----

----

----

----

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

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

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

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

----

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

| Large Accelerated Filer x | Accelerated Filer o | 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                                                    | 33  |
| ITEM 4A. UNRESOLVED STAFF COMMENTS                                                    | 70  |
| ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  | 71  |
| ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 102 |
| ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             | 119 |
| ITEM 8. FINANCIAL INFORMATION                                                         | 123 |
| ITEM 9. THE OFFER AND LISTING                                                         | 124 |
| ITEM 10. ADDITIONAL INFORMATION                                                       | 126 |
| ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 137 |
| ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 140 |
| ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 141 |
| ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 141 |
| ITEM 15. CONTROLS AND PROCEDURES                                                      | 141 |
| ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 142 |
| ITEM 16B. CODE OF ETHICS                                                              | 142 |
| ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 142 |
| ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  | 143 |
| ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 143 |
| ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACOUNTANT                           | 143 |
| ITEM 16G. CORPORATE GOVERNANCE                                                        | 143 |
| ITEM 17. FINANCIAL STATEMENTS                                                         | 143 |
| ITEM 18. FINANCIAL STATEMENTS                                                         | 143 |
| ITEM 19. EXHIBITS                                                                     | 143 |

----

----

ITEM 

ITEM 

ITEM 

----

| IFRS                                                         |   | Year ended December 31,                                |    |
|--------------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                         |   | 2008                                                   |    |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2011 |   |
|                                                         |   | New Israeli Shekels in millions(except per share data) |    |   | US$ inmillions (1) |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated Statement of Income Data                        |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                     |   |                                                   | 6,302   |   |   |   | 6,079 |   |   |   | 6,674 |   |   |   | 6,998 |   |   |   | 1,831 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                             |   |                                                   | 3,868   |   |   |   | 3,770 |   |   |   | 4,093 |   |   |   | 4,978 |   |   |   | 1,303 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                 |   |                                                   | 2,434   |   |   |   | 2,309 |   |   |   | 2,581 |   |   |   | 2,020 |   |   |   | 528 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing Expenses                               |   |                                                   | 388     |   |   |   | 387 |   |   |   | 479 |   |   |   | 711 |   |   |   | 186 |   |
| General and administrative Expenses                          |   |                                                   | 284     |   |   |   | 290 |   |   |   | 306 |   |   |   | 291 |   |   |   | 76 |   |
| Impairment of goodwill                                       |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   | 87 |   |   |   | 23 |   |
| Other income - Net                                           |   |                                                   | 64      |   |   |   | 69 |   |   |   | 64 |   |   |   | 105 |   |   |   | 28 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating profit                                             |   |                                                   | 1,826   |   |   |   | 1,701 |   |   |   | 1,860 |   |   |   | 1,036 |   |   |   | 271 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Finance income                                               |   |                                                   | 30      |   |   |   | 28 |   |   |   | 28 |   |   |   | 39 |   |   |   | 10 |   |
| Finance expenses                                             |   |                                                   | 214     |   |   |   | 204 |   |   |   | 209 |   |   |   | 333 |   |   |   | 87 |   |
| Finance costs, net                                           |   |                                                   | 184     |   |   |   | 176 |   |   |   | 181 |   |   |   | 294 |   |   |   | 77 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit before income tax                                     |   |                                                   | 1,642   |   |   |   | 1,525 |   |   |   | 1,679 |   |   |   | 742 |   |   |   | 194 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expenses                                          |   |                                                   | 444     |   |   |   | 384 |   |   |   | 436 |   |   |   | 299 |   |   |   | 78 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit for the year                                          |   |                                                   | 1,198   |   |   |   | 1,141 |   |   |   | 1,243 |   |   |   | 443 |   |   |   | 116 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per ordinary share and per ADS                      |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                       |   |                                                   | 7.71    |   |   |   | 7.42 |   |   |   | 8.03 |   |   |   | 2.85 |   |   |   | 0.75 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                                                      |   |                                                   | 7.65    |   |   |   | 7.37 |   |   |   | 7.95 |   |   |   | 2.84 |   |   |   | 0.74 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding (in thousands) |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                       |   |                                                   | 155,350 |   |   |   | 153,809 |   |   |   | 154,866 |   |   |   | 155,542 |   |   |   | 155,542 |   |
| Diluted:                                                     |   |                                                   | 156,520 |   |   |   | 154,817 |   |   |   | 156,296 |   |   |   | 155,779 |   |   |   | 155,779 |   |

----

| IFRS                                                       |   | Year ended December 31,                                |   |
|------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                       |   | 2008                                                   |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2011 |   |
|                                                       |   | New Israeli Shekels in millions(except per share data) |   | US$ inmillions (1) |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Financial Data                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures (2)                                   |   |                                                   | 589    |   |   |   | 522 |   |   |   | 435 |   |   |   | 468 |   |   |   | 122 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| EBITDA (3)                                                 |   |                                                   | 2,298  |   |   |   | 2,304 |   |   |   | 2,570 |   |   |   | 2,178 |   |   |   | 570 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividend per share (4)                                     |   |                                                   | 5.45   |   |   |   | 6.86 |   |   |   | 7.85 |   |   |   | 2.25 |   |   |   | 0.59 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital reduction (4)                                      |   |                                                   | -      |   |   |   | – |   |   |   | 9.04 |   |   |   | - |   |   |   | - |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Statement of Cash Flow Data                                |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                  |   |                                                   | 1,915  |   |   |   | 1,753 |   |   |   | 1,958 |   |   |   | 1,570 |   |   |   | 410 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in investing activities                      |   |                                                   | (514   | ) |   |   | (732 | ) |   |   | (486 | ) |   |   | (1,085 | ) |   |   | (284 | ) |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in financing activities                      |   |                                                   | (1,365 | ) |   |   | (876 | ) |   |   | (1,480 | ) |   |   | (274 | ) |   |   | (71 | ) |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet Data (at year end)                           |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                                             |   |                                                   | 1,472  |   |   |   | 1,807 |   |   |   | 1,830 |   |   |   | 2,308 |   |   |   | 604 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non current assets                                         |   |                                                   | 3,693  |   |   |   | 3,816 |   |   |   | 3,797 |   |   |   | 4,779 |   |   |   | 1,252 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Advance payment in respect of the acquisition of 012 smile |   |                                                   | -      |   |   |   | - |   |   |   | 30 |   |   |   | - |   |   |   | - |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property and equipment                                     |   |                                                   | 1,935  |   |   |   | 2,064 |   |   |   | 2,058 |   |   |   | 2,051 |   |   |   | 537 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| License and other intangible assets                        |   |                                                   | 1,260  |   |   |   | 1,260 |   |   |   | 1,077 |   |   |   | 1,290 |   |   |   | 338 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                                   |   |                                                   | -      |   |   |   | - |   |   |   | - |   |   |   | 407 |   |   |   | 107 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred income tax asset                                  |   |                                                   | 81     |   |   |   | 14 |   |   |   | – |   |   |   | 30 |   |   |   | 8 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative financial instruments                           |   |                                                   | -      |   |   |   | 4 |   |   |   | 6 |   |   |   | 24 |   |   |   | 6 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                               |   |                                                   | 5,165  |   |   |   | 5,623 |   |   |   | 5,627 |   |   |   | 7,087 |   |   |   | 1,856 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities (5)                                    |   |                                                   | 1,734  |   |   |   | 1,915 |   |   |   | 1,826 |   |   |   | 1,889 |   |   |   | 495 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term liabilities (5)                                  |   |                                                   | 1,699  |   |   |   | 1,746 |   |   |   | 3,175 |   |   |   | 4,773 |   |   |   | 1,249 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                                          |   |                                                   | 3,433  |   |   |   | 3,661 |   |   |   | 5,001 |   |   |   | 6,662 |   |   |   | 1,744 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                                 |   |                                                   | 1,732  |   |   |   | 1,962 |   |   |   | 626 |   |   |   | 425 |   |   |   | 112 |   |
|                                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity           |   |                                                   | 5,165  |   |   |   | 5,623 |   |   |   | 5,627 |   |   |   | 7,087 |   |   |   | 1,856 |   |

----

| US. GAAP                            |   | Year ended December 31, |   |
|-------------------------------------|--------|-------------------------|--------|
|                                |   | 2007                    |   |   | 2008 |   |
|                                |   |                    |   |   |   |   |
| Statement of Operations Data        |   |                    |   |   |   |   |
| Revenues, net                       |   |                    |   |   |   |   |
|                                |   |                    |   |   |   |   |
| Services                            |   |                    | 5,329  |   |   |   | 5,546 |   |
|                                |   |                    |   |   |   |   |   |   |
| Equipment                           |   |                    | 785    |   |   |   | 756 |   |
|                                |   |                    |   |   |   |   |   |   |
|                                |   |                    | 6,114  |   |   |   | 6,302 |   |
|                                |   |                    |   |   |   |   |   |   |
| Cost of revenues                    |   |                    |   |   |   |   |   |   |
|                                |   |                    |   |   |   |   |   |   |
| Services                            |   |                    | 3,090  |   |   |   | 3,209 |   |
|                                |   |                    |   |   |   |   |   |   |
| Equipment                           |   |                    | 1,002  |   |   |   | 843 |   |
|                                |   |                    |   |   |   |   |   |   |
|                                |   |                    | 4,092  |   |   |   | 4,052 |   |
|                                |   |                    |   |   |   |   |   |   |
| Gross profit                        |   |                    | 2,022  |   |   |   | 2,250 |   |
|                                |   |                    |   |   |   |   |   |   |
| Selling and marketing Expenses      |   |                    | 392    |   |   |   | 389 |   |
| General and administrative Expenses |   |                    | 231    |   |   |   | 256 |   |
|                                |   |                    |   |   |   |   |   |   |
| Operating profit                    |   |                    | 1,399  |   |   |   | 1,605 |   |
|                                |   |                    |   |   |   |   |   |   |
| Financial expenses, net             |   |                    | 121    |   |   |   | 158 |   |
|                                |   |                    |   |   |   |   |   |   |
| Income before tax                   |   |                    | 1,278  |   |   |   | 1,447 |   |
|                                |   |                    |   |   |   |   |   |   |
| Tax expenses                        |   |                    | 338    |   |   |   | 396 |   |
|                                |   |                    |   |   |   |   |   |   |
| Net income for the year             |   |                    | 940    |   |   |   | 1,051 |   |

