |   |                     |   | 8.55 |   |   |   | 32.93 |   |   |   | 30.40 |   |
| February 2014                                                                                                                                                                                                                                                                                                                                                  |   |        | 9.19   |   |                     |   | 8.40 |   |   |   | 32.15 |   |   |   | 30.01 |   |
| March 2014 (through March 7)                                                          |   |        | 9.03   |   |                     |   | 8.72 |   |   |   | 31.79 |   |   |   | 30.83 |   |

ITEM 10.                ADDITIONAL INFORMATION

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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 Capital 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. On 2012 and 2013 the real capital gain accrued on the sale of our Shares and ADSs for 2012 and 2013 was generally taxed at a rate of 25% for corporations (to be increased to 26.5% as of 2014) and a rate of up to 25% for individuals. 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%. However, the foregoing tax rates will not apply to (i) dealers in securities; and (ii) shareholders who have acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement). Inflationary surplus that accrued after December 31, 1993, is exempt from tax. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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| · | 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; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| · | 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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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                     |   |                                                     | 387     |   |                                                     |   | 365 |   |
| Weighted average interest rate payable                              |   |                                                     |    |   |                                                     |   | 3.4 | % |
| Long-term fixed Notes payable series C due 2018                     |   |                                                     | 766     |   |                                                     |   | 702 |   |
| Weighted average interest rate payable                              |   |                                                     |    |   |                                                     |   | 3.35 | % |
| Long-term bank borrowing bearing fixed interest                     |   |                                                     | 567     |   |                                                     |   | 532 |   |
| Weighted average interest rate payable                              |   |                                                     |    |   |                                                     |   | 2.75 | % |
| Long-term bank borrowing bearing fixed interest                     |   |                                                     | 221     |   |                                                     |   | 200 |   |
| Weighted average interest rate payable                              |   |                                                     |    |   |                                                     |   | 3.42 | % |
| Other payables (2)                                                  |   |                                                     |  1 |   |                                                     |   | 1 |   |
|                                                                |   |                                                     |    |   |                                                     |   |   |   |
| NIS-denominated debt not linked to the CPI                          |   |                                                     |    |   |                                                     |   |   |   |
| Long-term variable interest Notes payable series D due 2021         |   |                                                     | 537     |   |                                                     |   | 541 |   |
| Weighted average interest rate payable                              |   |                                                     |    |   |                                                     |   | 2.63 | % |
| Long-term fixed Notes payable series E due 2017                     |   |                                                     | 808     |   |                                                     |   | 739 |   |
| Weighted average interest rate payable                              |   |                                                     |    |   |                                                     |   | 5.5 | % |
|                                                                |   |                                                     |    |   |                                                     |   |   |   |
| Long-term bank borrowing bearing variable interest (2)              |   |                                                     | 152     |   |                                                     |   | 152 |   |
| Weighted average interest rate payable                              |   |                                                     |    |   |                                                     |   | 2.83 | % |
| Long-term bank borrowing bearing fixed interest                     |   |                                                     | 292     |   |                                                     |   | 250 |   |
| Weighted average interest rate payable                              |   |                                                     |    |   |                                                     |   | 5.70 | % |
|                                                                |   |                                                     |    |   |                                                     |   |   |   |
| Trade payables and others (2)                                       |   |                                                     | 614     |   |                                                     |   | 614 |   |
|                                                                |   |                                                     |    |   |                                                     |   |   |   |
| Debt denominated in foreign currencies (2)                          |   |                                                     |    |   |                                                     |   |   |   |
|                                                                |   |                                                     |    |   |                                                     |   |   |   |
| Trade payables denominated in USD                                   |   |                                                     | 75      |   |                                                     |   | 75 |   |
|                                                                |   |                                                     |    |   |                                                     |   |   |   |
| Trade payables denominated in other foreign currencies (mainly EUR) |   |                                                     | 168     |   |                                                     |   | 168 |   |
|                                                                |   |                                                     |    |   |                                                     |   |   |   |
| Total                                                               |   |                                                     | 4,588   |   |                                                     |   | 4,339 |   |

| (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, 2013. |
|-----|----------------------------------------------------------|

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Change |   |   | Equity                         |   |   | Profit |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------------------------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   | New Israeli Shekelsin millions |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   |                           |   |   |   |   |
| December 31, 2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |                           |   |   |   |   |   |   |   |
| Increase in the CPI of                                                                            |   |   | 2.0    | %      |                           |   | (36    | )      |   |   | (36 | ) |
| Decrease in the CPI of                                                                            |   |   | (2.0   | )%     |                           |   | 36     |   |   |   | 36 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Change |   |   | Equity                         |   |   | Profit |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------------------------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   | New Israeli Shekelsin millions |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   |                           |   |   |   |   |
| December 31, 2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |                           |   |   |   |   |
| Increase in the USD of                                                                            |   |   | 10     | %      |                           |   | (22    | )      |   |   | (22 | ) |
| Decrease in the USD of                                                                            |   |   | (10    | )%     |                           |   | 22     |   |   |   | 22 |   |

----

ITEM 12.               DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

ITEM 13.               DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

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

----

ITEM 15.               CONTROLS AND PROCEDURES

|   | · | 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. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

16A.       AUDIT COMMITTEE FINANCIAL EXPERT

16B.       CODE OF ETHICS

|   | - | a more complete statement setting forth the values underlying the Code of Ethics; |
|--------|---|-----------------------------------------------------------------------------------|

|   | - | a detailed guide to appropriate behavior toward interested parties, including customers, suppliers, employees, directors, shareholders, franchisers and the community in which the Company operates; |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | the extension of the Code of Ethics to our affiliated companies; and |
|--------|---|----------------------------------------------------------------------|

|   | - | additional guidance for ensuring compliance with the Code of Ethics. |
|--------|---|----------------------------------------------------------------------|

16C.       PRINCIPAL ACCOUNTANT FEES AND SERVICES

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 2012           |   |   | 2013           |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|----------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | (NISthousands) |   |   | (NISthousands) |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |           |   |   |           |   |
| Audit Fees (1)                                                                                                 |   |           | 2,905  |   |           |   | 2,112 |   |
| Audit-related Fees (2)                                                                                         |   |           | 340    |   |           |   | 293 |   |
| Tax Fees (3)                                                                                                   |   |           | 355    |   |           |   | 329 |   |
| TOTAL                                                                                                          |   |           | 3,600  |   |           |   | 2,734 |   |

| (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. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

16D.       EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

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

16F.        CHANGE IN REGISTRANT’S CERTIFYING ACOUNTANT

16G.       CORPORATE GOVERNANCE

ITEM 17.                          FINANCIAL STATEMENTS

ITEM 18.                          FINANCIAL STATEMENTS

ITEM 19.                          EXHIBITS

----

| Exhibit No.               | Description                                                                                                                |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------|
| 1.1                       | Articles of Association last updated and approved 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).74-84                              | [reserved]                                                                                                                                                                                                                                                                                                                                                                              |
| 4.(a).854.(a).864.(a).874.(a).884.(a).89 | Amendment No. 69 to our License from the Israeli Ministry of CommunicationsAmendment No. 70 to our License from the Israeli Ministry of CommunicationsAmendment No. 71 to our License from the Israeli Ministry of CommunicationsAmendment No. 72 to our License from the Israeli Ministry of CommunicationsAmendment No. 73 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                                                                                                                                                                                                                                                                                                                                              |
| 4.(b).3                                  | Registration Rights Agreement with S.B. Israel Telecom Ltd.                                                                                                                                                                                                                                                                                                                             |

| +>>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”).                                                                                                      |
| 10.1        | Consent of Kesselman & Kesselman                                                                                                                                                    |
| 10.2        | Consent 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                                                   |
| 15.(b).1    | Compensation Policy adopted on October 17, 2013 (incorporated by reference to Exhibit C from the Company's Current Report on Form 6-K (file No. 001-14968) filed on September 12, 2013) |

----

| **                   | 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. |
| +>>            | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2012. |
| #                    | Confidential treatment requested.                                                                        |

----

|   | Partner Communications Company Ltd. |
|--------|-------------------------------------|
|   |                                |   |
|   | By: /s/ Haim Romano                 |   |
|   |                                |   |
|   | Chief Executive Officer             |   |
|   |                                |   |
|   | March 10, 2014                      |   |
|   |                                |   |
|   | By: /s/ Ziv Leitman                 |   |
|   |                                |   |
|   | Chief Financial Officer             |   |
|   |                                |   |
|   | March 10, 2014                      |   |

----

----

|                                                                                         | Page            |
|----------------------------------------------------------------------------------------------|-----------------|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                      | F - 2- F - 3    |
| CONSOLIDATED FINANCIAL STATEMENTS:                                                           |            |
| Statements of Financial Position as of December 31, 2012 and 2013                            | F - 4 - F- 5    |
| Statements of Income for the years ended December 31, 2011, 2012 and 2013               | F - 6           |
| Statements of Comprehensive Income for the years ended December 31, 2011, 2012 and 2013 | F - 7           |
| Statements of Changes in Equity for the years ended December 31, 2011, 2012 and 2013    | F - 8           |
| Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013           | F - 9- F - 10   |
| Notes to financial statements                                                                | F - 11 - F - 87 |

----

Report 

----

----

| Tel-Aviv, Israel | Kesselman & Kesselman                                     |
|------------------|---------------------------------------------------------------|
| March 9, 2014    | Certified Public Accountants (lsr.)                           |
|             | A member firm of PricewaterhouseCoopers International Limited |

----

----

PARTNER 

|                                   |   |   |     |   |   New Israeli Shekels |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|----------------------------------------|--------|--------|----------|--------|----------------------------|--------|--------|----------------------------------------------------|--------|
|                                   |   |   |     |   | December 31,               |   |
|                                   |   |   |     |   | 2012                       |   |   | 2013                                               |   |   | 2013 |   |
|                                   |   | Note   |     |   | In millions                |   |
| CURRENT ASSETS                         |   |   |     |   |                       |   |   |                                               |   |   |   |   |
| Cash and cash equivalents              |   |   |     |   |                       | 548    |   |                                               |   | 481 |   |   |   | 139 |   |
| Trade receivables                      |   |   | 8        |   |                       |   | 1,397  |                                               |   |   | 1,051 |   |   |   | 302 |   |
| Other receivables and prepaid expenses |   |   |     |   |                       |   | 47     |                                               |   |   | 45 |   |   |   | 12 |   |
| Deferred expenses – right of use |   |   | 12       |   |                       |   | 22     |                                               |   |   | 28 |   |   |   | 8 |   |
| Inventories                            |   |   | 9        |   |                       |   | 98     |                                               |   |   | 93 |   |   |   | 27 |   |
| Income tax receivable                  |   |   |     |   |                       |   | 7      |                                               |   |   | 3 |   |   |   | 1 |   |
| Derivative financial instruments       |   |   | 7        |   |                       |   | 1      |                                               |   |   | 2 |   |   |   | 1 |   |
|                                   |   |   |     |   |                       |   | 2,120  |                                               |   |   | 1,703 |   |   |   | 490 |   |
|                                   |   |   |     |   |                       |   |   |                                               |   |   |   |   |   |   |   |   |
| NON CURRENT ASSETS                     |   |   |     |   |                       |   |   |                                               |   |   |   |   |   |   |   |   |
| Trade Receivables                      |   |   | 8        |   |                       |   | 509    |                                               |   |   | 289 |   |   |   | 83 |   |
| Deferred expenses – right of use |   |   | 12       |   |                       |   | 138    |                                               |   |   | 118 |   |   |   | 34 |   |
| Property and equipment                 |   |   | 10       |   |                       |   | 1,990  |                                               |   |   | 1,791 |   |   |   | 516 |   |
| Licenses and other intangible assets   |   |   | 11       |   |                       |   | 1,217  |                                               |   |   | 1,167 |   |   |   | 336 |   |
| Goodwill                               |   |   | 5, 13(b) |   |                       |   | 407    |                                               |   |   | 407 |   |   |   | 117 |   |
| Deferred income tax asset              |   |   | 25       |   |                       |   | 36     |                                               |   |   | 12 |   |   |   | 4 |   |
|                                   |   |   |     |   |                       |   | 4,297  |                                               |   |   | 3,784 |   |   |   | 1,090 |   |
|                                   |   |   |     |   |                       |   |   |                                               |   |   |   |   |   |   |   |   |
| TOTAL ASSETS                           |   |   |     |   |                       |   | 6,417  |                                               |   |   | 5,487 |   |   |   | 1,580 |   |