----

| US. GAAP                                                     |   | Year ended December 31, |    |
|--------------------------------------------------------------|--------|-------------------------|---------|
|                                                         |   | 2007                    |    |   | 2008 |   |
|                                                         |   |                    |    |   |   |   |
| Earnings per ordinary share and per ADS                      |   |                    |    |   |   |   |
| Basic:                                                       |   |                    |    |   |   |   |
| Before cumulative effect                                     |   |                    | 6.01    |   |   |   | 6.77 |   |
| Cumulative effect                                            |   |                    | – |   |   |   | – |   |
|                                                         |   |                    | 6.01    |   |   |   | 6.77 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Diluted:                                                     |   |                    |    |   |   |   |   |   |
| Before cumulative effect                                     |   |                    | 5.96    |   |   |   | 6.73 |   |
| Cumulative effect                                            |   |                    | – |   |   |   | – |   |
|                                                         |   |                    | 5.96    |   |   |   | 6.73 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Weighted average number of shares outstanding (in thousands) |   |                    |    |   |   |   |   |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Basic:                                                       |   |                    | 156,415 |   |   |   | 155,350 |   |
| Diluted:                                                     |   |                    | 157,787 |   |   |   | 156,520 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Other Financial Data                                         |   |                    |    |   |   |   |   |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Capital expenditures (2)                                     |   |                    | 499     |   |   |   | 590 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| EBITDA (3)                                                   |   |                    | 2,009   |   |   |   | 2,257 |   |
| Dividend per share (4)                                       |   |                    | 4.77    |   |   |   | 5.45 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Statement of Cash Flow Data                                  |   |                    |    |   |   |   |   |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Net cash provided by operating activities                    |   |                    | 1,446   |   |   |   | 1,839 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Net cash used in investing activities                        |   |                    | (529    | ) |   |   | (531 | ) |
|                                                         |   |                    |    |   |   |   |   |   |
| Net cash provided by used in financing activities            |   |                    | (846    | ) |   |   | (1,273 | ) |
|                                                         |   |                    |    |   |   |   |   |   |
| Balance Sheet Data (at year end)                             |   |                    |    |   |   |   |   |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Current assets                                               |   |                    | 1,520   |   |   |   | 1,542 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Investments and long-term receivables                        |   |                    | 535     |   |   |   | 499 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Fixed assets, net                                            |   |                    | 1,728   |   |   |   | 1,756 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| License and deferred charges, net                            |   |                    | 1,154   |   |   |   | 1,061 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Deferred income taxes                                        |   |                    | 94      |   |   |   | 110 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Total assets                                                 |   |                    | 5,031   |   |   |   | 4,968 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Current liabilities (5)                                      |   |                    | 1,157   |   |   |   | 1,734 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Long-term liabilities (5)                                    |   |                    | 2,219   |   |   |   | 1,794 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Total liabilities                                            |   |                    | 3,376   |   |   |   | 3,529 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Shareholders’ equity                                   |   |                    | 1,655   |   |   |   | 1,439 |   |
|                                                         |   |                    |    |   |   |   |   |   |
| Total liabilities and shareholders’ equity             |   |                    | 5,031   |   |   |   | 4,968 |   |

----

| (1) | The translations of NIS amounts into US dollars appearing throughout this annual report have been made at the exchange rate on December 31, 2011, of NIS 3.821 = US$1.00 as published by the Bank of Israel, unless otherwise specified. See “Item 3A. Key Information – Selected Financial Data – Exchange Rate Data”. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| (3) | EBITDA as reviewed by the Chief Operator Decision Maker ("CODM"), represents earnings before interest (finance costs, net), taxes, depreciation, amortization and impairment charges, as a measure of operating profit. EBITDA is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies. EBITDA may not be indicative of the Company's historic operating results nor is it meant to be predictive of potential future results. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | The dividend per share was calculated in respect of the period for which it was announced. For the year 2011, the Company declared a dividend which in the aggregate amounted to approximately NIS 350 million (US$ 92 million), or NIS 2.25 per share. The aggregate total dividend for 2010 was NIS 1,217 million or NIS 7.85 per share. Further, NIS 1,400 million or NIS 9.04 per share was distributed to shareholders in March 2010 following the reduction of the shareholders’ equity as approved by the Courts (see “Item 5A. Operating Results - Capital Reduction”). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | See notes 16 and 17 to our consolidated financial statements for information regarding long-term liabilities and current maturities of long-term bank loans and notes payable. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| IFRS                                                                        |   | Year ended December 31,         |   |
|-----------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                        |   | 2008                            |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2011 |   |
|                                                                        |   | New Israeli Shekels in millions |   |   | US $ inmillions (1) |   |
|                                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation Between Operating Cash flow and EBITDA                       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                   |   |                            | 1,915  |   |   |   | 1,753 |   |   |   | 1,958 |   |   |   | 1,570 |   |   |   | 410 |   |
| Liability for employee rights upon retirement                               |   |                            | (5     | ) |   |   | (1 | ) |   |   | (8 | ) |   |   | 26 |   |   |   | 7 |   |
| Accrued interest, exchange and linkage differences on long-term liabilities |   |                            | (182   | ) |   |   | (167 | ) |   |   | (160 | ) |   |   | (289 | ) |   |   | (75 | ) |
| Increase (Decrease) in accounts receivable:                                 |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                                       |   |                            | (47    | ) |   |   | 229 |   |   |   | 214 |   |   |   | 190 |   |   |   | 50 |   |
| Other (*)                                                                   |   |                            | (4     | ) |   |   | 16 |   |   |   | 34 |   |   |   | 2 |   |   |   | 1 |   |
|                                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (Increase) in accounts payable and accruals:                       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                                       |   |                            | (10    | ) |   |   | (43 | ) |   |   | 40 |   |   |   | 37 |   |   |   | 10 |   |
| Parent group-trade                                                          |   |                            | (1     | ) |   |   | 17 |   |   |   | (38 | ) |   |   | (70 | ) |   |   | (18 | ) |
| Other (*)                                                                   |   |                            | 48     |   |   |   | (43 | ) |   |   | (15 | ) |   |   | 54 |   |   |   | 14 |   |
| Increase (decrease) in inventories                                          |   |                            | (8     | ) |   |   | 33 |   |   |   | (57 | ) |   |   | 58 |   |   |   | 15 |   |
| Decrease (Increase) in asset retirement obligation                          |   |                            | (1     | ) |   |   | 1 |   |   |   | (1 | ) |   |   | (1 | ) |   |   | (1 | ) |
| Income tax paid                                                             |   |                            | 420    |   |   |   | 339 |   |   |   | 426 |   |   |   | 311 |   |   |   | 81 |   |
| Financial expenses (**)                                                     |   |                            | 173    |   |   |   | 170 |   |   |   | 177 |   |   |   | 290 |   |   |   | 76 |   |
|                                                                        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| EBITDA                                                                      |   |                            | 2,298  |   |   |   | 2,304 |   |   |   | 2,570 |   |   |   | 2,178 |   |   |   | 570 |   |

----

| US. GAAP                                                                    |   | Year ended December 31,         |    |
|-----------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                        |   | 2007                            |    |   | 2008 |   |
|                                                                        |   | New Israeli Shekels in millions |    |
|                                                                        |   |                            |    |   |   |   |
| Reconciliation Between Operating Cash flow and EBITDA                       |   |                            |    |   |   |   |
| Net cash provided by operating activities                                   |   |                            | 1,446   |   |   |   | 1,839 |   |
| Liability for employee rights upon retirement                               |   |                            | (18     | ) |   |   | (16 | ) |
| Accrued interest, exchange and linkage differences on long-term liabilities |   |                            | (60     | ) |   |   | (94 | ) |
| Amount carried to deferred charges                                          |   |                            | – |   |   |   | – |   |
| Gain (loss) from assets in respect of severance pay funds                   |   |                            | 6       |   |   |   | (16 | ) |
| Increase (Decrease) in accounts receivable:                                 |   |                            |    |   |   |   |   |   |
| Trade                                                                       |   |                            | 329     |   |   |   | (47 | ) |
| Other (*)                                                                   |   |                            | 2       |   |   |   | (13 | ) |
|                                                                        |   |                            |    |   |   |   |   |   |
| Decrease (Increase) in accounts payable and accruals:                       |   |                            |    |   |   |   |   |   |
| Trade                                                                       |   |                            | (101    | ) |   |   | (9 | ) |
| Related parties                                                             |   |                            | 12      |   |   |   | (1 | ) |
| Other (*)                                                                   |   |                            | 276     |   |   |   | 476 |   |
| Decrease (Increase) in inventories                                          |   |                            | 9       |   |   |   | (8 | ) |
| Decrease (Increase) in asset retirement obligation                          |   |                            | (1      | ) |   |   | (1 | ) |
| Financial expenses (**)                                                     |   |                            | 109     |   |   |   | 147 |   |
|                                                                        |   |                            |    |   |   |   |   |   |
| EBITDA                                                                      |   |                            | 2,009   |   |   |   | 2,257 |   |

|                                                              |   | At December 31, |   |
|-------------------------------------------------------------------|--------|-----------------|--------|
|                                                              |   | 2009            |   |   | 2010 |   |   | 2011 |   |
|                                                              |   |            |   |   |   |   |   |   |   |
| Industry Data                                                     |   |            |   |   |   |   |   |   |   |
|                                                              |   |            |   |   |   |   |   |   |   |
| Estimated population of Israel (in millions) (1)                  |   |            | 7.5    |   |   |   | 7.7 |   |   |   | 7.8 |   |
| Estimated Israeli cellular telephone subscribers(in millions) (2) |   |            | 9.0    |   |   |   | 9.9 |   |   |   | 10.0 |   |
| Estimated Israeli cellular telephone penetration (3)              |   |            | 126    | % |   |   | 129 | % |   |   | 128 | % |

----

|                                                                                                |   | Year ended December 31, |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                |   | 2007                    |   |   | 2008 |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |
|                                                                                                |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partner Data                                                                                        |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cellular subscribers (000’s) (at period end) (4)                                              |   |                    | 2,860  |   |   |   | 2,898 |   |   |   | 3,042 |   |   |   | 3,160 |   |   |   | 3,176 |   |
| Pre-paid cellular subscribers (000’s) (at period end) (4)                                     |   |                    | 792    |   |   |   | 745 |   |   |   | 811 |   |   |   | 870 |   |   |   | 894 |   |
|                                                                                                |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Post-paid cellular subscribers (000’s) (at period end) (4)                                    |   |                    | 2,068  |   |   |   | 2,153 |   |   |   | 2,231 |   |   |   | 2,290 |   |   |   | 2,282 |   |
|                                                                                                |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share of total Israeli cellular subscribers (at period end) (5)                                     |   |                    | 32     | % |   |   | 32 | % |   |   | 32 | % |   |   | 32 | % |   |   | 32 | % |
| Average monthly usage per cellular subscriber (“MOU”) (mins.) (6)                       |   |                    | 336    |   |   |   | 365 |   |   |   | 364 |   |   |   | 366 |   |   |   | 397 |   |
| Average monthly revenue per cellular subscriber including in roaming (“ARPU”) (NIS) (7) |   |                    | 161    |   |   |   | 161 |   |   |   | 151 |   |   |   | 148 |   |   |   | 111 |   |
| Churn rate for cellular subscribers (8)                                                             |   |                    | 15     | % |   |   | 18 | % |   |   | 18 | % |   |   | 21 | % |   |   | 29 | % |
| Number of fixed-lines (000’s) (at period end)                                                 |   |                    |   |   |   |   |   |   |   |   |   |   |   |   | 69 |   |   |   | 292 |   |
| ISP subscribers (000’s) (at period end)                                                       |   |                    |   |   |   |   |   |   |   |   |   |   |   |   | 60 |   |   |   | 632 |   |
|                                                                                                |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Estimated cellular coverage of Israeli population (at period end) (9)                               |   |                    | 97     | % |   |   | 98 | % |   |   | 98 | % |   |   | 99 | % |   |   | 99 | % |
|                                                                                                |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of employees (full time equivalent) (at period end) (10)                                     |   |                    | 4,130  |   |   |   | 4,671 |   |   |   | 5,670 |   |   |   | 6,068 |   |   |   | 7,891 |   |

| (1) | The population estimates are as published by the Central Bureau of Statistics in Israel as of December 31, 2011. |
|-----|------------------------------------------------------------------------------------------------------------------|

| (2) | We have estimated the total number of Israeli cellular telephone subscribers from information contained in published reports issued by, and public statements made by Pelephone Communications Ltd. (“Pelephone”) and Cellcom Israel Ltd. (“Cellcom”), or by their shareholders, and from Partner subscriber data. The number of subscribers of Mirs Communications Ltd. ("MIRS") is based on the figures reported by HOT Telecommunication Systems Ltd. ("HOT") based on the figures reported by Hot on July 25, 2011, in the valuation of MIRS performed by TASC, an Israeli consulting firm.  The number of subscribers of Pelephone includes subscribers of Rami Levy, an MVNO which began operating on the Pelephone network in December 2011. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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. As of 2008, a pre-paid subscriber is recognized as such only following the actual use of his pre-paid SIM card. Based on this policy in January 2008, we reduced the number of reported pre-paid subscribers by approximately 61,000. Applying this policy retroactively, the increase in subscribers in 2008 was 3.5%. In addition, as of January 2011, a pre-paid subscriber is recognized as such only once they have generated revenues in the amount of at least one shekel. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

| (7) | We have calculated Partner average monthly revenue per cellular subscriber by (i) dividing, for each month in the relevant year, the Partner revenue during the month, excluding revenue from equipment sales but including revenues from handset warranties and including revenue from foreign network operators for calls made by their roaming customers while in Israel using our network, by the average number of Partner 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) | 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. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10) | 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, |   |
|---------------|--------|-------------------------|--------|
|          |   | 2007                    |   |   | 2008 |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |
|          |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average (1)   |   |                    | 4.108  |   |   |   | 3.588 |   |   |   | 3.927 |   |   |   | 3.732 |   |   |   | 3.579 |   |
| High          |   |                    | 4.342  |   |   |   | 4.022 |   |   |   | 4.256 |   |   |   | 3.894 |   |   |   | 3.821 |   |
| Low           |   |                    | 3.830  |   |   |   | 3.230 |   |   |   | 3.690 |   |   |   | 3.549 |   |   |   | 3.363 |   |
| End of period |   |                    | 3.846  |   |   |   | 3.802 |   |   |   | 3.775 |   |   |   | 3.549 |   |   |   | 3.821 |   |

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

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|                                                                                                       |   | September2011 |   |   | October2011 |   |   | November2011 |   |   | December2011 |   |   | January2012 |   |   | February2012 |   |   | March 2012 (throughMarch 19) |   |
|------------------------------------------------------------------------------------------------------------|--------|---------------|--------|--------|-------------|--------|--------|--------------|--------|--------|--------------|--------|--------|-------------|--------|--------|--------------|--------|--------|------------------------------|--------|
|                                                                                                       |   |          |   |   |        |   |   |         |   |   |         |   |   |        |   |   |         |   |   |                         |   |   |
| High                  |   |          | 3.725  |   |        |   | 3.763  |         |   |   | 3.800        |   |   |        | 3.821  |   |         |   | 3.854  |                         |   |   | 3.803 |   |   |   | 3.814 |   |
| Low                   |   |          | 3.574  |   |        |   | 3.602  |         |   |   | 3.650        |   |   |        | 3.727  |   |         |   | 3.733  |                         |   |   | 3.700 |   |   |   | 3.769 |   |

|   | · | During 2010, the Ministry of Communications adopted regulations for providing licenses to Mobile Virtual Network Operators ("MVNOs"), and granted MVNO licenses to a number of companies, the first of which began to operate in December 2011.  See “Item 3D.1 Risks Relating to the Regulation of our Industry  --  We have been required to offer access to our cellular network infrastructure to other operators, which has enabled new competitors, such as MVNOs and new cellular operators, to enter the market, and may reduce our ability to provide quality services to our subscribers and negatively affect our operating results.” |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the Ministry of Communications has reduced entry barriers to enable new operators as well as existing telecommunications services providers to enter the cellular market through site sharing and national roaming. In September 2010, the Ministry of Communications published a tender for the allocation of UMTS frequency to additional infrastructure-based cellular operators in Israel.  In April 2011, the tender was concluded and the UMTS frequencies were ultimately awarded to MIRS and Golan Telecom Ltd. ("Golan Telecom"). See “Item 4B Regulation - 4.8  Integrated Tender Committee For UMTS Frequency Allocation For An Additional Cellular Operator and National Roaming"; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | the Ministry of Communications also increased competition by continuing to promote reforms that facilitate the migration of subscribers among cellular companies by, among other measures, limiting the amount which telecommunication operators may charge subscribers who terminate their agreement before the end of their commitment period, prohibiting linkage between the sale of handsets and the provision of various benefits regarding cellular services, and prohibiting cellular companies from selling locked handsets for use only with the company's SIM card and requiring them to agree to unlock all handsets they have sold in the past, free of charge; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the Ministry of Communications published in 2009 an instruction to cellular operators and Internet Service Providers ("ISP") to maintain Internet “network neutrality” by avoiding any limitation on the transmission through their networks of applications or on Internet protocol usage, as well as any other action which might proactively hinder a type of service or the quality of service other than due to a technical need related to network quality. As part of an amendment to the Communications Law (Telecommunications and Broadcasting), 1982 (the “Telecommunications Law”), new provisions became effective as of January 2011, according to which a mobile operator is prohibited from limiting or blocking, including by requiring payment for, the ability of a subscriber to use any service and any application supplied over the Internet, except for limitations or blocking that are required as a result of proper and fair management of traffic transferred over its network. This new amendment may significantly limit our ability to manage traffic on our network, which could cause the performance of internet connectivity services to be degraded.  As a result, we may be required to acquire more bandwidth and network capacity to serve our customers, which we may not be able to obtain, or whose cost would increase our expenses and reduce profits. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | A public committee (the “Hayek Committee”), appointed to examine the fixed line telecommunications sector, published recommendations in October 2011 that include (1) abolishing the structural separation imposed upon Bezeq, Israel's largest telecommunications provider, in the provision of certain services; (2) replacing the existing supervision over Bezeq's retail tariffs, which sets tariffs, with supervision which sets maximum tariffs; and (3) requiring the holders of general fixed line telecommunications licenses to provide services and allow the use of  their infrastructure by other license holders in accordance with wholesale service tariffs to be set by the regulator. If the Minister of Communications adopts the first two recommendations, which are expected to strengthen Bezeq’s market position, before adopting the third recommendation to create a wholesale market, it may affect our ability to compete with the existing fixed-line operators since Partner, without its own fixed-line infrastructure in the private market and only a partial fixed-line infrastructure in the business market, would not be able to offer fixed-line services and service packages that could compete with those of Bezeq. See “Item 4B Regulation- 4.7 Public Committee to Examine the Fixed-Line Telecommunications Sector.” |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The Ministry of Communications is also considering providing new company protections for Tamares Telecom Ltd. ("Tamares"), a new company which has recently laid an underwater cable, to facilitate the company's entry into the international transmission market. More specifically, the Ministry of Communications may fix, for a specified period of time, the minimum tariffs which Tamares's main competitor, Mediterranean Nautilus Israel Ltd. ("Med Nautilus") may charge its customers, which includes 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. However, because Bezeq International Ltd. ("Bezeq International") has recently completed the installation of its own underwater cable, it will not be required to purchase capacity from Med Nautilus or Tamares and may supply itself with its own international transmission services at a lower cost.  As a result, our ability to compete on price with Bezeq for services in the fixed line telecommunications market may be reduced. See “Item 4B. Regulation- 4.6 Hearings and Examinations". |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | The Ministries of Finance, National Infrastructures and Communications and the Israeli Electric Corporation, the Israeli national electric company (the “Electric Company”), published in October 2011 a tender to identify an investor for the Electric Company's telecommunications project. Together with the investor, the Electric Company would establish a new hard-line telecommunications infrastructure capable of offering Internet broadband access (two such infrastructures already exist in Israel, owned by Bezeq and HOT respectively).  The new company would be controlled by the investor and held jointly with the Electric Company and would ultimately be awarded a telecommunications license by the Ministry of Communications. If the new company is allowed to sell services to end users (retail) and not just to other providers of telecommunications services (wholesale), it would enter into direct competition with other companies offering Internet broadband access infrastructure services, such as Partner, which may have an adverse affect on our business, operating results and financial condition.   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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ITEM 4. INFORMATION ON THE COMPANY