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

----

|                                                                                                                                                                                                |   |   |   |   |   New Israeli Shekels |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                                                                                                                                                |   |   |   |   | December 31,                    |   |
|                                                                                                                                                                                                |   |   |   |   | 2012                            |   |   | 2013                                               |   |   | 2013 |   |
|                                                                                                                                                                                                |   | Note   |   |   | In millions                     |   |
| CURRENT LIABILITIES                                                                                                                                                                                 |   |   |   |   |                            |   |   |                                               |   |   |   |   |
| Current maturities of notes payable and bank borrowings                                                                                                                                             |   |   | 15,16  |   |                            |   | 306    |                                               |   |   | 334 |   |   |   | 96 |   |
| Trade payables                                                                                                                                                                                      |   |   |   |   |                            |   | 866    |                                               |   |   | 761 |   |   |   | 219 |   |
| Parent group - trade                                                                                                                                                                                |   |   | 26     |   |                            |   | 70     |                                               |   |   |   |   |   |   |   |   |
| Payables in respect of employees                                                                                                                                                                    |   |   |   |   |                            |   | 110    |                                               |   |   | 98 |   |   |   | 28 |   |
| Other payables (mainly institutions)                                                                                                                                                                |   |   |   |   |                            |   | 59     |                                               |   |   | 45 |   |   |   | 13 |   |
| Income tax payable                                                                                                                                                                                  |   |   |   |   |                            |   |   |                                               |   |   | 31 |   |   |   | 9 |   |
| Deferred revenues                                                                                                                                                                                   |   |   |   |   |                            |   | 40     |                                               |   |   | 37 |   |   |   | 11 |   |
| Provisions                                                                                                                                                                                          |   |   | 14     |   |                            |   | 60     |                                               |   |   | 67 |   |   |   | 19 |   |
| Derivative financial instruments                                                                                                                                                                    |   |   | 7      |   |                            |   | 14     |                                               |   |   | 1 |   |   |   | * |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   | 1,525  |                                               |   |   | 1,374 |   |   |   | 395 |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| NON CURRENT LIABILITIES                                                                                                                                                                             |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| Notes payable                                                                                                                                                                                       |   |   | 16     |   |                            |   | 2,321  |                                               |   |   | 2,038 |   |   |   | 587 |   |
| Bank borrowings                                                                                                                                                                                     |   |   | 15     |   |                            |   | 1,733  |                                               |   |   | 1,109 |   |   |   | 320 |   |
| Liability for employee rights upon retirement, net                                                                                                                                                  |   |   | 17     |   |                            |   | 50     |                                               |   |   | 45 |   |   |   | 13 |   |
| Dismantling and restoring sites obligation                                                                                                                                                          |   |   | 14     |   |                            |   | 28     |                                               |   |   | 31 |   |   |   | 9 |   |
|         Other non-current liabilities                                                                                                                            |   |   |   |   |                            |   | 10     |                                               |   |   | 16 |   |   |   | 4 |   |
| Deferred tax liability                                                                                                                                                                              |   |   | 25     |   |                            |   | 9      |                                               |   |   | * |   |   |   | * |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   | 4,151  |                                               |   |   | 3,239 |   |   |   | 933 |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| TOTAL LIABILITIES                                                                                                                                                                                   |   |   |   |   |                            |   | 5,676  |                                               |   |   | 4,613 |   |   |   | 1,328 |   |
|                                                                                                                                                                                                |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| EQUITY                                                                                                                                                                                              |   |   | 21     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| Share capital - ordinary shares of NIS 0.01    par value: authorized - December 31, 2012    and 2013 - 235,000,000 shares;    issued and outstanding - |   |   |   | 2      |                            |   |   | 2                                                  |   |   |   | 1 |   |
| December 31, 2012 – **155,645,708 shares                                                                                                                                                      |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |
| December 31, 2013 – ­**155,687,002 shares                                                                                                                                                |   |   |   |   |                            |   |   |                                               |   |   |   |   |   |
| Capital surplus                                                                                                                                                                                     |   |   |   |   |                            |   | 1,100  |                                               |   |   | 1,100 |   |   |   | 317 |   |
| Accumulated retained earnings (deficit)                                                                                                                                                             |   |   |   |   |                            |   | (10    | )                                                  |   |   | 123 |   |   |   | 35 |   |
| Treasury shares, at cost - December 31, 2012 and 2013 - 4,467,990 shares                                                                                                                            |   |   |   | (351   | )                               |   |   | (351                                               | )      |   |   | (101 | ) |
| TOTAL EQUITY                                                                                                                                                                                        |   |   |   |   |                            |   | 741    |                                               |   |   | 874 |   |   |   | 252 |   |
| TOTAL LIABILITIES AND EQUITY                                                                                                                                                                        |   |   |   |   |                            |   | 6,417  |                                               |   |   | 5,487 |   |   |   | 1,580 |   |

----

PARTNER 

|                                |   |   |   |   |   New Israeli Shekels              |   |   |  Convenience translation into U.S. Dollars(note 2a) |   |
|-------------------------------------|--------|--------|--------|--------|-----------------------------------------|--------|--------|----------------------------------------------------------|--------|
|                                |   |   |   |   | Year ended December 31                  |   |
|                                |   |   |   |   | 2011                                    |   |   | 2012                                                     |   |   | 2013 |   |   | 2013 |   |
|                                |   | Note   |   |   | In millions (except earnings per share) |   |
| Revenues, net                       |   |   | 6      |   |                                    |   | 6,998  |                                                     |   |   | 5,572 |   |   |   | 4,519 |   |   |   | 1,302 |   |
| Cost of revenues                    |   |   | 6, 22  |   |                                    |   | 4,978  |                                                     |   |   | 4,031 |   |   |   | 3,510 |   |   |   | 1,011 |   |
| Gross profit                        |   |   |   |   |                                    |   | 2,020  |                                                     |   |   | 1,541 |   |   |   | 1,009 |   |   |   | 291 |   |
|                                |   |   |   |   |                                    |   |   |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing expenses      |   |   | 22     |   |                                    |   | 711    |                                                     |   |   | 551 |   |   |   | 462 |   |   |   | 133 |   |
| General and administrative expenses |   |   | 22     |   |                                    |   | 291    |                                                     |   |   | 236 |   |   |   | 217 |   |   |   | 63 |   |
| Impairment of goodwill              |   |   | 13(b)  |   |                                    |   | 87     |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income, net                   |   |   | 23     |   |                                    |   | 105    |                                                     |   |   | 111 |   |   |   | 79 |   |   |   | 23 |   |
| Operating profit                    |   |   |   |   |                                    |   | 1,036  |                                                     |   |   | 865 |   |   |   | 409 |   |   |   | 118 |   |
| Finance income                      |   |   | 24     |   |                                    |   | 33     |                                                     |   |   | 21 |   |   |   | 29 |   |   |   | 8 |   |
| Finance expenses                    |   |   | 24     |   |                                    |   | 327    |                                                     |   |   | 255 |   |   |   | 240 |   |   |   | 69 |   |
| Finance costs, net                  |   |   | 24     |   |                                    |   | 294    |                                                     |   |   | 234 |   |   |   | 211 |   |   |   | 61 |   |
| Profit before income tax            |   |   |   |   |                                    |   | 742    |                                                     |   |   | 631 |   |   |   | 198 |   |   |   | 57 |   |
| Income tax expenses                 |   |   | 25     |   |                                    |   | 299    |                                                     |   |   | 153 |   |   |   | 63 |   |   |   | 18 |   |
| Profit for the year                 |   |   |   |   |                                    |   | 443    |                                                     |   |   | 478 |   |   |   | 135 |   |   |   | 39 |   |
|                                |   |   |   |   |                                    |   |   |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share                  |   |   |   |   |                                    |   |   |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                               |   |   |   |   |                                    |   | 2.85   |                                                     |   |   | 3.07 |   |   |   | 0.87 |   |   |   | 0.25 |   |
| Diluted                             |   |   | 27     |   |                                    |   | 2.84   |                                                     |   |   | 3.07 |   |   |   | 0.86 |   |   |   | 0.25 |   |

----

PARTNER 

|                                                                              |   |   |   |   |    New Israeli Shekels |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|-----------------------------------------------------------------------------------|--------|--------|--------|--------|---------------------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                              |   |   |   |   | Year ended December 31                |   |
|                                                                              |   |   |   |   | 2011                                  |   |   | 2012                                               |   |   | 2013 |   |   | 2013 |   |
|                                                                              |   | Note   |   |   | In millions                           |   |
| Profit for the year                                                               |   |   |   |   |                                  | 443    |   |                                               |   | 478 |   |   |   | 135 |   |   |   | 39 |   |
| Other comprehensive losses, items that will not be reclassified to profit or loss |   |   |   |   |                                  |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
|  Remeasurements of post-employment benefit obligations                       |   |   | 17     |   |                                  |   | (21    | )                                                  |   |   | (17 | ) |   |   | (9 | ) |   |   | (3 | ) |
| Income taxes relating to remeasurements of post-employment benefit obligations    |   |   | 25     |   |                                  |   | 5      |                                               |   |   | 4 |   |   |   | 2 |   |   |   | 1 |   |
| Other comprehensive losses for the year, net of income taxes                      |   |   |   |   |                                  |   | (16    | )                                                  |   |   | (13 | ) |   |   | (7 | ) |   |   | (2 | ) |
|                                                                              |   |   |   |   |                                  |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL COMPREHENSIVE INCOME FOR THE YEAR                                           |   |   |   |   |                                  |   | 427    |                                               |   |   | 465 |   |   |   | 128 |   |   |   | 37 |   |

----

PARTNER 

|                                                 |   |   |   |   | Share capital |        |        |                      |   |   |    |   |   |                       |   |   |     |   |
|------------------------------------------------------|--------|--------|--------|--------|---------------|-------------|-------------|---------------------------|--------|--------|---------|--------|--------|----------------------------|--------|--------|----------|--------|
|                                                 |   |   |   |   | Number of     |        |        |                      |   |   | Capital |   |   |   Accumulatedearnings |   |   | 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, 2011                           |   |   |   |   |          | 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 |   |
|                                                 |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2013      |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year              |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   | 128 |   |   |   |   |   |   |   | 128 |   |
| Exercise of options granted to employees             |   |   |   |   |          |        | 41,294      |                      |   |   | *       |   |   |                       | *      |   |     |   |   |   |   |   |   |   |   |   | * |   |
| Employee share-based compensation expenses           |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   | 5 |   |   |   |   |   |   |   | 5 |   |
| BALANCE AT DECEMBER 31, 2013                         |   |   |   |   |          |        | 155,687,002 |                      |   |   | 2       |   |   |                       | 1,100  |   |     |   | 123 |   |   |   | (351 | ) |   |   | 874 |   |
|                                                 |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| Convenience translation into U.S. Dollars (note 2a): |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE AT JANUARY 1, 2013                           |   |   |   |   |          |        | 155,645,708 |                      |   |   | 1       |   |   |                       | 317    |   |     |   | (3 | ) |   |   | (101 | ) |   |   | 214 |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2013      |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year              |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   | 37 |   |   |   |   |   |   |   | 37 |   |
| Exercise of options granted to employees             |   |   |   |   |          |        | 41,294      |                      |   |   | *       |   |   |                       | *      |   |     |   |   |   |   |   |   |   |   |   |   |   |
| Employee share-based compensation expenses           |   |   |   |   |          |        |        |                      |   |   |    |   |   |                       |   |   |     |   | 1 |   |   |   |   |   |   |   | 1 |   |
| BALANCE AT DECEMBER 31, 2013                         |   |   |   |   |          |        | 155,687,002 |                      |   |   | 1       |   |   |                       | 317    |   |     |   | 35 |   |   |   | (101 | ) |   |   | 252 |   |

----

PARTNER 

|                                                                   |   |   |   |   | New Israeli Shekels    |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                   |   |   |   |   | Year ended December 31 |   |
|                                                                   |   |   |   |   | 2011                   |   |   | 2012                                               |   |   | 2013 |   |   | 2013 |   |
|                                                                   |   | Note   |   |   | In millions            |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                  |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |
| Cash generated from operations (Appendix)                              |   |   |   |   |                   | 1,881  |   |                                               |   | 1,858 |   |   |   | 1,548 |   |   |   | 446 |   |
| Income tax paid                                                        |   |   | 25     |   |                   |   | (311   | )                                                  |   |   | (153 | ) |   |   | (9 | ) |   |   | (3 | ) |
| Net cash provided by operating activities                              |   |   |   |   |                   |   | 1,570  |                                               |   |   | 1,705 |   |   |   | 1,539 |   |   |   | 443 |   |
|                                                                   |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                  |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition of property and equipment                                  |   |   | 10     |   |                   |   | (349   | )                                                  |   |   | (367 | ) |   |   | (326 | ) |   |   | (94 | ) |
| Acquisition of intangible assets                                       |   |   | 11     |   |                   |   | (155   | )                                                  |   |   | (133 | ) |   |   | (156 | ) |   |   | (45 | ) |
| Acquisition of 012 smile, net of cash acquired of  NIS 23 million |   |   | 5      |   |                   |   | (597   | )                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest received                                                      |   |   | 24     |   |                   |   | 12     |                                               |   |   | 9 |   |   |   | 8 |   |   |   | 2 |   |
| Proceeds from sale of property and equipment                           |   |   |   |   |                   |   | 3      |                                               |   |   | 2 |   |   |   | 1 |   |   |   | * |   |
| Proceeds from derivative financial instruments, net                    |   |   | 7      |   |                   |   | 1      |                                               |   |   | 18 |   |   |   | (25 | ) |   |   | (6 | ) |
| Net cash used in investing activities                                  |   |   |   |   |                   |   | (1,085 | )                                                  |   |   | (471 | ) |   |   | (498 | ) |   |   | (143 | ) |
|                                                                   |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                  |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from exercise of stock options granted to employees           |   |   |   |   |                   |   | 1      |                                               |   |   |   |   |   |   | * |   |   |   | * |   |
| Non-current bank borrowings received                                   |   |   | 15     |   |                   |   | 900    |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from issuance of notes payable, net of issuance costs         |   |   | 16     |   |                   |   | 1,136  |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|   Dividend paid                                                   |   |   | 21     |   |                   |   | (659   | )                                                  |   |   | (167 | ) |   |   |   |   |   |   |   |   |
| Repayment of finance lease                                             |   |   |   |   |                   |   | (4     | )                                                  |   |   | (2 | ) |   |   | (1 | ) |   |   | * |   |
|   Interest paid                                                   |   |   | 24     |   |                   |   | (235   | )                                                  |   |   | (200 | ) |   |   | (181 | ) |   |   | (52 | ) |
|   Repayment of current borrowings                                 |   |   | 15     |   |                   |   | (128   | )                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
|   Repayment of non-current bank borrowings                        |   |   | 15     |   |                   |   | (699   | )                                                  |   |   | (455 | ) |   |   | (617 | ) |   |   | (178 | ) |
|         Repayment of notes payable  |   |   | 16     |   |                   |   | (586   | )                                                  |   |   | (394 | ) |   |   | (309 | ) |   |   | (89 | ) |
| Net cash used in financing activities                                  |   |   |   |   |                   |   | (274   | )                                                  |   |   | (1,218 | ) |   |   | (1,108 | ) |   |   | (319 | ) |
|                                                                   |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       |   |   |   |   |                   |   | 211    |                                               |   |   | 16 |   |   |   | (67 | ) |   |   | (19 | ) |
|                                                                   |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS ATBEGINNING OF YEAR                          |   |   |   |   |                   |   | 321    |                                               |   |   | 532 |   |   |   | 548 |   |   |   | 158 |   |
|                                                                   |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                               |   |   |   |   |                   |   | 532    |                                               |   |   | 548 |   |   |   | 481 |   |   |   | 139 |   |

----

|                                                                                            |   |   |      |   |   New Israeli Shekels |   |   | Convenience translation intoU.S. dollars(note 2a) |   |
|-------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|---------------------------------|--------|--------|---------------------------------------------------|--------|
|                                                                                            |   |   |      |   | Year ended December 31,    |   |
|                                                                                            |   |   |      |   | 2011                            |   |   | 2012                                              |   |   | 2013 |   |   | 2013 |   |
|                                                                                            |   | Note   |      |   | In millions                     |   |
|                                                                                            |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |
| Cash generated from operations:                                                                 |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |
|         Profit for the year                                  |   |   |      |   |                            | 443    |   |                                              |   | 478 |   |   |   | 135 |   |   |   | 39 |   |
|                                                                                            |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |
|     Adjustments for:                                                        |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |
|         Depreciation and amortization                   |   |   | 10, 11    |   |                            |   | 743    |                                              |   |   | 700 |   |   |   | 669 |   |   |   | 193 |   |
|         Amortization of deferred expenses- Right of use |   |   | 12        |   |                            |   | 29     |                                              |   |   | 26 |   |   |   | 31 |   |   |   | 9 |   |
|         Impairment of deferred expenses- Right of use   |   |   | 12, 13(a) |   |                            |   | 148    |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
|         Impairment of goodwill                          |   |   | 13(b)     |   |                            |   | 87     |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Impairment of intangible assets                                                                 |   |   | 13        |   |                            |   | 114    |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Employee share based compensation expenses                                                      |   |   | 21        |   |                            |   | 19     |                                              |   |   | 11 |   |   |   | 5 |   |   |   | 1 |   |
| Liability for employee rights upon retirement, net                                              |   |   | 17        |   |                            |   | (26    | )                                                 |   |   | (12 | ) |   |   | (14 | ) |   |   | (4 | ) |
| Finance costs, net                                                                              |   |   | 24        |   |                            |   | 71     |                                              |   |   | 38 |   |   |   | 49 |   |   |   | 14 |   |
| Change in fair value of derivative financial instruments                                        |   |   | 7         |   |                            |   | (19    | )                                                 |   |   | 15 |   |   |   | 12 |   |   |   | 3 |   |
| Interest paid                                                                                   |   |   | 24        |   |                            |   | 235    |                                              |   |   | 200 |   |   |   | 181 |   |   |   | 52 |   |
| Interest received                                                                               |   |   | 24        |   |                            |   | (12    | )                                                 |   |   | (9 | ) |   |   | (8 | ) |   |   | (2 | ) |
| Deferred income taxes                                                                           |   |   | 25        |   |                            |   | 2      |                                              |   |   | (10 | ) |   |   | 17 |   |   |   | 5 |   |
| Income tax paid                                                                                 |   |   | 25        |   |                            |   | 311    |                                              |   |   | 153 |   |   |   | 9 |   |   |   | 3 |   |
| Capital loss (gain) from property and equipment                                                 |   |   | 10        |   |                            |   | 2      |                                              |   |   | * |   |   |   | (1 | ) |   |   | * |   |
| Changes in operating assets and liabilities:                                                    |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in accounts receivable:                                                     |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
|  Trade                                                                                     |   |   | 8         |   |                            |   | (190   | )                                                 |   |   | 467 |   |   |   | 566 |   |   |   | 163 |   |
|  Other                                                                                     |   |   |      |   |                            |   | 44     |                                              |   |   | (5 | ) |   |   | 2 |   |   |   | 1 |   |
| Increase (decrease) in accounts payable and accruals:                                           |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
|  Parent group - trade                                                                      |   |   | 26        |   |                            |   | 70     |                                              |   |   | (72 | ) |   |   |   |   |   |   |   |   |
|  Trade                                                                                     |   |   |      |   |                            |   | (37    | )                                                 |   |   | (107 | ) |   |   | (115 | ) |   |   | (33 | ) |
|  Other payables                                                                            |   |   |      |   |                            |   | (91    | )                                                 |   |   | (44 | ) |   |   | (17 | ) |   |   | (5 | ) |
| Provisions                                                                                      |   |   | 14        |   |                            |   | 36     |                                              |   |   | (5 | ) |   |   | 7 |   |   |   | 2 |   |
| Deferred revenues                                                                               |   |   |      |   |                            |   | *      |                                              |   |   | (11 | ) |   |   | (3 | ) |   |   | (1 | ) |
| Increase in deferred expenses - Right of use                                                    |   |   | 12        |   |                            |   | (27    | )                                                 |   |   | (25 | ) |   |   | (17 | ) |   |   | (5 | ) |
| Current income tax liability                                                                    |   |   | 25        |   |                            |   | (13    | )                                                 |   |   | 5 |   |   |   | 35 |   |   |   | 10 |   |
| Decrease (increase) in inventories                                                              |   |   | 9         |   |                            |   | (58    | )                                                 |   |   | 65 |   |   |   | 5 |   |   |   | 1 |   |
| Cash generated from operations:                                                                 |   |   |      |   |                            |   | 1,881  |                                              |   |   | 1,858 |   |   |   | 1,548 |   |   |   | 446 |   |

----

PARTNER 

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

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

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

----

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

|   | (2) | Fixed-line segment The fixed-line segment includes: (1) Internet services ("ISP") under which the Group  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"), and Network Termination Point Services ("NTP") – under which the Group supply, install operate and maintain all types of endpoint network equipment and solutions, including providing and installing equipment and cabling, within a subscriber's place of business or premises. (2) Transmission services and Primary Rate Interface ("PRI"); (3) International Long Distance call services ("ILD"): outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Main recent regulatory developments |
|--------|----|-------------------------------------|

|   | (1) | See information in respect of royalty payments in note 18(1). |
|--------|-----|---------------------------------------------------------------|

|   | (2) | See information in respect of corporate tax rates in note 25. |
|--------|-----|---------------------------------------------------------------|

----

|   | d. | Group licenses |
|--------|----|----------------|

|   | Type of services | Area of service | License owner                                                   | Granted by | Valid through | Guarantees made  |
|--------|------------------|-----------------|-----------------------------------------------------------------|------------|---------------|------------------|
| (1)    | Cellular         | Israel          | Partner Communications Company Ltd.                             | MOC        | Feb 1, 2022   | USD 10 million   |
| (2)    | Cellular         | West Bank       | Partner Communications Company Ltd.                             | CA         | Feb 1, 2022   | USD 0.5 million  |
| (3)    | ISP              | Israel          | Partner Communications Company Ltd.                             | MOC        | Mar 30, 2018  |             |
| (4)    | ISP              | West Bank       | Partner Communications Company Ltd.                             | CA         | Mar 30, 2018  |             |
| (5)    | ISP              | Israel          | 012 Smile Telecom Ltd.                                          | MOC        | Dec 31, 2014  |             |
| (6)    | ISP              | West Bank       | 012 Smile Telecom Ltd.                                          | CA         | Feb 21, 2016  |             |
| (7)    | ILD              | Israel          | 012 Smile Telecom Ltd.                                          | MOC        | Nov 15, 2029  | NIS 10.8 million |
| (8)    | ILD              | West Bank       | 012 Smile Telecom Ltd.                                          | CA         | Feb 21, 2018  | NIS 0.6 million  |
| (9)    | VOB and PRI      | Israel          | 012 Telecom Ltd.                                                | MOC        | Dec 21, 2025  | NIS 12 million   |
| (10)   | VOB and PRI      | West Bank       | 012 Telecom Ltd.                                                | CA         | Feb 21, 2018  |             |
| (11)   | VOB and PRI      | Israel          | Partner Land-line Communication Solutions - Limited Partnership | MOC        | Jan 15, 2027  | NIS 12.1 million |
| (12)   | VOB and PRI      | West Bank       | Partner Land-line Communication Solutions - Limited Partnership | CA         | Mar 22, 2019  |             |
| (13)   | NTP              | Israel          | Partner Land-line Communication Solutions - Limited Partnership | MOC        | Feb 28, 2017  |             |
| (14)   | NTP              | Israel          | 012 Smile Telecom Ltd.                                          | MOC        | Dec 31, 2014  |             |

----

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

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

----

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

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

----

|   | d. | Inventories |
|--------|----|-------------|

|   | e. | Property and equipment |
|--------|----|------------------------|

----

|   | e. | 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                                   |

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

|   | (1) | Licenses costs and amortization (see also note 1 (d)): |
|--------|-----|--------------------------------------------------------|

|   | (a) | The licenses to operate cellular communication services were recognized at cost, adjusted for changes in the CPI until December 31, 2003 (See note 2 (b)(1)) 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) | Partner Land-line Communication solutions – limited partnership's license for providing fixed-line communication services is stated at cost. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | 012 Smile and its subsidiaries' licenses were recognized at fair value in a business combination as of the acquisition date of 012 Smile March 3, 2011 (see note 5). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

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

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

----

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

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

|   | g. | Right Of Use (ROU) of international fiber optic cables |
|--------|----|--------------------------------------------------------|

|   | h. | Goodwill |
|--------|----|----------|

----

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

|   | h. | Goodwill (continued) |
|--------|----|----------------------|

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

|   | j. | 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, determined at initial recognition. See note 7 (c) as to classification of financial instruments to the categories. Financial assets are classified as current if they are expected to mature within 12 months after the end of the reporting period; otherwise they are classified as non-current. Financial liabilities are included in current liabilities, except for maturities greater than 12 months after the end of the reporting period, which are classified as non-current liabilities. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|   | j. | Financial instruments (continued) |
|--------|----|-----------------------------------|

----

|   | k. | Employee benefits |
|--------|----|-------------------|

----

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

|   | l. | Share based payments |
|--------|----|----------------------|

----

|   | m. | 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 (unwinding of discount). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (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. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | n. | Revenues |
|--------|----|----------|

----

|   | n. | Revenues (continued) |
|--------|----|----------------------|

----

|   | o. | Leases |
|--------|----|--------|

|   | p. | Advertising expenses |
|--------|----|----------------------|

|   | q. | Tax expenses |
|--------|----|--------------|

----

|   | r. | Share capital |
|--------|----|---------------|

|   | s. | Dividend distributions |
|--------|----|------------------------|

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

----

|   | (2) In May 2013 the IASB issued amendments to IAS 36 Impairment of Assets. The amendment requires disclosures of recoverable amount of an individual asset (including goodwill) or a cash-generating unit, for which an impairment loss has been recognized or reversed during the period. The Group will implement the amendment for annual periods beginning on January 1, 2014 and this implementation is not expected to have a material effect on the financial statements. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|   | (1) | Estimating service revenues earned but not yet billed: |
|--------|-----|--------------------------------------------------------|

|   | (2) | Assessing the useful lives of assets: |
|--------|-----|---------------------------------------|

|   | (3) | Assessing the recoverable amount for impairment tests of assets with finite useful economic lives: |
|--------|-----|----------------------------------------------------------------------------------------------------|

----

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

|   | (4) | Assessing the recoverable amount of goodwill for annual impairment tests: |
|--------|-----|---------------------------------------------------------------------------|

|                    |            |
|-------------------------|-----------------|
| Terminal growth rate    | (negative 0.3%) |
| After-tax discount rate | 11.7%           |
| Pre-tax discount rate   | 15.8%           |

|   | (5) | Assessing allowance for doubtful accounts: The allowance is established when there is objective evidence that the Group will not be able to collect amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, or delinquency or default in debtor payments are considered indicators that a trade receivable is impaired. The amount of the allowance is determined as a percentage of specific debts doubtful of collection, and taking into consideration the likelihood of recoverability of accounts receivable based on the age of the balances, the Group's historical write-off experience net of recoveries, changes in the credit worthiness of the Group's customers, and collection trends. The trade receivables are periodically reviewed for impairment. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | Considering uncertain tax positions |
|--------|-----|-------------------------------------|

----

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

----

|   | On March 3, 2011, (the "acquisition date") the Company completed the acquisition of 012 Smile Telecom Ltd., from Merhav-Ampal Energy Ltd. (the "Seller"), (the "Transaction"). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 012 Smile, a private Israeli company, is a leading provider of communication services in Israel, which provides a wide range of broadband and traditional voice services. 012 Smile's services are part of the fixed-line segment, see note 1(b)(2). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company has acquired all of the issued and outstanding shares of 012 Smile and therefore is the controlling party of 012 Smile, which will allow it to become a leading comprehensive communications group, expanding its services and products. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The purchase price for the acquisition of 012 Smile was NIS 650 million which included the acquisition of all of the outstanding shares of 012 Smile and a loan from the previous shareholder to 012 Smile. The Company had previously paid NIS 30 million as a deposit for the acquisition. The remaining NIS 620 million was funded by cash on hand of NIS 158 million and notes payable of NIS 462 million. As part of the Transaction, 012 Smile undertook a liability to the Company by an amount similar to the abovementioned loan. As part of the Transaction, the Company also guaranteed the bank loans and other bank guarantees, which were provided to 012 Smile, in a total amount of approximately NIS 800 million. For information about developments occurred after the acquisition date in respect of 012 Smile's indebtedness see notes 15. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                           |   | 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    |   |
| Reconciliation for net cash used in the acquisition:                           |   |            |   |   |
| Less: Advance payment in respect of the acquisition of 012 Smile, made in 2010 |   |            | (30    | ) |
| Less: cash acquired                                                            |   |            | (23    | ) |
| Net cash used in the acquisition of 012 Smile in 2011                          |   |            | 597    |   |

----

|                                                               |   | New Israeli Shekels          |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|
|                                                               |   | Year ended December 31, 2013 |   |
|                                                               |   | In millions                  |   |
|                                                               |   | Cellular segment             |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue - Services                                         |   |                         | 2,876  |   |   |   | 908 |   |   |   |   |   |   | 3,784 |   |
| Inter-segment revenue - Services                                   |   |                         | 31     |   |   |   | 177 |   |   |   | (208 | ) |   |   |   |   |
| Segment revenue - Equipment                                        |   |                         | 703    |   |   |   | 32 |   |   |   |   |   |   |   | 735 |   |
| Total revenues                                                     |   |                         | 3,610  |   |   |   | 1,117 |   |   |   | (208 | ) |   |   | 4,519 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues - Services                                |   |                         | 2,070  |   |   |   | 747 |   |   |   |   |   |   |   | 2,817 |   |
| Inter-segment cost of  revenues- Services                |   |                         | 175    |   |   |   | 33 |   |   |   | (208 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                               |   |                         | 664    |   |   |   | 29 |   |   |   |   |   |   |   | 693 |   |
| Cost of revenues                                                   |   |                         | 2,909  |   |   |   | 809 |   |   |   | (208 | ) |   |   | 3,510 |   |
| Gross profit                                                       |   |                         | 701    |   |   |   | 308 |   |   |   |   |   |   |   | 1,009 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                 |   |                         | 544    |   |   |   | 135 |   |   |   |   |   |   |   | 679 |   |
| Other income, net                                                  |   |                         | 77     |   |   |   | 2 |   |   |   |   |   |   |   | 79 |   |
| Operating profit                                                   |   |                         | 234    |   |   |   | 175 |   |   |   |   |   |   |   | 409 |   |
| Adjustments to presentation of Adjusted EBITDA                     |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization |   |                         | 545    |   |   |   | 155 |   |   |   |   |   |   |   | 700 |   |
|     –Other (1)                           |   |                         | 5      |   |   |   | * |   |   |   |   |   |   |   | 5 |   |
| Adjusted EBITDA (2)                                                |   |                         | 784    |   |   |   | 330 |   |   |   |   |   |   |   | 1,114 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of Adjusted EBITDA to profit before income tax      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 700 |   |
|     -  Finance costs, net            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 211 |   |
|     -  Other (1)                     |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 5 |   |
| Profit before income tax                                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 198 |   |

----

|                                                               |   | 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 |   |