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

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

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

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

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

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

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

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

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

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

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

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

----

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

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

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

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

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

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

| · | In October 2009, Scailex became our principal shareholder through acquiring the entire interest in the Company of our previous controlling shareholder. Scailex is indirectly controlled by Mr. Ilan Ben-Dov. See “Item 3D.3 45.94% of our shares and voting rights are indirectly controlled by a single shareholder”. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| · | In October  2010, we entered into a share purchase agreement to acquire all of the outstanding shares of 012 Smile Telecom Ltd. from Merhav-Ampal Energy Ltd. 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 broadband services include broadband Internet access (ISP) with a suite of value-added services,  specialized data services and server hosting, as well as new innovative services such as local telephony via voice over broadband (VOB) and a WiFi network of hotspots across Israel. Traditional voice services include outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. 012 Smile services residential and business customers, as well as Israeli cellular operators and international communication services providers through its integrated multipurpose network. 012 Smile's network allows it to provide services to almost all of the homes and businesses in Israel. The acquisition will allow us to become a leading comprehensive communications group, expanding our services and products. |
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| · | After receipt of approval from the Anti Trust Commissioner and the Ministry of Communications, the transaction was completed on March 3, 2011. However we were required by the Ministry of Communications to maintain 012 Smile’s operations structurally separated until December 14, 2011. |
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| ·   | On December 25, 2011, the Company announced a change in the organizational structure, in which the parallel infrastructure and headquarters activities of Partner and 012 Smile will be merged and integrated. As part of the integration strategy, along with maintaining separate segments (cellular and fixed-line), the headquarter services of 012 Smile and the Company, including human resources, finance, legal, procurement and logistics, will be integrated and will be provided jointly under an integrated management. |
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|   | - | the cellular business segment, our main business, which represents the substantial portion of our total revenues. The cellular business segment includes all services provided over our cellular networks including airtime, interconnect, roaming and content services. In addition, the cellular business segment’s activities include sales of relevant equipment including cellular handsets, tablets, datacards, modems including built-in modems in laptops and related equipment and accessories. |
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|   | - | the fixed line business segment, which includes a number of services provided over fixed line networks including (1) transmission services; (2) Primary Rate Interface ("PRI") lines for business sector customers; (3) Voice over Broadband ("VoB") telephony services; (4) outgoing and Incoming international telephony, hubbing, roaming and signaling and calling card services (ILD); and (5) Internet service provider ("ISP") services, including value added services, specialized data services and server hosting, and WiFi network of hotspots across Israel. In addition, this segment includes sales of related equipment such as routers and phones. |
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|   | As of December 31, 2011, our fixed-line telephony subscriber base for both residential as well as business subscribers reached approximately 292,000 lines and our ISP subscriber base reached approximately 632,000 customers. |
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| · | High Cellular Phone Usage. Israeli usage of cellular phones is relatively high compared to Western Europe in terms of average monthly usage per subscriber. |
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| · | Calling Party Pays. In Israel, only the party originating a telephone call pays for the airtime. Cellular telephone network operators do not charge subscribers to receive calls on their handsets, except while roaming. This encourages higher rates of cellular telephone usage. |
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| · | High Ratio of Post-Paid Subscribers. In Israel it is estimated that approximately 80% of the cellular companies’ subscribers subscribe to post-paid plans, which is relatively high compared to the European average. |
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| · | Cellular Telephone Market Saturation. Since 1994, the market has sustained a rapid annual rate of growth from a 2.6% penetration rate at year-end 1994 to an estimated penetration rate in Israel at December 31, 2011, of 128%, representing approximately 10.0 million subscribers out of an estimated population of approximately 8 million. The total number of estimated cellular telephone subscribers includes dormant subscribers and subscribers to multiple networks as well as other subscribers who are not included in the Israeli population figures, such as Palestinians, visitors, and foreign workers. |
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| · | Increased Competition due to Regulatory Changes. The recent regulatory changes in the telecommunications industry with respect to new entrants that include MVNOs and new cellular operators, low exit fees, number portability, prohibition of linkage between the sale of handsets and the provision of various benefits regarding cellular services and prohibition of the sale of locked handsets, have created a high level of competition in the industry. |
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| .· | 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. |
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| · | Strong Potential For Value-Added Services. 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. We believe that these characteristics of the Israeli population has facilitated and will continue to facilitate,  the acceptance of new value-added services, including services for new data devices such as tablets and laptops. |
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| · | Pursue our Evolution intoa Diversified Multi-service Communications Group. 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. In addition to our major business providing cellular telecommunications services, our services offering range now includes fixed-line telephony, ISP services, transmission services and, ILD services and other accompanying telecom and media services. The acquisition of 012 Smile in 2011 enables us to expand our service offerings (see “Item 4A. History and Development of the Company”).   We also intend to further enrich our media and content offerings in order to attract new customers and increase the level of loyalty and satisfaction of our existing customer base. Our licenses to operate in various telecommunications areas enable us to provide a wide range of services that will potentially be used to create a bundle of telecom and other adjacent services which we believe will favorably affect our ability to limit churn rates, increase customer loyalty, maximize the synergy between our lines of business and generate additional streams of revenues. |
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| · | Maintain Strong Branding. We believe that a focused marketing strategy based upon strong branding for our products and services has substantially reinforced our subscriber loyalty. We intend to continue to promote a strong brand. We also intend to support our branded image by continuing to focus on service, innovation and advanced technology. |
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| · | Customer Centric Strategy. We place a priority on striving for excellence in the customer experience and differentiating ourselves from our competitors by our high level of customer service.   Through our offering of telecommunications services, our tariff packages and our customer service, we provide added value to our 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. |
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| · | Improve Efficiency. We place a premium on improving operational efficiency, adjusting costs and workforce to a level appropriate for evolving market conditions.  During the fourth quarter of 2011, the structural separation between the Company and 012 Smile was terminated and we started the process of merging the fixed-line businesses of Partner and of 012 Smile. We are currently in the process of integrating some of the headquarter activities, including human resources, finance, legal, procurement and logistics, under one management structure. This process is designed to maximize operating synergies and to enhance the organizational and managerial focus required for dealing with the market challenges in both the short and the long term. |
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| · | Growth in Mobile Broadband. We are pursuing growth in mobile broadband to capitalize on the rapid increase in demand for ubiquitous mobile data services and devices. In this context, we are responding to the rapid growth of mobile data traffic, and adopting targeted segmentation and pricing strategies as well as taking advantage of different broadband connection modes, to deliver a valuable quality of broadband service to users. |
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| · | Maintain High Quality Network.  We have had and shall continue to have, a commitment to ensuring network quality of both our cellular and transmission networks and the integration of technological progress to support mobile broadband growth.  We continuously invest in our transmission network and are preparing our network for upgrading to 4G, while ensuring smooth migration from existing networks to next generation networks. |
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| · | Wide variety of communication products. We believe that our offering of VoB, ISP services and ILD services, strengthens our position in the communications market. Offering a wide variety of combined mobile and fixed-line products and services will enable us to better compete with the bundled services of other players, increase customer loyalty, and serve as an additional source of revenue. |
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| · | Focus on Customer Experience. We believe we provide a quality customer experience through quick, simple and reliable handling of customer needs and interactions, which we have achieved through investments in technology, launching new and clear plans, launching a new portfolio of smartphones and tablets, and training of customer service skills. |
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|  · | High Quality Networks. We believe that we set high standards for network quality.  Our use of sophisticated network planning and optimization tools and techniques, and our investment in dense base cellular station coverage, together with our transmission network, have produced a high quality network. |
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| · | Strong Brand Identity. Since the launch of our full commercial operations in the cellular segment in 1999, we have made a substantial investment in promoting our brand identity in Israel to represent quality, innovation and customer service. Our marketing activities have resulted in wide-scale recognition of our brand for cellular services in Israel. |
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| · | Strong and Motivated Management Team. We have been able to attract a number of Israeli senior managers from the telecommunications, high-tech and consumer products industries. Our management team is experienced and highly respected and, we believe, well-positioned to manage and lead the Company. |
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| Fixed-line Services.  We offer fixed-line services that include ISP services as well as home Wi-Fi networks, ILD services, transmission services and VoB telephony services. |
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|   | · | ISP services. As an internet service provider, we offer our customers ISP services and as a reseller we offer internet access. Our ISP services offering includes email accounts, home WiFi networking, anti-virus and site filtering based on the customer’s restriction definition, and other value added internet services. Furthermore, we offer an advanced set of communications services that house web servers and related software and provide connectivity to the Internet for business customers.  See "Item 3D.2 Telecommunications industry consolidation - Uncertain future of the ISP market". |
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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. |
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|   | · | Transmission. We provide fixed-line transmission and data capacity services. Our fixed-line capacity also includes capacity which we lease from other land-line telecommunications service providers. The services we offer include primarily connectivity services by which we provide high quality, dedicated, point-to-point connection for business customers and telecommunications providers, as well as fixed-line services to business customers. |
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|   | · | VoB. This service allows users to make and receive telephone calls over the Internet through an internet connection. We offer traditional voice services to residential and business customers throughout Israel. Our service includes Quality of Service, which ensures high quality voice transmission regardless of the load on the internet connection, and a home gateway which is unique in the Israeli market for its range of sophisticated functionalities, including call "hijack" between the customer’s fixed and mobile telephone lines. |
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|   | · | ISO 9001:2008, which focuses on fulfillment of clients and legal requirements; |
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|   | · | ISO 14001:2004, which coordinates our commitment to habitat and environment; and |
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|   | · | OHSAS 18001:2007, which directs our efforts to provide a safe and healthy work environment at our premises. |
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|   | · | direct sales channels, which consist of sales centers call centers and business sales representatives; and |
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|   | · | indirect sales channels, which consist of traditional networks of specialized dealers and non-traditional networks of retail chains and stores. |
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|   | · | A team of regional representatives and customer account managers, located in regional offices, supports small to medium-sized businesses. |
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|   | · | A team of corporate representatives and customer account managers who support large corporate customers. |
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|   | · | A “door to door” sales-force located in regional offices focuses on individual and small business customers. |
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|   | · | A telemarketing department conducts direct sales by phone (to private and business customers), initiates contacts with prospective customers and coordinates appointments for the sales representatives. |
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| · | erection and operating permits from the Ministry of Environmental Protection; |
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| · | permits from the Civil Aviation Authority, in certain cases; and |
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| · | permits from the Israeli Defense Forces. |
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| Market Share* |   | 2007   |   |   | 2008   |   |   | 2009   |   |   | 2010   |   |   | 2011   |   |
|---------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partner       |   |   | 31.7   | %      |   |   | 32     | %      |   |   | 32     | %      |   |   | 32     | % |   |   | 32 | % |
| Cellcom       |   |   | 34.1   | %      |   |   | 35     | %      |   |   | 34     | %      |   |   | 34     | % |   |   | 34 | % |
| Pelephone     |   |   | 29.0   | %      |   |   | 29     | %      |   |   | 29     | %      |   |   | 29     | % |   |   | 29 | % |
| MIRS          |   |   | 5.2    | %      |   |   | 4      | %      |   |   | 5      | %      |   |   | 5      | % |   |   | 5 | % |