----

|   | a. | Financial risk factors |
|--------|----|------------------------|

----

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

|                                                                         |   | December 31, 2013               |   |
|------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                         |   | 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                                  |   |                            | 1      |   |   |   | 1 |   |   |   |   |   |   | 479 |   |   |   | 481 |   |
|    Trade receivables**                                        |   |                            | 50     |   |   |   | 132 |   |   |   |   |   |   | 869 |   |   |   | 1,051 |   |
|    Other receivables                                          |   |                            |   |   |   |   |   |   |   |   |   |   |   | 16 |   |   |   | 16 |   |
|    Derivative financial instruments                           |   |                            | 2      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2 |   |
|                                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current assets                                                          |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Trade receivables                                          |   |                            |   |   |   |   |   |   |   |   |   |   |   | 289 |   |   |   | 289 |   |
| Total assets                                                                 |   |                            | 53     |   |   |   | 133 |   |   |   |   |   |   | 1,653 |   |   |   | 1,839 |   |
|                                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                                          |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Current maturities of notes payable and current borrowings |   |                            |   |   |   |   |   |   |   |   | 122 |   |   |   | 212 |   |   |   | 334 |   |
|    Trade payables**                                           |   |                            | 75     |   |   |   | 168 |   |   |   |   |   |   |   | 518 |   |   |   | 761 |   |
|    Payables in respect of employees                           |   |                            |   |   |   |   |   |   |   |   |   |   |   |   | 87 |   |   |   | 87 |   |
|    Other payables                                             |   |                            |   |   |   |   |   |   |   |   | 1 |   |   |   | 9 |   |   |   | 10 |   |
|    Derivative financial instruments                           |   |                            | *      |   |   |   | 1 |   |   |   |   |   |   |   |   |   |   |   | 1 |   |
|                                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current liabilities                                                     |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Notes payable                                              |   |                            |   |   |   |   |   |   |   |   | 945 |   |   |   | 1,093 |   |   |   | 2,038 |   |
|    Bank borrowings                                            |   |                            |   |   |   |   |   |   |   |   | 732 |   |   |   | 377 |   |   |   | 1,109 |   |
| Total liabilities                                                            |   |                            | 75     |   |   |   | 169 |   |   |   | 1,800 |   |   |   | 2,296 |   |   |   | 4,340 |   |

|                                                                      |   | In or linked to foreign currencies |   |
|---------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                      |   | New Israeli Shekels in millions    |   |
| ** Accounts that were set-off under enforceable netting arrangements |   |                               |   |
| Trade receivables gross amounts                                           |   |                               | 453    |   |
| Set-off                                                                   |   |                               | (271   | ) |
| Trade receivables, net                                                    |   |                               | 182    |   |
|                                                                      |   |                               |   |   |
| Trade payables gross amounts                                              |   |                               | 514    |   |
| Set-off                                                                   |   |                               | (271   | ) |
| Trade payables, net                                                       |   |                               | 243    |   |
|                                                                      |   |                               |   |   |
| Net balances                                                              |   |                               | (61    | ) |

----

|   | 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 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 |   |

----

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

|   | (c)  Details regarding the derivative financial instruments, foreign exchange and CPI risk management and sensitivity analysis |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|

|                                       |   | New Israeli Shekels |   |
|--------------------------------------------|--------|---------------------|--------|
|                                       |   | December 31         |   |
|                                       |   | 2012                |   |   | 2013 |   |
|                                       |   | In millions         |   |
| Forward transactions pay NIS, receive USD  |   |                | 373    |   |   |   | - |   |
| Forward transactions pay Euro, receive USD |   |                | 247    |   |   |   | - |   |
| Embedded derivatives pay USD, receive NIS  |   |                | 64     |   |   |   | 35 |   |

|                                 |   | Exchange    |   |   | Exchange    |   |   |          |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|---------------|--------|
|                                 |   | rate of one |   |   | rate of one |   |   | Israeli       |   |
|                                 |   | Dollar      |   |   | Euro        |   |   | CPI*          |   |
| At December 31:                      |   |        |   |   |        |   |   |          |   |
|      2013   |   | NIS 3.471   |   |   | NIS 4.782   |   |   | 223.80 points |   |
|      2012   |   | NIS 3.733   |   |   | NIS 4.921   |   |   | 219.80 points |   |
|      2011   |   | NIS 3.821   |   |   | NIS 4.938   |   |   | 216.27 points |   |
| Increase (decrease) during the year: |   |        |   |   |        |   |   |          |   |
|      2013   |   |        | (7.0   | )%     |        |   | (2.8   | )%            |   |   | 1.8 | % |
|      2012   |   |        | (2.3   | )%     |        |   | (0.35  | )%            |   |   | 1.6 | % |
|      2011   |   |        | 7.7    | %      |        |   | 4.2    | %             |   |   | 2.2 | % |

----

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

----

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

|                                                                      |   | 2014                            |   |   | 2015   |   |   | 2016   |   |   | 2017 to 2018 |   |   | 2019to 2020 |   |   | 2021to 2022 |   |   | Total undisco-unted |   |   | Less offering expenses and discounts |   |   |   Total discounted |   |
|---------------------------------------------------------------------------|--------|---------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------------|--------|--------|-------------|--------|--------|-------------|--------|--------|---------------------|--------|--------|--------------------------------------|--------|--------|------------------------------|--------|
|                                                                      |   | New Israeli Shekels in millions |   |
| Principal payments of long term indebtedness:                             |   |                            |   |   |   |   |   |   |   |   |         |   |   |        |   |   |        |   |   |                |   |   |                                 |   |   |                         |   |
| Notes payable series B (*)                                                |   |                            | 122    |   |   |   | 122    |   |   |   | 122          |   |   |        |   |   |        |   |   |                |   |   |                                 | 366    |   |                         |   | (1 | ) |   |   | 365 |   |
| Notes payable series C (*)                                                |   |                            |   |   |   |   |   |   |   |   | 235          |   |   |        | 469    |   |        |   |   |                |   |   |                                 |   | 704    |                         |   |   | (2 | ) |   |   | 702 |   |
| Notes payable series D                                                    |   |                            |   |   |   |   |   |   |   |   |         |   |   |        | 218    |   |        |   | 218    |                |   |   | 109                                  |   |   |                         | 545    |   |   |   | (4 | ) |   |   | 541 |   |
| Notes payable series E                                                    |   |                            | 187    |   |   |   | 187    |   |   |   | 187          |   |   |        | 187    |   |        |   |   |                |   |   |                                 |   |   |                         | 748    |   |   |   | (9 | ) |   |   | 739 |   |
| Bank borrowing A (*)                                                      |   |                            |   |   |   |   |   |   |   |   | 177          |   |   |        | 355    |   |        |   |   |                |   |   |                                 |   |   |                         | 532    |   |   |   |   |   |   |   | 532 |   |
| Bank borrowing C                                                          |   |                            |   |   |   |   |   |   |   |   |         |   |   |        | 25     |   |        |   | 50     |                |   |   |                                 |   |   |                         | 75     |   |   |   |   |   |   |   | 75 |   |
| Bank borrowing D                                                          |   |                            | 25     |   |   |   | 25     |   |   |   | 25           |   |   |        | 50     |   |        |   | 50     |                |   |   |                                 |   |   |                         | 175    |   |   |   |   |   |   |   | 175 |   |
| Bank borrowing E                                                          |   |                            |   |   |   |   |   |   |   |   |         |   |   |        |   |   |        |   | 152    |                |   |   |                                 |   |   |                         | 152    |   |   |   |   |   |   |   | 152 |   |
| Bank borrowing F (*)                                                      |   |                            |   |   |   |   |   |   |   |   |         |   |   |        |   |   |        |   | 200    |                |   |   |                                 |   |   |                         | 200    |   |   |   |   |   |   |   | 200 |   |
| Expected interest payments of long term borrowings and notes payables (*) |   |                            | 129    |   |   |   | 114    |   |   |   | 98           |   |   |        | 111    |   |        |   | 29     |                |   |   | 2                                    |   |   |                         | 483    |   |   |   |   |   |   |   | 483 |   |
| Trade and other payables                                                  |   |                            | 849    |   |   |   |   |   |   |   |         |   |   |        |   |   |        |   |   |                |   |   |                                 |   |   |                         | 849    |   |   |   |   |   |   |   | 849 |   |
| Derivative financial instruments                                          |   |                            | 1      |   |   |   |   |   |   |   |         |   |   |        |   |   |        |   |   |                |   |   |                                 |   |   |                         | 1      |   |   |   |   |   |   |   | 1 |   |
|                                                                      |   |                            | 1,313  |   |   |   | 448    |   |   |   | 844          |   |   |        | 1,415  |   |        |   | 699    |                |   |   | 111                                  |   |   |                         | 4,830  |   |   |   | (16 | ) |   |   | 4,814 |   |

|   | b. | Capital risk management |
|--------|----|-------------------------|

|   |   | See note 15(2) regarding financial covenants. |
|--------|--------|-----------------------------------------------|

----

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

|                             |         |   | December 31, 2012               |   |   | December 31, 2013 |   |
|----------------------------------|--------------|--------|---------------------------------|--------|--------|-------------------|--------|
|                             | 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      |   |                            | 548    |   |              |   | 548 |   |   |   |   |   |   | 481 |   |   |   | 481 |   |   |   |   |
| Trade receivables                | L&R      |   |                            | 1,906  |   |              |   | 1,907 |   |   |   | 6.77 | % |   |   | 1,340 |   |   |   | 1,343 |   |   |   | 6.24 | % |
| Other receivables (*)            | L&R      |   |                            | 20     |   |              |   | 20 |   |   |   |   |   |   |   | 20 |   |   |   | 20 |   |   |   |   |   |
| Derivative financial instruments | FVTPLLevel 2 |   |                            | 1      |   |              |   | 1 |   |   |   |   |   |   |   | 2 |   |   |   | 2 |   |   |   |   |   |
| Liabilities                      |         |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable series B           | AC           |   |                            | 478    |   |              |   | 503 |   |   | Market quote |   |   |   | 365 |   |   |   | 387 |   |   | Market quote |   |
| Notes payable series C           | AC           |   |                            | 688    |   |              |   | 741 |   |   | Market quote |   |   |   | 702 |   |   |   | 766 |   |   | Market quote |   |
| Notes payable series D           | AC           |   |                            | 540    |   |              |   | 515 |   |   | Market quote |   |   |   | 541 |   |   |   | 537 |   |   | Market quote |   |
| Notes payable series E           | AC           |   |                            | 921    |   |              |   | 987 |   |   | Market quote |   |   |   | 739 |   |   |   | 808 |   |   | Market quote |   |
| Trade and other payables (*)     | AC           |   |                            | 962    |   |              |   | 962 |   |   |   |   |   |   |   | 849 |   |   |   | 849 |   |   |   |   |   |
| Bank borrowing A                 | AC           |   |                            | 522    |   |              |   | 545 |   |   |   | 1.83 | % |   |   | 532 |   |   |   | 567 |   |   |   | 1.09 | % |
| Bank borrowing C                 | AC           |   |                            | 175    |   |              |   | 194 |   |   |   | 3.51 | % |   |   | 75 |   |   |   | 91 |   |   |   | 2.13 | % |
| Bank borrowing D                 | AC           |   |                            | 175    |   |              |   | 194 |   |   |   | 3.51 | % |   |   | 175 |   |   |   | 201 |   |   |   | 2.13 | % |
| Bank borrowing E (*)             | AC           |   |                            | 376    |   |              |   | 376 |   |   |   |   |   |   |   | 152 |   |   |   | 152 |   |   |   |   |   |
| Bank borrowing F                 | AC           |   |                            | 485    |   |              |   | 519 |   |   |   | 1.71 | % |   |   | 200 |   |   |   | 221 |   |   |   | 1.69 | % |
| Parent group – trade (*)   | AC           |   |                            | 70     |   |              |   | 70 |   |   |   |   |   |   |   | - |   |   |   | - |   |   |   |   |   |
| Finance lease obligation (*)     | AC           |   |                            | 1      |   |              |   | 1 |   |   |   |   |   |   |   | - |   |   |   | - |   |   |   |   |   |
| Derivative financial instruments | FVTPLLevel 2 |   |                            | 14     |   |              |   | 14 |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |   |   |   |   |

|   |  (*) | The fair value of these financial instruments equals their carrying amounts, as the impact of discounting is not significant. |
|--------|-----------|-------------------------------------------------------------------------------------------------------------------------------|

|   | (**) | The fair values of the notes payable are quoted market prices at the end of the reporting period are within level 1 of the fair value hierarchy. The fair values of other instruments under L&R and AC categories were calculated based on observable weighted average of interest rates derived from quoted market prices of the Group's notes payable of similar terms and nature, are within level 2 of the fair value hierarchy. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|                            |   | New Israeli Shekels |   |
|---------------------------------|--------|---------------------|--------|
|                            |   | December 31         |   |
|                            |   | 2012                |   |   | 2013 |   |
|                            |   | In millions         |   |
| Trade (current and non-current) |   |                | 2,212  |   |   |   | 1,590 |   |
| Deferred interest income        |   |                | (84    | ) |   |   | (48 | ) |
| Allowance for doubtful accounts |   |                | (222   | ) |   |   | (202 | ) |
|                            |   |                | 1,906  |   |   |   | 1,340 |   |
| Current                         |   |                | 1,397  |   |   |   | 1,051 |   |
| Non – current             |   |                | 509    |   |   |   | 289 |   |

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

|                                                     |   | New Israeli Shekels |   |
|----------------------------------------------------------|--------|---------------------|--------|
|                                                     |   | Year ended          |   |
|                                                     |   | 2011                |   |   | 2012 |   |   | 2013 |   |
|                                                     |   | In millions         |   |
| Balance at beginning of year                             |   |                | 256    |   |   |   | 244 |   |   |   | 222 |   |
| Receivables written-off during the year as uncollectible |   |                | (55    | ) |   |   | (69 | ) |   |   | (70 | ) |
| Charge or expense during the year                        |   |                | 43     |   |   |   | 47 |   |   |   | 50 |   |
| Balance at end of year                                   |   |                | 244    |   |   |   | 222 |   |   |   | 202 |   |

----

|                        |   | New Israeli Shekels |   |
|-----------------------------|--------|---------------------|--------|
|                        |   | December 31         |   |
|                        |   | 2012                |   |   | 2013 |   |
|                        |   | In millions         |   |
|                        |   | Gross               |   |   | Allowance |   |   | Gross |   |   | Allowance |   |
| Not past due                |   |                | 1,867  |   |   |   | 31 |   |   |   | 1,315 |   |   |   | 16 |   |
| Past due less than one year |   |                | 163    |   |   |   | 60 |   |   |   | 117 |   |   |   | 64 |   |
| Past due more than one year |   |                | 182    |   |   |   | 131 |   |   |   | 158 |   |   |   | 122 |   |
|                        |   |                | 2,212  |   |   |   | 222 |   |   |   | 1,590 |   |   |   | 202 |   |

|                                                                                         |   | New Israeli Shekels |   |
|----------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                         |   | December 31         |   |
|                                                                                         |   | 2012                |   |   | 2013 |   |
|                                                                                         |   | In millions         |   |
| Handsets                                                                                     |   |                | 67     |   |   |   | 69 |   |
| Accessories and other                                                                        |   |                | 12     |   |   |   | 11 |   |
| Spare parts                                                                                  |   |                | 12     |   |   |   | 8 |   |
| ISP modems, routers, servers and related                                                     |   |                |   |   |   |   |   |   |
|     equipment                                                            |   |                | 7      |   |   |   | 5 |   |
|                                                                                         |   |                | 98     |   |   |   | 93 |   |
|                                                                                         |   |                |   |   |   |   |   |   |
| Write-offs recorded                                                                          |   |                | 2      |   |   |   | 2 |   |
| Cost of inventory recognized as expenses and included in cost of revenues for the year ended |   |                | 841    |   |   |   | 705 |   |

----

|                         |   | 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, 2011   |   |                            | 2,129  |   |                                  |   | 317    |                            |   |   | 328                            |   |   |                               | 21     |   |   |   | 228 |   |   |   | 3,023 |   |
| Acquisition of 012 Smile     |   |                            | 101    |   |                                  |   | 27     |                            |   |   |                           |   |   |                               | 7      |   |   |   | 24 |   |   |   | 159 |   |
| Additions in 2011            |   |                            | 217    |   |                                  |   | 45     |                            |   |   | 37                             |   |   |                               | 5      |   |   |   | 37 |   |   |   | 341 |   |
| Disposals in 2011            |   |                            | 57     |   |                                  |   | 35     |                            |   |   | 1                              |   |   |                               | 3      |   |   |   | 24 |   |   |   | 120 |   |
| Balance at December 31, 2011 |   |                            | 2,390  |   |                                  |   | 354    |                            |   |   | 364                            |   |   |                               | 30     |   |   |   | 265 |   |   |   | 3,403 |   |
|                         |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Additions in 2012            |   |                            | 295    |   |                                  |   | 61     |                            |   |   | 48                             |   |   |                               | 3      |   |   |   | 17 |   |   |   | 424 |   |
| Disposals in 2012            |   |                            | 184    |   |                                  |   | 14     |                            |   |   |                           |   |   |                               | 2      |   |   |   | 4 |   |   |   | 204 |   |
| Balance at December 31, 2012 |   |                            | 2,501  |   |                                  |   | 401    |                            |   |   | 412                            |   |   |                               | 31     |   |   |   | 278 |   |   |   | 3,623 |   |
|                         |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Additions in 2013            |   |                            | 208    |   |                                  |   | 2      |                            |   |   | 38                             |   |   |                               | *      |   |   |   | 10 |   |   |   | 258 |   |
| Disposals in 2013            |   |                            | 205    |   |                                  |   | 71     |                            |   |   | -                              |   |   |                               | 1      |   |   |   | 74 |   |   |   | 351 |   |
| Balance at December 31, 2013 |   |                            | 2,504  |   |                                  |   | 332    |                            |   |   | 450                            |   |   |                               | 30     |   |   |   | 214 |   |   |   | 3,530 |   |
|                         |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Accumulated Depreciation     |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2011   |   |                            | 714    |   |                                  |   | 110    |                            |   |   | 44                             |   |   |                               | 13     |   |   |   | 84 |   |   |   | 965 |   |
| Depreciation in 2011         |   |                            | 369    |   |                                  |   | 66     |                            |   |   | 26                             |   |   |                               | 6      |   |   |   | 35 |   |   |   | 502 |   |
| Disposals in 2011            |   |                            | 55     |   |                                  |   | 35     |                            |   |   |                           |   |   |                               | 2      |   |   |   | 23 |   |   |   | 115 |   |
| Balance at December 31, 2011 |   |                            | 1,028  |   |                                  |   | 141    |                            |   |   | 70                             |   |   |                               | 17     |   |   |   | 96 |   |   |   | 1,352 |   |
|                         |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Depreciation in 2012         |   |                            | 352    |   |                                  |   | 62     |                            |   |   | 23                             |   |   |                               | 5      |   |   |   | 42 |   |   |   | 484 |   |
| Disposals in 2012            |   |                            | 183    |   |                                  |   | 14     |                            |   |   |                           |   |   |                               | 2      |   |   |   | 4 |   |   |   | 203 |   |
| Balance at December 31, 2012 |   |                            | 1,197  |   |                                  |   | 189    |                            |   |   | 93                             |   |   |                               | 20     |   |   |   | 134 |   |   |   | 1,633 |   |
|                         |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Depreciation in 2013         |   |                            | 318    |   |                                  |   | 61     |                            |   |   | 27                             |   |   |                               | 3      |   |   |   | 48 |   |   |   | 457 |   |
| Disposals in 2013            |   |                            | 205    |   |                                  |   | 71     |                            |   |   | -                              |   |   |                               | 1      |   |   |   | 74 |   |   |   | 351 |   |
| Balance at December 31, 2013 |   |                            | 1,310  |   |                                  |   | 179    |                            |   |   | 120                            |   |   |                               | 22     |   |   |   | 108 |   |   |   | 1,739 |   |
|                         |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Carrying amounts, net        |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
|                         |   |                            |   |   |                                  |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2011         |   |                            | 1,362  |   |                                  |   | 213    |                            |   |   | 294                            |   |   |                               | 13     |   |   |   | 169 |   |   |   | 2,051 |   |
| At December 31, 2012         |   |                            | 1,304  |   |                                  |   | 212    |                            |   |   | 319                            |   |   |                               | 11     |   |   |   | 144 |   |   |   | 1,990 |   |
| At December 31, 2013         |   |                            | 1,194  |   |                                  |   | 153    |                            |   |   | 330                            |   |   |                               | 8      |   |   |   | 106 |   |   |   | 1,791 |   |

|                                                                          |   | New Israeli Shekels    |   |
|-------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                          |   | Year ended December 31 |   |
|                                                                          |   | 2011                   |   |   | 2012 |   |   | 2013 |   |
|                                                                          |   | In millions            |   |
| Depreciation expenses charged to the income statement:                        |   |                   |   |   |   |   |   |   |   |
| Cost of revenues                                                              |   |                   | 470    |   |   |   | 454 |   |   |   | 427 |   |
| Selling and marketing expenses                                                |   |                   | 15     |   |   |   | 13 |   |   |   | 13 |   |
| General and administrative expenses                                           |   |                   | 17     |   |   |   | 17 |   |   |   | 17 |   |
|                                                                          |   |                   | 502    |   |   |   | 484 |   |   |   | 457 |   |
| Cost additions include capitalization of salary and employee related expenses |   |                   | 16     |   |   |   | 24 |   |   |   | 42 |   |

----

|                                    |   | Licenses                        |   |   | Trade name |   |   | Customer relationships |   |   | Subscriber acquisition and retention costs |   |   | Computer software(*) |   |   | Total  |   |
|-----------------------------------------|--------|---------------------------------|--------|--------|------------|--------|--------|------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------|--------|--------|--------|--------|
|                                    |   | New Israeli Shekels In millions |   |
| Cost                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |
| Balance at January 1, 2011              |   |                            | 2,085  |   |       |   |   |                   |   | 18     |                                       |   |   | 66                   |   |   |   | 414    |   |   |   | 2,583 |   |
| Acquisition of 012 Smile                |   |                            | 3      |   |       |   | 73     |                   |   |   | 258                                        |   |   |                 | 35     |   |   |   | 39 |   |   |   | 408 |   |
| Additions in 2011                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 33     |   |   |   | 127 |   |   |   | 160 |   |
| Disposals in 2011                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 51     |   |   |   | 112 |   |   |   | 163 |   |
| Balance at December 31, 2011            |   |                            | 2,088  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 83     |   |   |   | 468 |   |   |   | 2,988 |   |
| Additions in 2012                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 9      |   |   |   | 134 |   |   |   | 143 |   |
| Disposals in 2012                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 20     |   |   |   | 139 |   |   |   | 159 |   |
| Balance at December 31, 2012            |   |                            | 2,088  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 72     |   |   |   | 463 |   |   |   | 2,972 |   |
| Additions in 2013                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 7      |   |   |   | 155 |   |   |   | 162 |   |
| Disposals in 2013                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 67     |   |   |   | 45 |   |   |   | 112 |   |
| Balance at December 31, 2013            |   |                            | 2,088  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 12     |   |   |   | 573 |   |   |   | 3,022 |   |
|                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Accumulated amortization and impairment |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2011              |   |                            | 1,173  |   |       |   |   |                   |   |   | 13                                         |   |   |                 | 40     |   |   |   | 280 |   |   |   | 1,506 |   |
| Amortization in 2011                    |   |                            | 81     |   |       |   | 4      |                   |   |   | 29                                         |   |   |                 | 52     |   |   |   | 75 |   |   |   | 241 |   |
| Impairment charge in 2011               |   |                            |   |   |       |   | 14     |                   |   |   | 73                                         |   |   |                 | 27     |   |   |   |   |   |   |   | 114 |   |
| Disposals in 2011                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 51     |   |   |   | 112 |   |   |   | 163 |   |
| Balance at December 31, 2011            |   |                            | 1,254  |   |       |   | 18     |                   |   |   | 115                                        |   |   |                 | 68     |   |   |   | 243 |   |   |   | 1,698 |   |
| Amortization in 2012                    |   |                            | 82     |   |       |   | 5      |                   |   |   | 25                                         |   |   |                 | 19     |   |   |   | 85 |   |   |   | 216 |   |
| Disposals in 2012                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 20     |   |   |   | 139 |   |   |   | 159 |   |
| Balance at December 31, 2012            |   |                            | 1,336  |   |       |   | 23     |                   |   |   | 140                                        |   |   |                 | 67     |   |   |   | 189 |   |   |   | 1,755 |   |
| Amortization in 2013                    |   |                            | 82     |   |       |   | 5      |                   |   |   | 24                                         |   |   |                 | 9      |   |   |   | 92 |   |   |   | 212 |   |
| Disposals in 2013                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 67     |   |   |   | 45 |   |   |   | 112 |   |
| Balance at December 31, 2013            |   |                            | 1,418  |   |       |   | 28     |                   |   |   | 164                                        |   |   |                 | 9      |   |   |   | 236 |   |   |   | 1,855 |   |
|                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Carrying amounts, net                   |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2011                    |   |                            | 834    |   |       |   | 55     |                   |   |   | 161                                        |   |   |                 | 15     |   |   |   | 225 |   |   |   | 1,290 |   |
| At December 31, 2012                    |   |                            | 752    |   |       |   | 50     |                   |   |   | 136                                        |   |   |                 | 5      |   |   |   | 274 |   |   |   | 1,217 |   |
| At December 31, 2013                    |   |                            | 670    |   |       |   | 45     |                   |   |   | 112                                        |   |   |                 | 3      |   |   |   | 337 |   |   |   | 1,167 |   |

|                                                                                  |   | New Israeli Shekels    |   |
|---------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                  |   | Year ended December 31 |   |
|                                                                                  |   | 2011                   |   |   | 2012 |   |   | 2013 |   |
|                                                                                  |   | In millions            |   |
| Amortization expenses, including impairment charges, charged to the income statement: |   |                   |   |   |   |   |   |   |   |
| Cost of revenues                                                                      |   |                   | 238    |   |   |   | 187 |   |   |   | 183 |   |
| Selling and marketing expenses                                                        |   |                   | 117    |   |   |   | 29 |   |   |   | 29 |   |
|                                                                                  |   |                   | 355    |   |   |   | 216 |   |   |   | 212 |   |
|                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |
| (*) Cost additions include capitalization of salary and employee related expenses     |   |                   | 29     |   |   |   | 37 |   |   |   | 45 |   |

----

|                                    |   | New Israeli Shekels in millions |   |
|-----------------------------------------|--------|---------------------------------|--------|
| Cost                                    |   |                            |   |
| Balance at January 1, 2011              |   |                            | -      |   |
| Acquisition of 012 Smile                |   |                            | 311    |   |
| Additional payments in 2011             |   |                            | 27     |   |
| Balance at December 31, 2011            |   |                            | 338    |   |
| Additional payments in 2012             |   |                            | 25     |   |
| Balance at December 31, 2012            |   |                            | 363    |   |
| Additional payments in 2013             |   |                            | 17     |   |
| Balance at December 31, 2013            |   |                            | 380    |   |
|                                    |   |                            |   |   |
| Accumulated amortization and impairment |   |                            |   |   |
| Balance at January 1, 2011              |   |                            | -      |   |
| Amortization during the period (*)      |   |                            | 29     |   |
| Impairment charge (see note 13(a)(2))   |   |                            | 148    |   |
| Balance at December 31, 2011            |   |                            | 177    |   |
| Amortization in 2011                    |   |                            | 26     |   |
| Balance at December 31, 2012            |   |                            | 203    |   |
| Amortization in 2013                    |   |                            | 31     |   |
| Balance at December 31, 2013            |   |                            | 234    |   |
|                                    |   |                            |   |   |
| 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    |   |
|                                    |   |                            |   |   |
| Carrying amount, net                    |   |                            |   |   |
| At December 31, 2013                    |   |                            | 146    |   |
| Current                                 |   |                            | 28     |   |
| Non-current                             |   |                            | 118    |   |