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|   | · | the maximum interconnect tariff payable by a telecommunications operator to a cellular operator for the completion of a call in its cellular network was reduced from the tariff of NIS 0.251 per minute to NIS 0.0687 per minute effective January 1, 2011; to NIS 0.0634 per minute effective January 1, 2012; to 0.0591 per minute effective January 1, 2013; and to NIS 0.0555 per minute effective January 1, 2014; and |
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|   | · | the maximum interconnect tariff payable by a telecommunications operator to a cellular operator for sending an SMS message to its cellular network was reduced from the tariff of NIS 0.0285 to NIS 0.0016 effective January 1, 2011; to NIS 0.0015 effective January 1, 2012; to NIS 0.0014 effective January 1, 2013; and to NIS 0.0013 effective January 1, 2014. |
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| · | The Ministry of Communications is evaluating the cost of roaming and may introduce new regulations that would limit fees charged by Israeli cellular companies for calls made by the customers of foreign network operators while they are in Israel and using our network, as well as for calls made by our own customers using their handsets abroad. The Ministry of Communications has requested additional and more specific international roaming data from the cellular companies. Because we consider roaming charges to be a significant source of revenue, such regulatory limits could adversely affect our revenues. |
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| · | The Ministry of Communications and the Council for Cable TV and Satellite Broadcasting have published a public hearing in order to determine whether there is a need to regulate the provision of video services over the internet which might compete with multiple channel television services. In October 2011 the Ministry of Communications published its recommendations that included conditions for the adoption of suitable regulation and monitoring of television broadcasts over the internet and the establishment of a continuing implementation team in order to update the existing regulation in the existing broadcasting market and to apply regulation to television broadcasts over the internet. |
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| · | On August 31, 2009, the Ministry of Communications announced that it would conduct a public hearing process regarding the regulation of broad band access services over cellular networks. Currently, a customer who obtains broad band access services over a cellular network must purchase both the broad band infrastructure and the ISP services from the cellular operator (which has itself entered into an agreement with an ISP provider), whereas a customer who obtains broad band access services over a fixed line network can purchase the broad band infrastructure and the ISP services from different vendors. The Ministry of Communications is examining the current method by which broad band access services based on cellular networks are provided to customers and has asked for public comments with regard to the current framework, as well as regarding possible alternative regulatory frameworks. As a result of this hearing, new regulations regarding broad band access services over cellular services could be introduced. We cannot assure you that, if introduced, such regulations would not adversely affect our business or operating results. See “Item 3D.1 Risks Relating to the Regulation of Our Industry – We operate in a highly regulated telecommunications market which limits our flexibility in managing our business and may materially and adversely affect our business and results of operations”. |
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| · | In March 2010, the Ministry of Communications began conducting a hearing in order to allow exclusive general licensees, mobile radio telephone licensees, and domestic fixed-line licensees to supply VoB services to subscribers that are abroad, through a telephone number that will be allocated to them by the licensee. The licensees submitted their positions to the Ministry of Communications. In December 2011, the Ministry of Communications amended the licenses of the land-line and exclusive general fixed-line licensees to allow them to supply VoB services through an Israeli phone number also to their subscribers abroad. |
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| · | In December 2010, the Ministry of Communications published a hearing regarding the granting of VoC licenses either as part of MVNO licenses or by granting a general special license for the provision of national fixed telecommunication services. The Company submitted its response in January 2011. |
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| · | The Ministry of Communications is conducting a re-assessment of the frequency fees set forth in the law in order to support effective allocation and the utmost utilization of the frequencies. |
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| · | In January 2011, the Ministry of Communications published a  hearing regarding the pricing of international calls to mobile phone destinations. The Israeli international calls operators currently set higher rates for international calls to mobile phone destinations than those for fixed line destinations. In this consultation the Ministry proposes to regulate the price difference between international calls to mobile phone destinations and those for fixed line destinations in one of two possible manners: (1) setting a uniform maximal surcharge for international calls to mobile destinations to be added to the cost of a call to fixed line destinations in each country or (2) requiring the mobile telephony operators to set a uniform call fee for both types of destinations to each foreign country. |
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| · | In November 2011, the Ministry of Communications published a hearing regarding a proposed regulation related to the underwater international telecom connection from Israel, proposing certain limitations on the agreements with Med Nautilus, Partner's provider, which shall, among other effects, limit the discounts and capacity Med Nautilus may provide to the Company, in order to provide new company protections for Tamares Telecom, a new company which has recently laid an underwater cable, to facilitate Tamares’ entry into the fixed line telecommunications market. More specifically, the Ministry of Communications may set, for a specified period of time, the minimum tariffs which Tamares’ main competitor, Med Nautilus, may charge its customers, including Partner, as well as maximum capacity which it may offer its customers, thus creating a place in the market for Tamares at rates which will protect its new business. |
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| · | In December 2011, the Ministry of Communications published a hearing for internet access providers regarding various consumer matters, similar to the hearing held for cellular telecommunication companies. The topics of the hearing include among other matters, the content of subscriber agreements and the manner in which they are executed, the obligation to document specific customer service requests, the obligation to record each phone transaction and submit to the Ministry of Communications upon its request, the obligation to document each phone conversation between a customer and a customer services representative and setting rules for the provision of cash rebates for overcharging by the telecommunications services providers, the manner in which subscribers and the Ministry of Communications are notified of price changes and others. The adoption of more of these provisions may limit Partner's flexibility in operations and competing for customers and may also increase operating costs. |
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| · | In December 2011, the Ministry of Communications published a hearing regarding a new regulation for the provision of internet broadband access service ("ADSL") by Bezeq, to subscribers that are not Bezeq's telephony service customers. The Ministry expressed its opinion that the existing pricing of Bezeq creates a consumer and competitive problem. Following the hearing, the Ministry has instructed that as of April 5, 2012, Bezeq to refrain from charging its customers a monthly sum of NIS 25 that is currently charged to subscribers for "ADSL only service" in addition to the monthly sum, charged to all its customers, for the ADSL service itself. In addition, the Ministry determined that Bezeq will price the ADSL service that is provided to all its customers such that it will include its relative portion of the network access cost, however the prices that will be set for the ADSL service shall be uniform in such a manner that Bezeq will not be allowed to set a different price for the ADSL service when the customer also consumes telephony service from Bezeq. This reform, removes yet another barrier in the fixed line market and will allow VOB operators to compete with Bezeq. |
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| · | ILITA-The Israeli Law, Information and Technology Authority, a data protection regulator, has circulated initial draft guidelines aimed at the cellular operators. The guidelines, if adopted as currently drafted, would require operators to adopt elaborate mechanisms for seeking users' consent to the collection and processing of personal information, which may affect the extent to which we can collect and process information. |
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| · | The Ministry of Communications shall examine the possibility of shortening the commitment period for subscribers so that they do not exceed 12 months. |
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| · | An inter-ministry committee headed by the director of the Ministry of Communications shall be established to submit recommendations regarding a model for cellular infrastructure sharing, including necessary statutory amendments and submit such recommendations for the government’s approval. In July 2011 the committee published its recommendations which included a requirement to allow cellular site sharing as a condition for obtaining a building permit for the construction of new cellular sites or for the modification of existing cellular sites, while providing preference and leniencies to the new UMTS operators. It was further recommended that The Ministry of Communications will be authorized to exempt site sharing in case of engineering or technological prevention. These recommendations, if enacted, shall have a negative impact on our ability to construct new cellular sites and to modify existing cellular sites and may adversely affect the Company's existing network, the network future expansion and the Company's result of operations. |
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| · | An inter-ministry committee shall be established to examine the implementation of vacating frequencies for 4th generation cellular activities including frequencies in the 2,500 MHz-2,700 MHz, while examining the possibility for compensation. The committee is expected to submit a summary document by December 25, 2011 that will examine the advantages of introducing 4G technology in light of the possible risks to the public health, if any were to be found. |
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| · | In order to increase transparency in the cellular market, and facilitate the consumers’ ability to choose telecommunication services, the Minister of Communications shall conduct periodic comparisons between the service prices of the cellular operators and bring this to the public’s attention on the ministry’s website. The ministry should publish on its website at the beginning of each year a report regarding the service levels and prices provided to cellular subscribers including changes in price levels, consumer complaint details that were received by the ministry regarding the activity of a cellular operator and details of breaches and monetary sanctions imposed by the ministry on cellular operators. |
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| · | In August 2011, a law proposal was published that was meant to set a mechanism that would allow the Ministry of Communications to impose financial sanctions on a licensee based on two parameters: the annual income of the violator and the degree of severity of the violation. The Company submitted its response in September 2011. The proposal has recently passed a first reading in the Parliament. If the law proposal passes, it could increase the variety of monitoring and enforcement measures of the Ministry of Communications towards the licensees. |
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|   | · | A proposal to unify the tariff for sending an SMS message regardless of the length of the message or number of characters. |
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|   | · | A proposal to allow customers who purchased monthly "banks" of minutes, SMSs, or data to accumulate the unutilized balance for later use. |
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|   | · | A proposal to prohibit cellular operators from imposing exit fees at all upon certain subscribers who terminate a commitment agreement during the commitment period. |
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| · | Our founding shareholders and their approved substitutes must hold, in the aggregate, at least 26% of each of our means of control. Furthermore, the maintenance of at least 26% of our means of control by our founding shareholders and their approved substitutes allows Partner to be protected from a license breach that would result from a transfer of shares for which the authorization of the Ministry of Communications was required, but not obtained. |
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| · | Israeli entities from among our founding shareholders and their approved substitutes must hold at least 5% of our issued and outstanding share capital and of each of our means of control. “Israeli entities” are defined as individuals who are citizens and residents of Israel and entities formed in Israel and controlled, directly or indirectly, by individuals who are citizens and residents of Israel, provided that indirect control is only through entities formed in Israel, unless otherwise approved by the Israeli Prime Minister or Minister of Communications. |
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| · | At least 10% of our Board of Directors must be appointed by Israeli entities, as defined above, provided that if the Board of Directors is comprised of up to 14 members, only one such director must be so appointed, and if the Board of Directors is comprised of between 15 and 24 members, only two such directors must be so appointed. |
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| · | Matters relating to national security shall be dealt with only by a Board of Directors committee that has been formed for that purpose. The committee includes at least 4 members, of which at least one is an external director. Only directors with the required clearance and those deemed appropriate by Israel’s General Security Service may be members of this committee. Resolutions approved by this committee shall be deemed adopted by the Board of Directors. |
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| · | The Ministry of Communications shall be entitled to appoint an observer to the Board of Directors and its committees, subject to certain qualifications and confidentiality undertakings. |
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| · | observing the provisions of the Telecommunications Law, the Wireless Telegraphy Ordinance, the regulations and the provisions of our license; |
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| · | acting to continuously improve our mobile telephone services, their scope, availability, quality and technology, and that there has been no act or omission by us harming or limiting competition in the mobile telephone sector; |
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| · | having the ability to continue to provide mobile telephone services of a high standard and to implement the required investments in the technological updating of our system in order to improve the scope of such services, as well as their availability and quality; and |
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| · | using the spectrum allocated to us efficiently, compared to alternative applications. |
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| · | voting rights in Partner; |
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| · | the right to appoint a director or managing director of Partner; |
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| · | the right to participate in Partner’s profits; or |
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| · | the right to share in Partner’s remaining assets after payment of debts when Partner is wound up. |
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| · | the founding shareholders or their approved substitutes of Partner continue to hold in the aggregate at least 26% of the means of control of Partner; |
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| · | our Articles of Association include the provisions described in this paragraph; |
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| · | we act in accordance with such provisions; |
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| · | our Articles of Association provide that an ordinary majority of the voting power at the general meeting of Partner is entitled to appoint all the directors of Partner other than external directors. |
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| · | Founding shareholders or their approved substitutes must hold at least 26% of the means of control of Partner. |
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| · | Israeli entities from among our founding shareholders and their approved substitutes must hold at least 5% of our issued share capital and of each of our means of control. |
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| · | The majority of our directors, and our general manager, must be citizens and residents of Israel. |
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| · | Neither the general manager of Partner nor a director of Partner may continue to serve in office if he has been convicted of certain legal offenses. |
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| · | No trust fund, insurance company, investment company or pension fund that is an Interested Party in Partner may: (a) hold, either directly or indirectly, more than 5% of any means of control in a competing mobile radio telephone operator without having obtained a permit to do so from the Ministry of Communications, or (b) hold, either directly or indirectly, more than 5% of any means of control in a competing mobile radio telephone operator in accordance with a permit from the Ministry, and in addition have a representative or appointee who is an Office Holder in a competing mobile radio telephone operator, unless it has been legally required to do so, or (c) hold, either directly or indirectly, more than 10% of any means of control in a competing mobile radio telephone operator, even if it received a permit to hold up to 10% of such means of control. |
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| · | No trust fund, insurance company, investment company or a pension fund that is an Interested Party in a competing mobile radio telephone operator may: (a) hold, either directly or indirectly, more than 5% of any means of control in Partner, without having obtained a permit to do so from the Ministry of Communications; or (b) hold, directly or indirectly, more than 5% of any means of control in Partner in accordance with a permit from the Ministry of Communications, and in addition have a representative or appointee who is an Office Holder in Partner, unless it has been legally required to do so; or (c) hold, either directly or indirectly, more than 10% of any means of control in Partner, even if it received a permit to hold up to 10% of such means of control. |
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| · | Partner, an Office Holder or Interested Party in Partner, or an Office Holder in an Interested Party in Partner does not control a competing mobile radio telephone operator, is not controlled by a competing mobile radio telephone operator, by an Office Holder or an Interested Party in a competing mobile radio telephone operator, by an Office Holder in an Interested Party in a competing mobile radio telephone operator, or by a person or corporation that controls a competing mobile radio telephone operator. |
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| · | We have illegally ceased, limited or delayed any one of our services; |
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| · | Any means of control in Partner or control of Partner has been transferred in contravention of our license; |
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| · | We fail to invest the required amounts in the establishment and operation of the mobile radio telephone system in accordance with our undertakings to the Ministry of Communications; |
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| · | We have harmed or limited competition in the area of mobile radio telephone services; |
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| · | A receiver or temporary liquidator is appointed for us, an order is issued for our winding up or we have decided to voluntarily wind up; or |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

| · | Partner, an Office Holder in Partner or an Interested Party in Partner or an Office Holder in an Interested Party of Partner is an Interested Party in a competing mobile radio telephone operator or is an Office Holder in a competing mobile radio telephone operator or in an interested party in a competing mobile radio telephone operator without first obtaining a permit from the Ministry of Communications to do so or has not fulfilled one of the conditions included in such permit. See “Item 4B Regulation–5.13 Our Permit Regarding Cross Ownership.” |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | 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

----

ITEM 

|                                                                                  |   | Year ended December 31, |   |
|---------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                  |   | 2009                    |   |   | 2010 |   |   | 2011 |   |
|                                                                                  |   |                    |   |   |   |   |   |   |   |
| Revenues (NIS million)                                                                |   |                    | 6,079  |   |   |   | 6,674 |   |   |   | 6,998 |   |
| Operating profit (NIS million)                                                        |   |                    | 1,701  |   |   |   | 1,860 |   |   |   | 1,036 |   |
| Income before taxes (NIS million)                                                     |   |                    | 1,525  |   |   |   | 1,679 |   |   |   | 742 |   |
| Net profit (NIS million)                                                              |   |                    | 1,141  |   |   |   | 1,243 |   |   |   | 443 |   |
| Capital expenditures (NIS million)                                                    |   |                    | 522    |   |   |   | 435 |   |   |   | 468 |   |
| Cash flow provided by operating activities net of investment activities (NIS million) |   |                    | 1,021  |   |   |   | 1,472 |   |   |   | 485 |   |
| Cellular Subscribers (end of period, thousands)                                       |   |                    | 3,042  |   |   |   | 3,160 |   |   |   | 3,176 |   |
| Annual cellular churn rate (%)                                                        |   |                    | 18     | % |   |   | 21 | % |   |   | 29 | % |
| Average monthly usage per cellular subscriber (MOU) (in minutes)                      |   |                    | 364    |   |   |   | 366 |   |   |   | 397 |   |
| Average monthly revenue per cellular subscriber (ARPU) (NIS)                          |   |                    | 151    |   |   |   | 148 |   |   |   | 111 |   |

----

----

----

----

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

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

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

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

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

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

|   | · | Impairment of deferred expenses – right of use |
|--------|--------|------------------------------------------------------|

|   | · | Network and cable maintenance |
|--------|--------|-------------------------------|

|   | · | Payments to ISPs |
|--------|--------|------------------|

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

----

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

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

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

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

|   | · | Impairment of intangible assets |
|--------|--------|---------------------------------|

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

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

|   | · | Depreciation and amortization |
|--------|--------|-------------------------------|

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

----

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

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

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

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

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

|   | · | average monthly revenue per subscriber (ARPU); |
|--------|--------|------------------------------------------------|

|   | · | average monthly minutes of usage per subscriber (MOU); and |
|--------|--------|------------------------------------------------------------|