----

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

|   | (1) | Subscriber acquisition and retention costs In August 2011, an amendment to the Telecommunications Law was enacted with respect to exit fees charged from subscribers of various other telecommunications operators: cable and satellite, internet, fixed-line telephony and international telephony. According to the amendment, new subscribers may not be charged exit fees while existing subscribers with average monthly bills lower than NIS 5,000, may be charged exit fees of no more than 8% of the subscriber's average monthly bill for operator’s services until termination, multiplied by the balance of the remaining number of months in the commitment period.As a result, the Group recorded in 2011 an impairment of intangible asset of VOB and ISP subscriber acquisition costs (fixed-line segment) in an amount of NIS 27 million. The impairment was charged to cost of revenues. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (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) For the purpose of the impairment test as at December 31, 2011, the assets were grouped to the lowest level for which there are separately identifiable cash flows (CGU). The Group reviewed the recoverability of the VOB/ISP assets. As a result, an impairment charge in a total amount of NIS 235 million was recognized. The impairment charge was allocated to the assets of the CGU pro rata, on the basis of the carrying amount of each asset, provided that the impairment did not reduce the carrying amount of an asset below the highest of its fair value less costs to sell and its value-in-use, and zero. Accordingly, the following impairment charges were recorded in 2011with respect to the assets of the above CGU:(a) Trade name by NIS 14 million, recorded in selling and marketing expenses.(b) Customer relationships by NIS 73 million, recorded in selling and marketing expenses.(c) Right of use (see note 12) by NIS 148 million, recorded in cost of revenues.The recoverable amount as at December 31, 2011 was assessed by management with the assistance of an external independent expert ("Giza Singer Even. Ltd") based on value-in-use calculations. The value in use calculations use pre-tax cash flow projections covering a five-year period and using extrapolation with specific adjustments expected until 2027, and a pre-tax discount rate of 12.5%. The value-in-use calculations included all factors in real terms. The impairment test as at December 31, 2011 was based on assessments of financial performance and future strategies in light of current and expected market and economic conditions. See also notes 2(i), 4(a)(3). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 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 |   |
|-------------------------|--------|-------------------------------|--------|--------|--------------------------|--------|
| Terminal 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 Since the beginning of 2012, management undertook a program to integrate the fixed-line segment structure that included aggregating all the fixed-line activities of the Group under the responsibility of Head of Fixed-Line Division. As a result of this integration the reporting and monitoring structure was aligned with the fixed-line segment and goodwill was allocated to a single group of CGUs which constitute all the operations of the fixed-line segment, in an amount of NIS 407 million.For the purpose of impairment testing as of December 31, 2012 and thereafter, this group of CGUs represents the lowest level within the Group at which goodwill is monitored by management for internal reporting purposes.For the purpose of the goodwill impairment test as of December 31, 2012, the recoverable amount was assessed by management with the assistance of an external independent expert ("Giza Singer Even. Ltd") based on value-in-use calculations. The value-in-use calculations use pre-tax cash flow projections covering a five-year period. Cash flows beyond the five-year period to be generated from continuing use are extrapolated using estimated growth rates. The growth rates do not exceed the long-term average growth rate of the fixed-line communications services business. The key assumptions used are as follows: |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

|   | b.  | Goodwill impairment tests(continued) Goodwill impairment test as of December 31, 2013 Goodwill is allocated to a single group of CGUs which constitute all the operations of the fixed-line segment, in an amount of NIS 407 million.For the purpose of the goodwill impairment test as of December 31, 2013, the recoverable amount was assessed by management with the assistance of an external independent expert ("Giza Singer Even. Ltd") based on value-in-use calculations. The value-in-use calculations use pre-tax cash flow projections covering a five-year period. Cash flows beyond the five-year period to be generated from continuing use are extrapolated using estimated growth rates. The growth rates do not exceed the long-term average growth rate of the fixed-line communications services business. The key assumptions used are as follows: |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Terminal growth rate    | (negative 0.3%) |
|-------------------------|-----------------|
| After-tax discount rate | 11.7%           |
| Pre-tax discount rate   | 15.8%           |

----

|                            |   | Dismantling and restoring sites obligation |   |   |  Legal claims* |   |   | Handset warranty |   |
|---------------------------------|--------|--------------------------------------------|--------|--------|---------------------|--------|--------|------------------|--------|
|                            |   | New Israeli Shekels In millions            |   |
| Balance as at January 1, 2013   |   |                                       | 28     |   |                |   | 55     |             |   |   | 5 |   |
| Additions during the year       |   |                                       | 2      |   |                |   | 21     |             |   |   | 12 |   |
| Reductions during the year      |   |                                       | *      |   |                |   | (14    | )                |   |   | (12 | ) |
| Unwind of discount              |   |                                       | 1      |   |                |   |   |             |   |   |   |   |
| Balance as at December 31, 2013 |   |                                       | 31     |   |                |   | 62     |             |   |   | 5 |   |
| Non-current                     |   |                                       | 31     |   |                |   | -      |             |   |   | - |   |
| Current                         |   |                                       | -      |   |                |   | 62     |             |   |   | 5 |   |
|                            |   |                                       |   |   |                |   |   |             |   |   |   |   |
| Balance as at December 31, 2012 |   |                                       | 28     |   |                |   | 55     |             |   |   | 5 |   |
| Non-current                     |   |                                       | 28     |   |                |   | -      |             |   |   | - |   |
| Current                         |   |                                       | -      |   |                |   | 55     |             |   |   | 5 |   |

----

|   | (1) | Bank Borrowings The Group has received bank loans from leading Israeli commercial banks. The Group may, at its discretion prepay the loans, subject to certain conditions, including that the Group shall reimburse the bank for losses sustained by the bank as a result of the prepayment. The reimbursement is mainly based on the difference between the interest rate that the Group would otherwise pay and the current market interest rate on the prepayment date.The Israeli Prime interest rate is determined by the Bank of Israel and updated on a monthly basis. The Israeli Prime interest rate as of December 31, 2012 and 2013 was 3.25% and 2.5% per year, respectively. Bank borrowings as of December 31, 2013: |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|            |   | Total principal outstanding(NIS m) |   |  Date originally received |           |  Linkage terms |   |   Annual interest rate |
|-----------------|--------|------------------------------------|--------|--------------------------------|----------------|---------------------|--------|----------------------------------|
| Borrowing A (*) |   |                               | 532    |                           | Nov. 11, 2010  |                | CPI    |                             | 2.75% CPI adj. |
| Borrowing C     |   |                               | 75     |                           | June 8, 2010   |                |   |                             | 5.7% fixed |
| Borrowing D     |   |                               | 175    |                           | June 9, 2010   |                |   |                             | 5.7% fixed |
| Borrowing E     |   |                               | 152    |                           | May 8, 2011    |                |   |                             | Prime minus 0.025% |
| Borrowing F (*) |   |                               | 200    |                           | April 10, 2011 |                | CPI    |                             | 3.42% CPI adj. |
|            |   |                               | 1,134  |                           |           |                |   |                             |   |

----

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

|   | (2) | 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, 2012 and 2013 was 4.3 and 5.2, 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, 2012 and 2013 was 2.8 and 3.2, respectively). |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Negative pledge: |
|--------|-----|------------------|

----

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

----

----

|   | (1) | Defined contribution plan: The Group had contributed NIS 14 million, NIS 17 million, NIS 15 million for the years 2011, 2012 and 2013 respectively, in accordance with Section 14 of the Israeli Severance Pay Law. See also note 2(k)(i)(1). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                                                                                |   | New Israeli Shekels |   |
|-----------------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                                |   | December 31         |   |
|                                                                                                |   | 2012                |   |   | 2013 |   |
|                                                                                                |   | In millions         |   |
| Present value of funded obligations                                                                 |   |                | 190    |   |   |   | 190 |   |
| Less: fair value of plan assets                                                                     |   |                | 140    |   |   |   | 145 |   |
| Liability for employee rights upon retirement, net  – presented as non-current liability |   |                | 50     |   |   |   | 45 |   |

----

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

|                                                        |   | New Israeli Shekels in millions |   |
|-------------------------------------------------------------|--------|---------------------------------|--------|
|                                                        |   | Present value of obligation     |   |   | Fair value of plan assets |   |   | Total |   |
| At January 1, 2012                                          |   |                            | 177    |   |   |   | (132 | ) |   |   | 45 |   |
| Current service cost                                   |   |                            | 33     |   |   |   |   |   |   |   | 33 |   |
| Interest expense (income)                              |   |                            | 8      |   |   |   | (6 | ) |   |   | 2 |   |
| Remeasurements:                                             |   |                            |   |   |   |   |   |   |   |   |   |   |
| Experience loss (gain)                                      |   |                            | 21     |   |   |   | (11 | ) |   |   | 10 |   |
| Loss (gain)  from change in financial assumptions |   |                            | 7      |   |   |   |   |   |   |   | 7 |   |
| Return on plan assets                                       |   |                            |   |   |   |   | * |   |   |   | * |   |
| Employer contributions                                      |   |                            |   |   |   |   | (26 | ) |   |   | (26 | ) |
| Benefits paid                                               |   |                            | (56    | ) |   |   | 35 |   |   |   | (21 | ) |
| At January 1, 2013                                          |   |                            | 190    |   |   |   | (140 | ) |   |   | 50 |   |
|                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |
| Current service cost                                   |   |                            | 23     |   |   |   |   |   |   |   | 23 |   |
| Interest expense (income)                              |   |                            | 7      |   |   |   | (6 | ) |   |   | 1 |   |
| Remeasurements:                                             |   |                            |   |   |   |   |   |   |   |   |   |   |
| Experience loss (gain)                                      |   |                            | 23     |   |   |   | (15 | ) |   |   | 8 |   |
| Loss (gain)  from change in financial assumptions |   |                            | 1      |   |   |   |   |   |   |   | 1 |   |
| Return on plan assets                                       |   |                            |   |   |   |   | * |   |   |   | * |   |
| Employer contributions                                      |   |                            |   |   |   |   | (21 | ) |   |   | (21 | ) |
| Benefits paid                                               |   |                            | (54    | ) |   |   | 37 |   |   |   | (17 | ) |
| Balance at December 31, 2013                           |   |                            | 190    |   |   |   | (145 | ) |   |   | 45 |   |

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

|   | The expected contribution to the defined benefit plan during the year ended December 31, 2014 is approximately NIS 17 million. |
|--------|--------------------------------------------------------------------------------------------------------------------------------|

----

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

|                                                                                      |   | New Israeli Shekels    |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                      |   | Year ended December 31 |   |
|                                                                                      |   | 2011                   |   |   | 2012 |   |   | 2013 |   |
|                                                                                      |   | In millions            |   |
| Current service cost                                                                 |   |                   | 31     |   |   |   | 33 |   |   |   | 23 |   |
| Interest expense                                                                     |   |                   | 3      |   |   |   | 2 |   |   |   | 1 |   |
| Total expenses recognized in the income statement                                         |   |                   | 34     |   |   |   | 35 |   |   |   | 24 |   |
| Charged to the statement of income as follows:                                            |   |                   |   |   |   |   |   |   |   |   |   |   |
|          Cost of revenues                    |   |                   | 19     |   |   |   | 20 |   |   |   | 13 |   |
|          Selling and marketing expenses      |   |                   | 9      |   |   |   | 10 |   |   |   | 8 |   |
|          General and administrative expenses |   |                   | 3      |   |   |   | 3 |   |   |   | 2 |   |
|          Finance costs, net                  |   |                   | 3      |   |   |   | 2 |   |   |   | 1 |   |
|                                                                                      |   |                   | 34     |   |   |   | 35 |   |   |   | 24 |   |
| Remeasurement losses net, recognized in the statement of comprehensive income, before tax |   |                   | 21     |   |   |   | 17 |   |   |   | 9 |   |
| Actual return on plan assets                                                              |   |                   | (5     | ) |   |   | 6 |   |   |   | 6 |   |

|                            |   | December 31 |    |
|---------------------------------|--------|-------------|---------|
|                            |   | 2012        |    |   | 2013 |   |
|                            |   | %           |    |   | % |   |
|                            |   |        |    |   |   |   |
| Interest rate weighted average  |   |        | 4.2     | % |   |   | 4.2 | % |
| Inflation rate weighted average |   |        | 2.6     | % |   |   | 2.4 | % |
| Expected turnover rate          |   |        | 8% - 55 | % |   |   | 8% - 55 | % |
| Future salary increases         |   |        | 1% - 26 | % |   |   | 1% - 26 | % |

----

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

|                    |   | December 31, 2013                 |   |
|-------------------------|--------|-----------------------------------|--------|
|                    |   | NIS in millions                   |   |
|                    |   | Increase of 10% of the assumption |   |   | Decrease of 10% of the assumption |   |
| Interest rate           |   |                              | (1.2   | ) |   |   | 1.2 |   |
| Expected turnover rate  |   |                              | 0.3    |   |   |   | (0.4 | ) |
| Future salary increases |   |                              | 0.8    |   |   |   | (0.7 | ) |

|                |   | NIS in millions |   |
|---------------------|--------|-----------------|--------|
|  2014          |   |            | 38     |   |
|  2015          |   |            | 16     |   |
| 2016                |   |            | 13     |   |
| 2017 and 2018       |   |            | 23     |   |
| 2019 and thereafter |   |            | 140    |   |
|                |   |            | 230    |   |

----

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

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

|              |   | Royalty rates on income from mobile telephone services provided under the Mobile Telephone License |   |   | Royalty rates on income from domestic fixed-line services and ILD services provided under the Fixed Line Licenses |   |
|-------------------|--------|----------------------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------|--------|
| Year 2011         |   |                                                                                               | 1.75   | %      |                                                                                                              |   | 1 | % |
| Year 2012         |   |                                                                                               | 1.3    | %      |                                                                                                              |   | 1 | % |
| Year 2013 onwards |   |                                                                                               | 0      | %      |                                                                                                              |   | 0 | % |

|   | (2) | Under the Telegraph Regulations the Company is committed to pay an annual fixed fee for each frequency used. 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 years 2012 and 2013 the Company paid a total amount of approximately NIS 59 and NIS 60 million, respectively.  See also note 20(b)(1). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|   | (3) | At December 31, 2013, the Group is committed to acquire property and equipment and software elements for approximately NIS 59 million, mainly for the upgrade of the networks and the deployment of a fourth generation network. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | At December 31, 2013, the Group is committed to acquire inventory in an amount of approximately NIS 1,077 million; of which an amount of NIS 18 million is from Scailex, a related party. This includes the following: the Company has signed in 2012 an 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 |   |
|---------------------|--------|---------------------------------|--------|
| 2014                |   |                            | 16     |   |
| 2015                |   |                            | 16     |   |
| 2016                |   |                            | 32     |   |
| 2017                |   |                            | 35     |   |
| 2018 and thereafter |   |                            | 160    |   |
|                |   |                            | 259    |   |

----

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

|   | (6) | In April 2012 - the Company 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. The minimum commitment as of December 31, 2013 is NIS 203 million. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | (9) | Financial covenants and negative pledge – see note 15(2), (3). |
|--------|-----|----------------------------------------------------------------------|

|   | (10) | Operating leases – see note 19. |
|--------|------|---------------------------------------|

|   | (11) | See note 28 with respect to network sharing and right of use agreements |
|--------|------|-------------------------------------------------------------------------|