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

----

----

----

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

----

----

|                                                                                                 |   | 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 EBITDA                                                                |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization                                   |   |                              | 590 |   |   |   | 182 |   |   |   |   |   |   |   | 772 |   |
|      –Impairment of intangible assets, deferred expenses and goodwill |   |                              |   |   |   |   | 349 |   |   |   |   |   |   |   | 349 |   |
|     –Other                                                                 |   |                              | 19 |   |   |   | 2 |   |   |   |   |   |   |   | 21 |   |
| EBITDA                                                                                               |   |                              | 1,896 |   |   |   | 282 |   |   |   |   |   |   |   | 2,178 |   |
|                                                                                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of EBITDA to profit before tax                                                        |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization                                        |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (772 | ) |
| Impairment of intangible assets, deferred expenses and goodwill                                      |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (349 | ) |
|      - Finance costs, net                                                   |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (294 | ) |
|      - Other                                                                |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (21 | ) |
| Profit before income tax                                                                             |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 742 |   |

----

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

----

----

----

|                               |   | New Israeli Shekels     |   |
|------------------------------------|--------|-------------------------|--------|
|                               |   | Year ended December 31, |   |
|                               |   | 2009                    |   |   | 2010 |   |
|                               |   | In millions             |   |
|                               |   |                    |   |   |   |   |
| Service revenues                   |   |                    | 5,424  |   |   |   | 5,662 |   |
| Equipment revenues                 |   |                    | 655    |   |   |   | 1,012 |   |
| Total revenues                     |   |                    | 6,079  |   |   |   | 6,674 |   |
|                               |   |                    |   |   |   |   |   |   |
| Cost of revenues – Services  |   |                    | 3,206  |   |   |   | 3,307 |   |
| Cost of revenues – Equipment |   |                    | 564    |   |   |   | 786 |   |
| Total Cost of revenues             |   |                    | 3,770  |   |   |   | 4,093 |   |
| Gross profit                       |   |                    | 2,309  |   |   |   | 2,581 |   |

----

----

----

|                                            |   | New Israeli Shekels          |   |
|-------------------------------------------------|--------|------------------------------|--------|
|                                            |   | Year ended December 31, 2009 |   |
|                                            |   | In millions                  |   |
|                                            |   | Cellular segment             |   |   | Fixed line segment |   |   | Elimination |   |   | Consolidated |   |
|                                            |   |                         |   |   |   |   |   |   |   |   |   |   |
| Segment revenue - Services                      |   |                         | 5,369  |   |   |   | 55 |   |   |   |   |   |   | 5,424 |   |
| Inter-segment revenue - Services                |   |                         | 11     |   |   |   | 33 |   |   |   | (44 | ) |   |   |   |   |
| Segment revenue - Equipment                     |   |                         | 628    |   |   |   | 27 |   |   |   |   |   |   |   | 655 |   |
| Total revenues                                  |   |                         | 6,008  |   |   |   | 115 |   |   |   | (44 | ) |   |   | 6,079 |   |
| Segment cost of revenues – Services       |   |                         | 3,091  |   |   |   | 115 |   |   |   |   |   |   |   | 3,206 |   |
|                                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Inter-segment cost of revenues- Services        |   |                         | 33     |   |   |   | 11 |   |   |   | (44 | ) |   |   |   |   |
| Segment cost of revenues - Equipment            |   |                         | 518    |   |   |   | 46 |   |   |   |   |   |   |   | 564 |   |
| Cost of revenues                                |   |                         | 3,642  |   |   |   | 172 |   |   |   | (44 | ) |   |   | 3,770 |   |
| Gross profit (loss)                             |   |                         | 2,366  |   |   |   | (57 | ) |   |   |   |   |   |   | 2,309 |   |
| Operating expenses                              |   |                         | 626    |   |   |   | 51 |   |   |   |   |   |   |   | 677 |   |
| Other income                                    |   |                         | 69     |   |   |   |   |   |   |   |   |   |   |   | 69 |   |
| Operating profit (loss)                         |   |                         | 1,809  |   |   |   | (108 | ) |   |   |   |   |   |   | 1,701 |   |
| Adjustments to presentation of EBITDA           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  –depreciation and amortization      |   |                         | 552    |   |   |   | 25 |   |   |   |   |   |   |   | 577 |   |
|  –other (1)                          |   |                         | 26     |   |   |   |   |   |   |   |   |   |   |   | 26 |   |
| EBITDA                                          |   |                         | 2,387  |   |   |   | (83 | ) |   |   |   |   |   |   | 2,304 |   |
| Reconciliation of EBITDA to profit before tax : |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  - Depreciation and amortization           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | (577 | ) |
|  - Finance costs, net                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | (176 | ) |
|  - Other (1)                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | (26 | ) |
| Profit before tax                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 1,525 |   |

----

----

|                                                                                                                                                                                                                                                                                                                                                                               |   | Three months ended |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|
| NIS in millions                                                                                                                                                                                                                                                                                                                                                                    |   | March 31           |   |   | June 30 |   |   | Sept. 30 |   |   | Dec. 31 |   |
|                                                                                                                                                                                                                                                                                                                                                                               |   |               |   |   |   |   |   |   |   |   |   |   |
| Service Revenues                                                                                                                                                                                                                                                                                                                                                                   |   |               |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                               |   |               |   |   |   |   |   |   |   |   |   |   |
| 2009                                                              |   |               | 1,298  |   |   |   | 1,360 |   |   |   | 1,389 |   |   |   | 1,377 |   |
| 2010                                                              |   |               | 1,360  |   |   |   | 1,412 |   |   |   | 1,457 |   |   |   | 1,432 |   |
| 2011                                                                                                                                                                                                                                                                                                                                                                               |   |               | 1,212  |   |   |   | 1,360 |   |   |   | 1,366 |   |   |   | 1,286 |   |

----

----

|                       |   | NIS in millions |   |
|----------------------------|--------|-----------------|--------|
|                       |   |            |   |
| Principal payments due in: |   |            |   |
| 2013                       |   |            | 118    |   |
| 2014                       |   |            | 118    |   |
| 2015                       |   |            | 118    |   |
| 2016                       |   |            | 118    |   |
|                       |   |            |   |   |
| Total                      |   |            | 472    |   |

----

|                       |   | NIS in millions |   |
|----------------------------|--------|-----------------|--------|
|                       |   |            |   |
| Principal payments due in: |   |            |   |
|                       |   |            |   |
| 2016                       |   |            | 227    |   |
| 2017                       |   |            | 227    |   |
| 2018                       |   |            | 227    |   |
|                       |   |            |   |   |
| Total                      |   |            | 681    |   |

----

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

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

|   | 1. | On November 24, 2009, a new facility (“Facility D”) was established with a leading commercial bank in the amount of NIS 700 million for a maximum period of 3 years, at a wholesale interest rate plus a margin of 0.85%, effective from January 1, 2010. The facility is used for short term financing. The wholesale interest rate of the bank as of December 31, 2010 and 2011 was 2.15% and 2.9% per year respectively. The Company is charged a commitment fee of 0.4% per year for undrawn amounts. As of December 31, 2011, no amounts had been drawn under this credit facility. During 2011, the Company used part of this credit facility to refinance part of 012 Smile's bank borrowings and for other operational needs. In addition, 012 Smile obtained a credit facility from a leading bank in the amount of NIS 80 million, which the bank is committed to until December 31, 2012. As of December 31, 2011, this credit facility is partially used to secure bank guarantees by 012 Smile. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | On November 11, 2010, a new long-term loan was established with a leading Israeli commercial bank in the amount of NIS 500 million. The loan is linked (principal and interest) to the Israeli CPI. The principal amount is repayable in three equal annual installments between 2016 and 2018 and bear interest at an annual rate of 2.75%. The interest is payable on a semi-annual basis. This loan has replaced bank facilities C and E which were cancelled. The Company may, at its discretion, at any time, prepay the loan, in whole or in part, subject to the following conditions: the amount to be prepaid shall not be less than NIS 5 million; and the Company shall reimburse the bank for any loss sustained by the bank, if any, as a result of the prepayment in an amount equal to the actual financing costs of the bank arising from such prepayment. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 3. | On December 28, 2009, a new long-term loan was established with a leading commercial bank in the amount of NIS 300 million for a period of 4 years, bearing variable interest at the rate of the Israeli Prime interest rate minus a margin of 0.35%. The interest is payable quarterly and the principal is payable in one payment at the end of the loan period. The Israeli Prime interest rate as of December 31, 2010 and 2011 was 3.5% and 4.25% per year respectively. The Israeli Prime interest rate is determined by the Bank of Israel and updated on a monthly basis. The Company may, at its discretion, at any time, prepay the loan, in whole or in part, provided that the Company shall reimburse the bank for losses sustained by the bank, as a result of the prepayment calculated according to provisions detained in the loan agreement. The loan contract requires that at any time the loan principal will not exceed 20% of all bank credits, loans, facilities (both utilized and committed facilities) and any other indebtedness of the company to the banks. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | On June 9, 2010, a new long-term loan was established with a leading commercial bank in the amount of NIS 250 million for a period of 10 years, bearing fixed interest at the rate of 5.7%. The principal and interest are payable annually. The Company may, at its discretion, at any time, prepay the loan, in whole or in part, subject to the following conditions: the amount to be prepaid shall not be less than NIS 5 million; and the Company shall reimburse the bank for any loss sustained by the bank, if any, as a result of the prepayment in an amount equal to the increase in the financing costs of the bank arising from such prepayment. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | On June 8, 2010, a new long-term loan was established with a leading commercial bank in the amount of NIS 250 million for a period of 10 years, bearing fixed interest at the rate of 5.7%. The principal and interest are payable annually. The Company may, at its discretion, at any time, prepay the loan, in whole or in part, provided that the Company shall reimburse the bank for any loss sustained by the bank, if any, as a result of the prepayment in an amount equal to the increase in the financing costs of the bank arising from such prepayment. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | On May 8, 2011, a new long-term loan was established with a leading Israeli commercial bank, in the principal loan amount of NIS 400 million, bearing a variable interest rate equal to the Prime Rate minus margin of 0.025%, per annum. The Israeli Prime interest rate as of December 31, 2011, was 4.25% per year. The interest is payable every three months. The Principal is payable in four installments, as follows: NIS 24 million on May 8, 2012, NIS 112 million on May 8, 2014, NIS 112 million on May 8, 2015, and NIS 152 million on May 8, 2019. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | On March 3, 2011, the Company completed the acquisition of all of the issued and outstanding shares of 012 Smile from Merhav-Ampal Energy Ltd. (“Ampal”). As part of 012 Smile acquisition, the Company guaranteed bank loans and other bank guarantees, which have been provided to 012 Smile, in a total amount of approximately NIS 800 million.  On April 10, 2011, 012 Smile prepaid its long term bank loans and obtained a new loan from a leading Israeli bank in a principal amount of NIS 500 million, bearing an annual interest of 3.42%. The interest is payable quarterly, and the loan is linked to the CPI (principal and interest). The principal is payable as follows (linked to the CPI as of December 2011): NIS 31 million on December 31, 2012, NIS 142 million on December 31, 2014, NIS 142 million on December 31, 2015, and NIS 194 million on December 31, 2019. 012 Smile may, at its discretion, at any time, prepay the loan, in all or in part, provided that 012 Smile shall reimburse the bank for losses sustained by the bank (excluding loss deriving from loss of future income), as a result of the prepayment. As a result of the bank loan prepayment mentioned above, and in respect of 012 Smile's credit facility described in paragraph 1 above, the bank guarantee the Company has provided to 012 Smile has decreased to NIS 580 million as of December 31, 2011. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (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) Earnings Before Interest costs, Tax, Depreciation,  Amortization and impairment charges ("EBITDA") after deducting Capital Expenditures shall not exceed 6.5 (the ratios as of December 31, 2010 and 2011 were 1.83 and 3.14, respectively); and |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | the ratio of (a) Total Debt to (b) the EBITDA of the Company shall not exceed 4 (the ratios as of December 31, 2010 and 2011 were 1.47 and 2.42, respectively). |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Current Portion Payable in 2012 as  of December 31, 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | NIS in millions |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |            |   |
| Principal on notes payable                                                                                             |   |            | 393    |   |
| Principal on long term bank loans                                                                                      |   |            | 105    |   |
| Principal on capital lease                                                                                             |   |            | 2      |   |
| Interest on notes payables                                                                                             |   |            | 116    |   |
| Interest on long term bank loans                                                                                       |   |            | 85     |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |            | 701    |   |