----

|   | (1) | The Group leases its headquarter facilities in Rosh Ha-ayin, Israel, with a total of approximately 56,163 gross square meters (including parking lots). The lease term is until the end of 2024. The rental payments are linked to the Israeli CPI. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The Group also leases five call centers in Haifa, Jerusalem, Rehovot, Rishon Lezion and Beer-Sheva and also retail stores. The leases for each site have different lengths and specific terms. Lease agreements for service centers and retail stores for a period of two to ten years. The Group has options to extend some lease contract periods for up to twenty years (including the original lease periods). Some of 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%. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Lease agreements in respect of cell sites and switching stations throughout Israel are for periods of two to ten years. The Company has an option to extend some of the lease contract periods for up to ten years (including the original lease periods). Some of 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%. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | As of December 31, 2013 operating lease agreements in respect of vehicles are for periods of up to three years. The rental payments are linked to the Israeli CPI. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | 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, 2013   |
|                | In millions         |
| 2014                | 232                 |
| 2015                | 206                 |
| 2016                | 180                 |
| 2017                | 155                 |
| 2018-2019           | 232                 |
| 2020-2021           | 148                 |
| 2022-2023           | 91                  |
| 2024 and thereafter | 38                  |
|                | 1,282               |

|   | (6) | The rental expenses for the years ended December 31, 2011, 2012 and 2013 were approximately NIS 296 million, NIS 290 million, and NIS 271 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          |   |             | 15     |   |                              |   | 452 |   |
| NIS 100- 400 million           |   |             | 8      |   |                              |   | 1,806 |   |
| NIS 400 million -NIS 1 billion |   |             | 2      |   |                              |   | 1,008 |   |
| Over NIS 1 billion             |   |             | 1      |   |                              |   | 2,700 |   |
| Unquantified claims            |   |             | 2      |   |                              |   | - |   |
| Total                          |   |             | 28     |   |                              |   | 5,965 |   |

|   | 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. The total amount of damages claimed by the plaintiffs against 012 Smile is approximately NIS 354 million. On November 3, 2010, the court granted the plaintiffs' request and certified the lawsuit as a class action against all of the defendants. On May 10, 2012, the parties signed a settlement agreement regarding the amended request and regarding an additional lawsuit in an amount of NIS 2.7 billion, dealing with similar issues. On March 11, 2013, the parties signed a revised settlement agreement, and on May 26, 2013, the court approved the settlement agreement. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 2. | During 2010, a claim and a motion to certify the claim as a class action were filed against the Company. 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 settlement agreement reached by the parties. On January 31, 2013, the court approved the settlement agreement of which Partner had fully implemented. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | On April 13, 2011, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner sent a message to its customers that their internet package was fully utilized before it was fully utilized. The amount claimed in the lawsuit was estimated by the plaintiffs to be approximately NIS 4.6 million. On June 26, 2013, The Court approved the motion and recognized the lawsuit as a class action. On August 19, 2013, Partner filed a request to appeal to the Supreme Court. It should be noted that Partner estimates that even if the claim will be decided in favor of the relevant customers, the damages that Partner will be required to pay for will be immaterial. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | On May 12, 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 misled certain subscribers with respect to terms and conditions of a content back up service for cellular handsets. The total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 35 million. On August 27, 2013, the Court approved the motion and recognized the lawsuit as a class action. Partner estimates that even if the claim will be decided in favor of the relevant customers, the damages that Partner will be required to pay for will be immaterial. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| Claim amount                   |   | Number of claims |   |   | Total claims amount (NIS million) |   |
|--------------------------------|--------|------------------|--------|--------|-----------------------------------|--------|
| Up to NIS 100 million          |   |             | 14     |   |                              |   | 319 |   |
| NIS 100-400 million            |   |             | 2      |   |                              |   | 352 |   |
| NIS 400 million -NIS 1 billion |   |             | 1      |   |                              |   | 560 |   |
| Unquantified  claims |   |             | 3      |   |                              |   | - |   |
| Total                          |   |             | 20     |   |                              |   | 1,231 |   |

|   | 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. On September 6, 2012, the court certified the claim as a class action. On March 24, 2013, the parties filed a settlement agreement which was approved by the court on August 5, 2013. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 customers 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. Partner estimates that even if the claim will be decided in favor of the relevant customers, the damages that Partner will be required to pay for will be immaterial. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | On May 6, 2010, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner unlawfully charged its customers for opening handsets that were locked for use on other cellular networks (sim lock). The amount claimed in the lawsuit was estimated by the plaintiffs to be approximately NIS 20 million. On August 25, 2013, The Court approved the motion and recognized the lawsuit as a class action.  On October 8, 2013, Partner filed a request to appeal to the Supreme Court. It should be noted that Partner estimates that the damages that Partner will be required to pay will be immaterial. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 2. | Environmental claims |
|--------|----|----------------------|

|   | 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. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (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 share option plan |
|--------|-----|----------------------------------|

|   | - | Exercise price adjustment: |
|--------|---|----------------------------|

|   | - | Cashless exercise:  Most options may only be exercised on a cashless basis, other option holders 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. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Information in respect of options granted under the Plan |
|--------|-----|----------------------------------------------------------|

|                                                             |   | Through December 31, 2013   |       |
|------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                             |   | Number of options or shares |       |
| Options granted                                                  |   |                        | 19,688,115 |   |
| Shares issued upon exercises                                     |   |                        | (5,669,407 | ) |
| Options cancelled upon net exercises, expiration and forfeitures |   |                        | (7,090,326 | ) |
| Outstanding                                                      |   |                        | 6,928,382  |   |
| Of which:                                                        |   |                        |       |   |
| Exercisable                                                      |   |                        | 4,818,696  |   |
| Vest in 2014                                                     |   |                        | 1,865,103  |   |
| Vest in 2015                                                     |   |                        | 194,583    |   |
| Vest in 2016                                                     |   |                        | 50,000     |   |
|                                                             |   |                        |       |   |
| Ungranted                                                        |   |                        | 1,319,211  |   |

----

|   | (3) | Options status summary as of December 31, 2011, 2012 and 2013 and the changes therein during the years ended on those dates: |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------|

|                                       |   | Year ended December 31 |       |
|--------------------------------------------|--------|------------------------|------------|
|                                       |   | 2011                   |       |   | 2012 |   |   | 2013 |   |
|                                       |   | Number                 |       |   | Weighted averageexercise price |   |   | Number |   |   | Weighted averageexercise price |   |   | Number |   |   | Weighted averageexercise price |   |
|                                       |   |                   |       |   | NIS |   |   |   |   |   | NIS |   |   |   |   |   | NIS |   |
| Balance outstanding at the                 |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| beginning of the year                      |   |                   | 6,826,275  |   |   |   | 55.88 |   |   |   | 6,452,891 |   |   |   | 52.98 |   |   |   | 7,523,748 |   |   |   | 44.02 |   |
| Changes during the year:                   |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                    |   |                   | 2,977,275  |   |   |   | 50.87 |   |   |   | 1,795,340 |   |   |   | 18.42 |   |   |   | 292,500 |   |   |   | 25.36 |   |
| Exercised                                  |   |                   | (1,454,250 | ) |   |   | 47.57 |   |   |   | - |   |   |   |   |   |   |   | (75,640 | ) |   |   | 13.66 |   |
| Forfeited                                  |   |                   | (1,896,409 | ) |   |   | 56.59 |   |   |   | (449,266 | ) |   |   | 54.97 |   |   |   | (322,009 | ) |   |   | 30.63 |   |
| Expired                                    |   |                   |       |   |   |   |   |   |   |   | (275,217 | ) |   |   | 56.07 |   |   |   | (490,217 | ) |   |   | 54.31 |   |
| Balance outstanding at the end of the year |   |                   | 6,452,891  |   |   |   | 52.98 |   |   |   | 7,523,748 |   |   |   | 44.02 |   |   |   | 6,928,382 |   |   |   | 43.46 |   |
| Balance exercisable at the end of the year |   |                   | 2,145,389  |   |   |   | 53.49 |   |   |   | 3,723,702 |   |   |   | 53.61 |   |   |   | 4,818,696 |   |   |   | 52.02 |   |
| Shares issued                              |   |                   | 396,532    |   |   |   |   |   |   |   | - |   |   |   |   |   |   |   | 41,294 |   |   |   |   |   |

|                                                                                                                       |   | Options granted in 2011 |   |   | Options granted in 2012 |   |   | Options granted in 2013 |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------|-------------------------|--------|--------|-------------------------|--------|
| Weighted average fair value of options granted using the Black & Scholes option-pricing model – per option (NIS) |   |                    | 6.28   |   |                    |   | 3.74   |                    |   |   | 6.74 |   |
| The above fair value is estimated on the grant date based on the following weighted average assumptions:                   |   |                    |   |   |                    |   |   |                    |   |   |   |   |
| Expected volatility                                                                                                        |   |                    | 27     | %      |                    |   | 30.46  | %                       |   |   | 34.43 | % |
| Risk-free interest rate                                                                                                    |   |                    | 3.65   | %      |                    |   | 2.52   | %                       |   |   | 1.78 | % |
| Expected life (years)                                                                                                      |   |                    | 3      |   |                    |   | 3      |                    |   |   | 3 |   |
| Dividend yield                                                                                                             |   |                    | 5.01   | %      |                    |   | *      |                    |   |   | * |   |

----

|   | (4) | Information about outstanding options by expiry dates |
|--------|-----|-------------------------------------------------------|

|  Expire in |   | Number of options |      |   | Weighted average exercise price in NIS |   |
|-----------------|--------|-------------------|-----------|--------|----------------------------------------|--------|
| 2014            |   |              | 773,666   |   |                                   |   | 53.16 |   |
| 2015            |   |              | 13,375    |   |                                   |   | 26.21 |   |
| 2016            |   |              | 32,500    |   |                                   |   | 29.45 |   |
| 2017            |   |              | 71,000    |   |                                   |   | 53.44 |   |
| 2019            |   |              | 1,268,271 |   |                                   |   | 51.13 |   |
| 2020            |   |              | 1,219,200 |   |                                   |   | 59.78 |   |
| 2021            |   |              | 1,665,850 |   |                                   |   | 48.50 |   |
| 2022            |   |              | 1,592,020 |   |                                   |   | 18.16 |   |
| 2023            |   |              | 292,500   |   |                                   |   | 25.36 |   |
|            |   |              | 6,928,382 |   |                                   |   | 43.46 |   |

|  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 |   |

----

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

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

----

| (a)  Cost of revenues                                                                             |   | New Israeli Shekels     |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                        |   | Year ended December 31, |   |
|                                                                                                        |   | 2011                    |   |   | 2012 |   |   | 2013 |   |
|                                                                                                        |   | In millions             |   |
| Payments to transmission, communication and content providers                                               |   |                    | 1,098  |   |   |   | 1,153 |   |   |   | 1,073 |   |
| Cost of handsets, accessories and ISP related  equipment                                          |   |                    | 1,368  |   |   |   | 788 |   |   |   | 664 |   |
| Wages, employee benefits expenses and car maintenance                                                       |   |                    | 705    |   |   |   | 614 |   |   |   | 408 |   |
| Depreciation, amortization and impairment charges                                                           |   |                    | 708    |   |   |   | 641 |   |   |   | 610 |   |
| Costs of handling, replacing or repairing handsets                                                          |   |                    | 152    |   |   |   | 140 |   |   |   | 104 |   |
| Operating lease, rent and overhead expenses                                                                 |   |                    | 308    |   |   |   | 303 |   |   |   | 312 |   |
| Network and cable maintenance                                                                               |   |                    | 133    |   |   |   | 133 |   |   |   | 123 |   |
| Payments to internet service providers (ISP)                                                                |   |                    | 94     |   |   |   | 69 |   |   |   | 45 |   |
| Carkit installation, IT support, and other operating expenses                                               |   |                    | 96     |   |   |   | 80 |   |   |   | 82 |   |
| Royalty expenses                                                                                            |   |                    | 63     |   |   |   | 39 |   |   |   |   |   |
| Amortization of rights of use                                                                               |   |                    | 29     |   |   |   | 26 |   |   |   | 31 |   |
| Impairment of deferred expenses – right of use       (see note 13) |   |                    | 148    |   |   |   |   |   |   |   |   |   |
| Other                                                                                                       |   |                    | 76     |   |   |   | 45 |   |   |   | 58 |   |
| Total cost of revenues                                                                                      |   |                    | 4,978  |   |   |   | 4,031 |   |   |   | 3,510 |   |

| (b)  Selling and marketing expenses            |   | New Israeli Shekels     |   |
|----------------------------------------------------------|--------|-------------------------|--------|
|                                                     |   | Year ended December 31, |   |
|                                                     |   | 2011                    |   |   | 2012 |   |   | 2013 |   |
|                                                     |   | In millions             |   |
| Wages, employee benefits expenses and car maintenance    |   |                    | 335    |   |   |   | 299 |   |   |   | 231 |   |
| Advertising and marketing                                |   |                    | 82     |   |   |   | 64 |   |   |   | 55 |   |
| Selling commissions, net                                 |   |                    | 82     |   |   |   | 59 |   |   |   | 72 |   |
| Depreciation and amortization                            |   |                    | 45     |   |   |   | 42 |   |   |   | 42 |   |
| Impairment of intangible assets (see  note 13) |   |                    | 87     |   |   |   |   |   |   |   |   |   |
| Operating lease, rent and overhead expenses              |   |                    | 44     |   |   |   | 45 |   |   |   | 33 |   |
| Other                                                    |   |                    | 36     |   |   |   | 42 |   |   |   | 29 |   |
| Total selling and marketing expenses                     |   |                    | 711    |   |   |   | 551 |   |   |   | 462 |   |

| (c)  General and administrative expenses    |   | New Israeli Shekels     |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   | Year ended December 31, |   |
|                                                  |   | 2011                    |   |   | 2012 |   |   | 2013 |   |
|                                                  |   | In millions             |   |
| Wages, employee benefits expenses and car maintenance |   |                    | 100    |   |   |   | 89 |   |   |   | 80 |   |
| Bad debts and allowance for doubtful accounts         |   |                    | 42     |   |   |   | 40 |   |   |   | 50 |   |
| Professional fees                                     |   |                    | 41     |   |   |   | 29 |   |   |   | 25 |   |
| Credit card and other commissions                     |   |                    | 42     |   |   |   | 33 |   |   |   | 23 |   |
| Depreciation                                          |   |                    | 17     |   |   |   | 17 |   |   |   | 17 |   |
| Other                                                 |   |                    | 49     |   |   |   | 28 |   |   |   | 22 |   |
| Total general and administrative expenses             |   |                    | 291    |   |   |   | 236 |   |   |   | 217 |   |

----

| (d)  Employee benefit expense                                                                                      |   | New Israeli Shekels     |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                         |   | Year ended December 31, |   |
|                                                                                                                         |   | 2011                    |   |   | 2012 |   |   | 2013 |   |
|                                                                                                                         |   | In millions             |   |
| Wages and salaries including social benefits, social security costs, pension costs and car maintenance before capitalization |   |                    | 1,121  |   |   |   | 1,002 |   |   |   | 763 |   |
| Less: expenses capitalized (notes 10, 11)                                                                                    |   |                    | (45    | ) |   |   | (61 | ) |   |   | (87 | ) |
| Service costs: defined benefit plan (note 17)                                                                                |   |                    | 31     |   |   |   | 33 |   |   |   | 23 |   |
| Service costs: defined contribution plan (note 17)                                                                           |   |                    | 14     |   |   |   | 17 |   |   |   | 15 |   |
| Share based compensation expenses (note 21)                                                                                  |   |                    | 19     |   |   |   | 11 |   |   |   | 5 |   |
|                                                                                                                         |   |                    | 1,140  |   |   |   | 1,002 |   |   |   | 719 |   |

|                                            |   | New Israeli ShekelsYear ended December 31, |   |
|-------------------------------------------------|--------|--------------------------------------------|--------|
|                                            |   | 2011                                       |   |   | 2012 |   |   | 2013 |   |
|                                            |   | In millions                                |   |
| Unwinding of trade receivables                  |   |                                       | 104    |   |   |   | 108 |   |   |   | 75 |   |
| Other income, net                               |   |                                       | 3      |   |   |   | 3 |   |   |   | 3 |   |
| Capital gain (loss) from property and equipment |   |                                       | (2     | ) |   |   | * |   |   |   | 1 |   |
|                                            |   |                                       | 105    |   |   |   | 111 |   |   |   | 79 |   |

|                                                                           |   | New Israeli Shekels     |   |
|--------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                           |   | Year ended December 31, |   |
|                                                                           |   | 2011                    |   |   | 2012 |   |   | 2013 |   |
|                                                                           |   | In millions             |   |
| Net foreign exchange rate gains                                                |   |                    | -      |   |   |   | 8 |   |   |   | 21 |   |
| Interest income from cash equivalents                                          |   |                    | 10     |   |   |   | 7 |   |   |   | 7 |   |
| Fair value gain from derivative financial instruments, net                     |   |                    | 18     |   |   |   | - |   |   |   | - |   |
| Other                                                                          |   |                    | 5      |   |   |   | 6 |   |   |   | 1 |   |
| Finance income                                                                 |   |                    | 33     |   |   |   | 21 |   |   |   | 29 |   |
|                                                                           |   |                    |   |   |   |   |   |   |   |   |   |   |
| Interest expenses                                                              |   |                    | 205    |   |   |   | 188 |   |   |   | 171 |   |
| Linkage expenses to CPI                                                        |   |                    | 77     |   |   |   | 35 |   |   |   | 46 |   |
| Interest costs in respect of liability for employees rights upon retirement ** |   |                    | 3      |   |   |   | 2 |   |   |   | 1 |   |
| Fair value loss from derivative financial instruments, net                     |   |                    | -      |   |   |   | 15 |   |   |   | 12 |   |
| Net foreign exchange rate losses                                               |   |                    | 18     |   |   |   | - |   |   |   | - |   |
| Other finance costs                                                            |   |                    | 24     |   |   |   | 15 |   |   |   | 10 |   |
| Finance expense                                                                |   |                    | 327    |   |   |   | 255 |   |   |   | 240 |   |
|                                                                           |   |                    | 294    |   |   |   | 234 |   |   |   | 211 |   |

----

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

----

|   | d. | Deferred income taxes |
|--------|----|-----------------------|

| Balance of deferred tax asset (liability) in respect of |   | As at January 1, 2011 |   |   | 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 |   |   | Charged to the income statement |   |   | Charged to other comprehensive income |   |   | Effect of change in corporate tax rate |   |   | As at December 31, 2013 |   |
|---------------------------------------------------------|--------|-----------------------|--------|--------|---------------------------|--------|-----------|---------------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------------------------|--------|--------|-------------------------|----------|----------|---------------------------------|--------|--------|--------------------------------------------|--------|--------|-------------------------|--------|--------|---------------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------------------------|--------|--------|-------------------------|--------|
| Allowance for doubtful accounts                         |   |                  | 60     |   |                      |   |   *  |                            |   |   | (5                                         | )      |   |                                   |   |   |                    |   6 |     |                            |   | 61     |                                       |   |   | (5                      | )      |   |                            |   |   |                                       | 56     |   |                                   |   | (5     | )                       |   |   |   |   |   | 3 |   |   |   | 54 |   |
| Provisions for employee rights                          |   |                  | 17     |   |                      |   | 1         |                            |   |   | (8                                         | )      |   |                                   | 5      |   |                    |     | 2        |                            |   |   | 17                                         |   |   |                    | (6     | )      |                            |   | 4      |                                       |   |   | 15                                     |   |   |                    | *      |   |   |   | 2 |   |   |   | 1 |   |   |   | 18 |   |
| Subscriber acquisition costs                            |   |                  |   |   |                      |   | 1         |                            |   |   | (1                                         | )      |   |                                   |   |   |                    |     | *        |                            |   |   | *                                          |   |   |                    | *      |   |                            |   |   |                                       |   |   | -                                      |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   | - |   |
| Depreciable fixed assets and software                   |   |                  | (105   | )      |                      |   | (2        | )                               |   |   | 10                                         |   |   |                                   |   |   |                    |     | (26      | )                               |   |   | (123                                       | )      |   |                    | 23     |   |                            |   |   |                                       |   |   | (100                                   | )      |   |                    | 13     |   |   |   |   |   |   |   | (5 | ) |   |   | (92 | ) |
| Intangibles, deferred expenses and carry forward losses |   |                  | 13     |   |                      |   |   13 |                            |   |   | 15                                         |   |   |                                   |   |   |                    |     |   7 |                            |   |   | 48                                         |   |   |                    | (1     | )      |                            |   |   |                                       |   |   | 47                                     |   |   |                    | (26    | ) |   |   |   |   |   |   | 2 |   |   |   | 23 |   |
| Options granted to employees                            |   |                  | 2      |   |                      |   |      |                            |   |   | (1                                         | )      |   |                                   |   |   |                    |     | *        |                            |   |   | 1                                          |   |   |                    | (1     | )      |                            |   |   |                                       |   |   | *                                      |   |   |                    | 1      |   |   |   |   |   |   |   | * |   |   |   | 1 |   |
| Financial instruments                                   |   |                  | *      |   |                      |   |      |                            |   |   | *                                          |   |   |                                   |   |   |                    |     | *        |                            |   |   | *                                          |   |   |                    | *      |   |                            |   |   |                                       |   |   | -                                      |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   | - |   |
| Other                                                   |   |                  | 11     |   |                      |   | (1        | )                               |   |   |                                       |   |   |                                   |   |   |                    |     | (1       | )                               |   |   | 9                                          |   |   |                    | *      |   |                            |   |   |                                       |   |   | 9                                      |   |   |                    | (1     | ) |   |   |   |   |   |   | * |   |   |   | 8 |   |
| Total                                                   |   |                  | (2     | )      |                      |   | 12        |                            |   |   | 10                                         |   |   |                                   | 5      |   |                    |     | (12      | )                               |   |   | 13                                         |   |   |                    | 10     |   |                            |   | 4      |                                       |   |   | 27                                     |   |   |                    | (18    | ) |   |   | 2 |   |   |   | 1 |   |   |   | 12 |   |

----

|                                                               |   | New Israeli Shekels |   |
|--------------------------------------------------------------------|--------|---------------------|--------|
|                                                               |   | December 31,        |   |
|                                                               |   | 2012                |   |   | 2013 |   |
|                                                               |   | In millions         |   |
| Deferred tax assets                                                |   |                |   |   |   |   |
| Deferred tax assets to be recovered after more than 12 months      |   |                | 90     |   |   |   | 89 |   |
| Deferred tax assets to be recovered within 12 months               |   |                | 38     |   |   |   | 39 |   |
|                                                               |   |                | 128    |   |   |   | 128 |   |
| Deferred tax liabilities                                           |   |                |   |   |   |   |   |   |
|                                                               |   |                |   |   |   |   |   |   |
| Deferred tax liabilities to be recovered after more than 12 months |   |                | 86     |   |   |   | 94 |   |
| Deferred tax liabilities to be recovered within 12 months          |   |                | 15     |   |   |   | 22 |   |
|                                                               |   |                | 101    |   |   |   | 116 |   |
| Deferred tax assets, net                                           |   |                | 27     |   |   |   | 12 |   |

|   | 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 |   |
|                                                                                             |   | 2011                   |   |   | 2012 |   |   | 2013 |   |
|                                                                                             |   | In millions            |   |
| Profit before taxes on income,                                                                   |   |                   |   |   |   |   |   |   |   |
| as reported in the income statements                                                             |   |                   | 742    |   |   |   | 631 |   |   |   | 198 |   |
| Theoretical tax expense                                                                          |   |                   | 178    |   |   |   | 158 |   |   |   | 50 |   |
| Increase in tax resulting from disallowable deductions                                           |   |                   | 18     |   |   |   | 5 |   |   |   | 17 |   |
| Decrease (increase) in tax resulting from deferred taxes calculated based on different tax rates |   |                   | 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 | ) |   |   | (3 | ) |
| Taxes on income in respect of previous years                                                     |   |                   | 14     |   |   |   | 2 |   |   |   |   |   |
| Expenses deductible according to different tax rates                                             |   |                   | *      |   |   |   |   |   |   |   |   |   |
| Change in corporate tax rate, see b above                                                        |   |                   | 12     |   |   |   |   |   |   |   | (1 | ) |
| Other                                                                                            |   |                   | 7      |   |   |   | 2 |   |   |   | * |   |
| Income tax expenses                                                                              |   |                   | 299    |   |   |   | 153 |   |   |   | 63 |   |

----

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

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

|                                                     |   | New Israeli Shekels    |   |
|----------------------------------------------------------|--------|------------------------|--------|
|                                                     |   | Year ended December 31 |   |
|                                                     |   | 2011                   |   |   | 2012 |   |   | 2013 |   |
|                                                     |   | In millions            |   |
| For the reported year:                                   |   |                   |   |   |   |   |   |   |   |
| Current                                                  |   |                   | 288    |   |   |   | 161 |   |   |   | 48 |   |
| Deferred, see d above                                    |   |                   | (15    | ) |   |   | (10 | ) |   |   | 18 |   |
| Effect of change in corporate tax rate on deferred taxes |   |                   | 12     |   |   |   |   |   |   |   | (1 | ) |
| In respect of previous year:                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Current                                                  |   |                   | 9      |   |   |   | 2 |   |   |   | (2 | ) |
| Deferred, see d above                                    |   |                   | 5      |   |   |   |   |   |   |   |   |   |
|                                                     |   |                   | 299    |   |   |   | 153 |   |   |   | 63 |   |

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

|   | 1) | The Company has received final corporate tax assessments through the year ended December 31, 2011. |
|--------|----|----------------------------------------------------------------------------------------------------|

|   | 2) | As general rule, tax self-assessments filed by a subsidiary through the year ended December 31, 2009, and another subsidiary through the year ended December 31, 2008 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, 2014. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|                                                           |   | New Israeli Shekels     |   |
|----------------------------------------------------------------|--------|-------------------------|--------|
|                                                           |   | Year ended December 31, |   |
|                                                           |   | 2011                    |   |   | 2012 |   |   | 2013 |   |
| Transactions with Scailex group                                |   | In millions             |   |
| Service revenues                                               |   |                    | 0.8    |   |   |   | 0.6 |   |   |   | 0.4 |   |
| Acquisition of handsets                                        |   |                    | 478    |   |   |   | 288 |   |   |   | 189 |   |
| Selling commissions, maintenance and other expenses (revenues) |   |                    | (4     | ) |   |   | (10 | ) |   |   | (2 | ) |

|                                                  |   | New Israeli Shekels |   |
|-------------------------------------------------------|--------|---------------------|--------|
|                                                  |   | December 31,        |   |
|                                                  |   | 2012                |   |   | 2013 |   |
| Statement of financial position items - Scailex group |   | In millions         |   |
| Current liabilities: Scailex group                    |   |                | 70     |   |   |   | 30 |   |

----

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

|                                           |   | New Israeli Shekels    |   |
|------------------------------------------------|--------|------------------------|--------|
|                                           |   | Year ended December 31 |   |
|                                           |   | 2011                   |   |   | 2012 |   |   | 2013 |   |
| Key management compensation expenses comprised |   | In millions            |   |
| Salaries and short-term employee benefits      |   |                   | 18     |   |   |   | 21 |   |   |   | 20 |   |
| Long term employment benefits                  |   |                   | 13     |   |   |   | 6 |   |   |   | 5 |   |
| Employee share-based compensation expenses     |   |                   | 12     |   |   |   | 7 |   |   |   | 2 |   |
|                                           |   |                   | 43     |   |   |   | 34 |   |   |   | 27 |   |

|                                                        |   | New Israeli Shekels |   |
|-------------------------------------------------------------|--------|---------------------|--------|
|                                                        |   | December 31,        |   |
|                                                        |   | 2012                |   |   | 2013 |   |
| Statement of financial position items - key management |   | In millions         |   |
| Current liabilities:                                        |   |                | -      |   |   |   | 5 |   |
| Non-current liabilities:                                    |   |                | 13     |   |   |   | 14 |   |

|   | 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 and Audit Committee, adopted a retention plan for the CEO which will apply in case there is a change of control in the Company, as defined in the retention plan. According to the retention plan, the CEO will receive a retention bonus in an amount of NIS 1.8 million, provided that the CEO does not resign during the 12 month period after the completion 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. On December 29, 2013 the CEO notified the Company that he irrevocably waives any right to the said retention bonus. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                             |   | Year ended December 31 |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                                                             |   | 2011                   |    |   | 2012 |   |   | 2013 |   |
| Profit used for the computation of                                                                                                          |   |                   |    |   |   |   |   |   |   |
| basic and diluted EPS (NIS in millions)                                                                                                          |   |                   | 443     |   |   |   | 478 |   |   |   | 135 |   |
|                                                                                                                                             |   |                   |    |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares used                                                                                                      |   |                   |    |   |   |   |   |   |   |   |   |   |
| in computation of basic EPS (in thousands)                                                                                                  |   |                   | 155,542 |   |   |   | 155,646 |   |   |   | 155,658 |   |
|                                                                                                                                             |   |                   |    |   |   |   |   |   |   |   |   |   |
| Add - net additional shares from assumed                                                                                                    |   |                   |    |   |   |   |   |   |   |   |   |   |
| exercise of employee stock options (in      thousands)                                                        |   |                   | 237     |   |   |   | 127 |   |   |   | 541 |   |
|                                                                                                                                             |   |                   |    |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares used in                                                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| computation of diluted EPS (in thousands)                                                                                                        |   |                   | 155,779 |   |   |   | 155,773 |   |   |   | 156,199 |   |
|                                                                                                                                             |   |                   |    |   |   |   |   |   |   |   |   |   |
| Number of options not taken into account in computation of diluted earnings per share, because of their anti-dilutive effect (in thousands) |   |                   | 5,889   |   |   |   | 6,156 |   |   |   | 5,378 |   |

----

----

----