----

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

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

|   | · | Existing credit facilities. |
|--------|--------|-----------------------------|

----

----

----

|                                                                                   |   | Payments Due by Period (NIS in millions) |   |
|----------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
| Contractual Obligations                                                                |   | Total                                    |   |   | less than 1year |   |   | 1-3 years |   |   | 3-5 years |   |   | more than 5 years |   |
|                                                                                   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-Term Debt*                                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes Series A                                                                         |   |                                     | 393    |   |   |   | 393 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Notes Series B                                                                         |   |                                     | 472    |   |   |   | – |   |   |   | 236 |   |   |   | 236 |   |   |   | – |   |
| Notes Series C                                                                         |   |                                     | 681    |   |   |   | – |   |   |   | – |   |   |   | 227 |   |   |   | 454 |   |
| Notes Series D                                                                         |   |                                     | 545    |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | 545 |   |
| Notes Series E                                                                         |   |                                     | 934    |   |   |   | – |   |   |   | 373 |   |   |   | 374 |   |   |   | 187 |   |
| Long term bank borrowing                                                               |   |                                     | 2,173  |   |   |   | 105 |   |   |   | 654 |   |   |   | 526 |   |   |   | 888 |   |
| Capital Lease Obligations                                                              |   |                                     | 3      |   |   |   | 2 |   |   |   | 1 |   |   |   | – |   |   |   | – |   |
| Operating Leases                                                                       |   |                                     | 1,366  |   |   |   | 263 |   |   |   | 415 |   |   |   | 318 |   |   |   | 370 |   |
|                                                                                   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contribution to funds in respect of Employee rights in respect of severance pay funds  |   |                                     | 20     |   |   |   | 20 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Commitments to pay for inventory purchases                                             |   |                                     | 220    |   |   |   | 220 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Commitments to pay for property, equipment purchases and software elements purchases** |   |                                     | 275    |   |   |   | 133 |   |   |   | 142 |   |   |   | – |   |   |   | – |   |
| Commitments to pay for rights of use                                                   |   |                                     | 173    |   |   |   | 37 |   |   |   | 83 |   |   |   | 53 |   |   |   | – |   |
|                                                                                   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations                                                     |   |                                     | 7,255  |   |   |   | 1,173 |   |   |   | 1,904 |   |   |   | 1,734 |   |   |   | 2,444 |   |

----

ITEM 

| Name of Director                                |   | Age      |   | Position                               |
|-------------------------------------------------|--------|----------|--------|----------------------------------------|
| Ilan Ben Dov (1)(3)(4)(5)                       |   |  55 |   | Chairman of the Board of Directors (X) |
|                                            |   |     |   |                                   |
| Dr. Michael J. Anghel (1)(2)(3)(5)(6)(7)(8)(10) |   | 73       |   | Director                               |
| Barry Ben -Zeev (2)(3)(4)(5)(6)(7)(8)(9)(10)    |   | 59       |   | Director                               |
| Dr. Shlomo Nass (1)                             |   | 51       |   | Director                               |
| Dr. Arie Ovadia                                 |   | 63       |   | Director                               |
| Osnat Ronen (4)(7)(8)(9)(10)                    |   | 49       |   | Director                               |
| Yahel Shachar (1)(3)(5)(10)                     |   | 49       |   | Director                               |
| Arik Steinberg (2)(7)(8)                        |   | 47       |   | Director                               |
| Avi Zeldman (1)(5)(7)(9)(11)                    |   | 63       |   | Director                               |

----

| (1) | Member of the Investment Committee of the Board of Directors. |
|-----|---------------------------------------------------------------|

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

| (3) | Member of the Compensation & Nominations Committee. |
|-----|---------------------------------------------------------|

| (4) | Member of the Hedging Committee. |
|-----|----------------------------------|

| (5) | Member of the Executive Committee |
|-----|-----------------------------------|

| (6) | External Director under the Companies Law. |
|-----|--------------------------------------------|

| (7) | Independent Director under NASDAQ rules. |
|-----|------------------------------------------|

| (8) | Independent Director under the Companies Law. |
|-----|-----------------------------------------------|

| (9) | Member of the Debt Committee |
|-----|------------------------------|

| (10) | Member of the Corporate Governance Committee |   |
|------|----------------------------------------------|--------|

| (11) | Appointed on behalf of Leumi Partners Ltd. See “Item 7A. Major Shareholders - Agreement between Scailex and Bank Leumi Ltd”. |
|------|------------------------------------------------------------------------------------------------------------------------------------------|

| (X) | On January 8, 2012, the Company announced that Mr. Ben Dov had notified the Company of his intention to terminate his position as Chairman of the Board of Directors, but that he intended to continue to serve as a Director.  The Board has not yet appointed a new Chairman, and Mr. Ben Dov is continuing to act as Chairman of the Board. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

| Name of Officer      |   | Age    |   | Position                                                            |
|----------------------|--------|--------|--------|---------------------------------------------------------------------|
|                 |   |   |   |                                                                |
| Haim Romano (1)      |   | 57     |   | Chief Executive Officer                                             |
| Ziv Leitman (2)      |   | 53     |   | Chief Financial Officer                                             |
| Roly Klinger (3)     |   | 52     |   | Vice President, Legal, Chief Legal Counsel and Corporate Secretary  |
| Yonit Raviv          |   | 55     |   | Acting Chief Legal Counsel and Corporate Secretary                  |
| Yacov Kedmi          |   | 60     |   | Head of Marketing, Content & Growth Engines Division            |
| Einat Rom            |   | 46     |   | Vice President, Private Customers Division                          |
| Avi Kalfa (4)        |   | 47     |   | Vice President, Business Customers Division                         |
| Amit Lang            |   | 41     |   | Head of Economics, Business Development & Regulation Department |
| Guillermo Codner (5) |   | 44     |   | Vice President, Human Resources                                     |
| Menahem Tirosh (6)   |   | 60     |   | Chief Operating Officer                                             |
| Avi Berger           |   | 49     |   | Vice President, Technologies                                        |
| Ronit Rubin          |   | 47     |   | Vice President, Information Technology                              |
| Shachar Landau       |   | 53     |   | Vice President, Operations                                          |
| Offer Peri (7)       |   | 49     |   | Chief Executive Officer, 012 Smile                                  |

----

----

----

----

| Details of the Compensation Recipient  |   | Compensation for services (the compensation amounts are displayed in terms of cost for the Company) (NIS thousands) |   |                           | Other compensation (the compensation amounts are displayed in terms of cost for the Company) (NIS thousands) |   |
|---------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------------------------------------------------------------------------------------------------------------------|--------|
| Name                                        |   | Position                                                                                                                      |   | Payroll & Related expenses |                                                                                                                   |   | Bonus |   |   | Share based payments |   |   | Other Compensation& Vehicle |   |   | Total (NIS thousands) |   |
| Yacov Kedmi                                 |   | Head of Marketing, Content & Growth Engines Division                                                                      |   |                           | 1,541                                                                                                                  |   |   |   | 520 |   |   |   | 2,182 |   |   |   | 1,774 |   |   |   | 6,017 |   |
| Yacov Gelbard                               |   | Former Chief Executive Officer                                                                                                |   |                           | 2,095                                                                                                                  |   |   |   | - |   |   |   | 1,492 |   |   |   | 723 |   |   |   | 4,310 |   |
| Ronit Rubin                                 |   | Vice President, Information Technology                                                                                        |   |                           | 1,092                                                                                                                  |   |   |   | 150 |   |   |   | 1,636 |   |   |   | 762 |   |   |   | 3,640 |   |
| Haim Romano                                 |   | Chief Executive Officer                                                                                                       |   |                           | 585                                                                                                                    |   |   |   | - |   |   |   | 501 |   |   |   | 2,512 |   |   |   | 3,598 |   |

|   | · | Yacov Kedmi's other compensation includes expenses for a signature bonus that was paid in 2010 and was recognized for accounting purposes over a period of three years,  expenses for retirement pay that were included during the reporting period of this annual report and will be paid only upon retirement and vehicle expenses. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | During 2010, 400,000 share options were granted to Mr. Yacov Kedmi with a vesting period over four years (as of March 21, 2012, the share price was NIS 29.7 compared to an exercise price of NIS 57.8). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Mr. Yacov Gelbard's compensation data is for a period of nine months that ended on September 30, 2011. |
|--------|--------|--------------------------------------------------------------------------------------------------------|

|   | · | Other compensation includes payments for retirement. |
|--------|--------|------------------------------------------------------|

|   | · | Other compensation includes expenses for retirement pay that were included during the reporting period of this annual report and will be paid only upon retirement and vehicle expenses. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | During 2010, 300,000 share options were granted to Ms. Ronit Rubin with a vesting period over four years (as of March 21, 2012, the share price was NIS 29.7 compared to an exercise price of NIS 57.8). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·  | On September 13, 2011, the Board of Directors appointed Mr. Haim Romano to replace Mr. Yacov Gelbard as Chief Executive Officer effective October 2, 2011. |
|--------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·  | 800,000 share options were granted to Mr. Haim Romano upon his appointment  with a vesting period over three years, The fair value of the share options as measured on the day of the grant was NIS 3.6 million (as of March 21, 2012, the share price was NIS 29.7 compared to an exercise price of NIS 37.5). |
|--------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·  | Other compensation includes expenses for retirement pay that were included during the reporting period of this annual report and will be paid only upon retirement and vehicle expenses. |
|--------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | – | In compliance with Israeli Companies Law, the compensation packages of our Office Holders (as defined under “Item 4B Regulation- 5.12”)  requires approval by our audit committee and by our Board of Directors. Our audit committee is an independent committee and is comprised of both our external directors and our Israeli independent director. Our compensation committee is authorized among other things, to evaluate and recommend to the audit committee and Board of Directors the total compensation package for the Company’s Chief Executive Officer and other non-director Office Holders. Our compensation committee consists of four Board of Directors members, two of whom are external directors, rather than entirely of independent directors. As a result, the conditions of NASDAQ Rule 5605(d), that compensation for the CEO and all other executive officers must be determined or recommended to the Board by the independent directors or a compensation committee comprised solely of independent directors, are not satisfied. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | – | 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. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

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

----

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

|   | (a) in the context of proceedings 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 a felony which does not require a finding of criminal intent. |
|--------|-------------------------------------------------------------------------------------------------------------------------|

|   | 3) | reasonable litigation expenses, including legal fees, incurred by the Office Holder due to such investigation or proceeding conducted against him by an authority authorized to conduct an investigation and which was ended without filing of an indictment against him and without the imposition of a financial liability as a substitute for a criminal proceeding or that was ended without filing of an indictment against him but for which he was subject to a financial liability as a substitute for a criminal proceeding relating to an offense which does not require criminal intent, within the meaning of the relevant terms in any law, or in relation to a financial sanction (the financial sanction has not yet been incorporated into our Articles of Association); |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4) | payment to the harmed party as a result of a violation set forth in certain sections of the Israeli Securities Law, including by indemnification in advance (clause 4 has not yet been incorporated into our Articles of Association); or |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5) | expenses incurred in connection with a procedure as defined in the Israeli Securities Law ("Procedure") in connection with any affairs including, without limitation, reasonable litigation expenses, including legal fees, including by indemnification in advance (clause 5 has not yet been incorporated into our Articles of Association). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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”) except only for negligence; |
|-----|------------------------------------------------------------------------------------------------------------------|

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

| (4) | a fine a civil fine, a financial sanction or a penalty imposed on him; and |
|-----|----------------------------------------------------------------------------|

| (5) | a Procedure. |
|-----|--------------|

----

|                       |   | December 31 |   |
|----------------------------|--------|-------------|--------|
|                       |   | 2009        |   |   | 2010 |   |   |   | 2011* |   |
|                       |   |        |   |   |   |   |   |   |   |   |
| Customer service           |   |        | 3,750  |   |   |   | 4,041 |   |   |   | 5,092 |   |
| Engineering                |   |        | 322    |   |   |   | 302 |   |   |   | 548 |   |
| Sales and sales support    |   |        | 517    |   |   |   | 586 |   |   |   | 792 |   |
| Information technology     |   |        | 249    |   |   |   | 277 |   |   |   | 399 |   |
| Marketing and Content      |   |        | 135    |   |   |   | 140 |   |   |   | 158 |   |
| Finance                    |   |        | 119    |   |   |   | 132 |   |   |   | 209 |   |
| Human resources            |   |        | 125    |   |   |   | 130 |   |   |   | 178 |   |
| Operations & Logistics |   |        | 334    |   |   |   | 364 |   |   |   | 376 |   |
| Remaining operations       |   |        | 122    |   |   |   | 96 |   |   |   | 138 |   |
| TOTAL                      |   |        | 5,670  |   |   |   | 6,068 |   |   |   | 7,891 |   |

|                    |   | At December 31, 2011 |
|-------------------------|--------|----------------------|
| Customer service        |   | 1,141                |
| Engineering             |   | 206                  |
| Sales and sales support |   | 186                  |
| Information technology  |   | 70                   |
| Marketing and Content   |   | 24                   |
| Finance                 |   | 67                   |
| Human resources         |   | 56                   |
| Remaining operations    |   | 25                   |
| TOTAL                   |   | 1,775                |

----

| 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 | % |

----

----

| Option exercise price(NIS) |   | Number of optionsheld |   | Option expiration Year |
|----------------------------|--------|-----------------------|--------|------------------------|
| 58.18                      |   | 210,050               |   | 2012                   |
| 40.84                      |   | 23,400                |   | 2013                   |
| 48.70                      |   | 399,191               |   | 2014                   |
| 26.21                      |   | 13,375                |   | 2015                   |
| 29.45                      |   | 32,500                |   | 2016                   |
| 53.44                      |   | 81,000                |   | 2017                   |
| 61.53                      |   | 12,500                |   | 2018                   |
| 51.14                      |   | 1,494,750             |   | 2019                   |
| 60.67                      |   | 1,416,900             |   | 2020                   |
| 50.60                      |   | 2,723,975             |   | 2021                   |
| 33.85                      |   | 220,000               |   | 2022                   |

----

----

ITEM 

| Name                                                            |   | Shares beneficially owned |        |   | Issued Shares (1)% |   |   | Issued and Outstanding Shares (1)% |   |
|-----------------------------------------------------------------|--------|---------------------------|-------------|--------|--------------------|--------|--------|------------------------------------|--------|
|                                                            |   |                      |        |   |               |   |   |                               |   |
| Scailex Corporation Ltd, together with Suny Electronics Ltd (2) |   |                      | 71,498,719  |   |               |   | 44.66  |                               |   |   | 45.94 |   |
|                                                            |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Treasury shares (3)                                             |   |                      | 4,467,990   |   |               |   | 2.79   |                               |   |   | – |   |
|                                                            |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Public (4)                                                      |   |                      | 84,146,989  |   |               |   | 52.55  |                               |   |   | 54.06 |   |
|                                                            |   |                      |        |   |               |   |   |                               |   |   |   |   |
| Total                                                           |   |                      | 160,113,698 |   |               |   | 100.00 |                               |   |   | 100.00 |   |

----

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

| (2) | Scailex, an Israeli corporation listed on the Tel Aviv Stock Exchange, held on February 29, 2012, 44.54% of our Issued and Outstanding shares and voting rights. Scailex is a majority owned subsidiary of Suny, an Israeli corporation listed on the Tel Aviv Stock Exchange which is indirectly controlled by Mr. Ilan Ben-Dov. Suny has acquired 1.40% of our Issued and Outstanding shares and total voting rights. As a result of his indirect control of Scailex and Suny, Mr. Ilan Ben-Dov indirectly controlled 45.94% of our Issued and Outstanding shares and total voting rights as of February 29, 2012. See “Item 3D.3 45.94% of our shares and voting rights are indirectly controlled by a single shareholder”. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Treasury shares do not have a right to dividends or to vote. |
|-----|--------------------------------------------------------------|

| (4) | The shares under “Public” include 5,015,457 shares held by Israeli entities from among our founding shareholders and their approved substitutes. These shares, together with 2,173,126 shares held by Suny and 869,129 shares held by Scailex, which are included in the table above, constitute 5.03% of our issued shares (approximately 5.18% of the Issued and Outstanding Shares). Under the terms of our mobile telephone license, 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 Minister of Communications. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | · | Leumi Partners acted as a pricing underwriter and distributor, in connection with a private offering to institutional investors in Israel following which in November 2009, the Company issued NIS 448 million in principal amount. Pursuant to the underwriting agreement, the Company paid Leumi Partners a sum of NIS 380,000 representing a commission at the rate of 28.27% from the total commission paid by Partner at the rate of 0.25% of the total immediate consideration for the offering plus an additional performance based commission at a rate of 0.05% of the total immediate consideration for the offering which the Company elected to pay at its sole discretion; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Leumi Partners acted as distributor in connection with a public offering following which in April 2010, the Company issued NIS 1 billion of Series C, Series D and Series E Notes. Pursuant to the underwriting agreement, the Company paid Leumi Partners a sum of NIS 900,000 (30% of the fees and commissions which were paid by the Company to all the distributors), representing a distributor's fee at the rate of 0.25% of the total immediate gross consideration for the Public Offering plus an additional performance based commission at a rate of 0.05% of the total immediate consideration for the Public Offering which the Company elected to pay at its sole discretion; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Leumi Partners acted as distributor in connection with a private offering to institutional investors in Israel following which in February 2011, the Company issued NIS 443 million of Notes Series C for a gross consideration of NIS 463 million. Pursuant to the underwriting agreement, the Company paid Leumi Partners a sum of NIS 694,000 representing a commission of 0.15% of the total immediate consideration for this offering. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Leumi Partners acted as distributor in connection with a public offering following which in May 2011, the Company issued additional NIS 681,207,000 par value of Series D and Series E Notes through an expansion of these series. Pursuant to the underwriting agreement, the Company paid Leumi Partners a sum of NIS 455,797 (33% of the total fees and commissions which were paid by the Company to all the distributers) representing a distributers fee at the rate of 0.20% of the total immediate gross consideration for the public offering. It should be noted that the Company did not elect to pay the performance based commission at a rate of 0.05% of the total immediate gross consideration for the Public Offering, which was at the Company's sole discretion. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

ITEM 

----

ITEM 

----

|                                                                                                                                                                                                                                                                                                                                                                                                        | NASDAQ      |   | Tel Aviv Stock Exchange  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|--------|--------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                        | ($ per ADS) |   | (NIS per ordinary share) |
|                                                                                                                                                                                                                                                                                                                                                                                                        | High        |   | Low                      |   | High |   | Low |
|                                                                                                                                                                                                                                                                                                                                                                                                        |        |   |                     |   |   |   |   |
| 2008                                                                                       | 24.62       |   | 15.15                    |   | 85.48 |   | 58.40 |
|                                                                                                                                                                                                                                                                                                                                                                                                        |        |   |                     |   |   |   |   |
| 2009                                                                                       | 20.46       |   | 13.46                    |   | 77.20 |   | 57.30 |
|                                                                                                                                                                                                                                                                                                                                                                                                        |        |   |                     |   |   |   |   |
| 2010                                                                                                                                                                                                                                                                                                                                                                                                        | 24.13       |   | 15.17                    |   | 94.29 |   | 59.00 |
|                                                                                                                                                                                                                                                                                                                                                                                                        |        |   |                     |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |        |   |                     |   |   |   |   |
| 2011                                                                                       |        |   |                     |   |   |   |   |
| First Quarter                                                                              | 20.62       |   | 17.93                    |   | 74.00 |   | 65.05 |
| Second Quarter                                                                             | 19.42       |   | 14.76                    |   | 67.70 |   | 51.30 |
| Third Quarter                                                                              | 16.01       |   | 9.34                     |   | 54.50 |   | 35.30 |
| Fourth Quarter                                                                             | 12.47       |   | 8.63                     |   | 44.00 |   | 32.92 |
|                                                                                                                                                                                                                                                                                                                                                                                                        |        |   |                     |   |   |   |   |
| September 2011                                                                                                                                                                                                                                                                                                                                                                                              | 10.71       |   | 9.34                     |   | 39.15 |   | 35.30 |
| October 2011                                                                                                                                                                                                                                                                                                                                                                                                | 12.47       |   | 9.44                     |   | 44.00 |   | 35.76 |
| November 2011                                                                                                                                                                                                                                                                                                                                                                                               | 11.42       |   | 9.21                     |   | 42.45 |   | 34.90 |
| December 2011                                                                                                                                                                                                                                                                                                                                                                                               | 9.60        |   | 8.63                     |   | 37.10 |   | 32.92 |
| January 2012                                                                                                                                                                                                                                                                                                                                                                                                | 9.23        |   | 7.61                     |   | 35.35 |   | 29.38 |
| February 2012                                                                                                                                                                                                                                                                                                                                                                                               | 8.81        |   | 7.31                     |   | 32.73 |   | 27.81 |
| March 2012 (through March 19)                                                              | 7.78        |   | 7.12                     |   | 29.25 |   | 26.78 |

----

ITEM 

----

----

----

----

----

| · | General. Israeli law imposes a capital gains tax on the sale of capital assets by an Israeli resident 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 Gain” and “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed on the basis of the increase in the CPI between the date of purchase and the date of sale. As of 2012,  the Real Gain accrued on the sale of our Shares and ADSs is generally taxed at a rate of 25% for corporations (24% in 2011) and a rate of 25%  for individuals (20% in 2011). Additionally, if such individual shareholder is considered a “Significant Shareholder” at any time during the 12-month period preceding such sale (i.e. if such individual shareholder holds directly or indirectly, along with others, at least 10% of any means of control in the company), the tax rate will be 30% (25% in 2011). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

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

|   |  Individual and corporate dealers in securities in Israel are taxed at tax rates applicable to business income. |
|--------|----------------------------------------------------------------------------------------------------------------------|

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

|   | The Purchaser, the Israeli stockbrokers and any financial institution through which the sold securities are held, are obliged, subject to certain exemptions, to withhold tax on the amount of consideration paid with respect to such sale (or on the capital gain realized on the sale, if known) at the rate of 25%. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

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

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

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

----

----

----

ITEM 

----

|                                                    |   | Fair Value(NISequivalentin millions, except percentages) |   |   | Book Value(NISequivalentin millions, except percentages) |   |
|---------------------------------------------------------|--------|----------------------------------------------------------|--------|--------|----------------------------------------------------------|--------|
|                                                    |   |                                                     |   |   |                                                     |   |
| NIS-denominated debt linked to the CPI (1)              |   |                                                     |   |   |                                                     |   |
|                                                    |   |                                                     |   |   |                                                     |   |
| Fixed Notes payable series A due 2012                   |   |                                                     | 394    |   |                                                     |   | 393 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 4.25 | % |
| Long-term fixed Notes payable series B due 2016         |   |                                                     | 475    |   |                                                     |   | 470 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 3.4 | % |
| Long-term fixed Notes payable series C due 2018         |   |                                                     | 666    |   |                                                     |   | 678 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 3.35 | % |
| Long-term bank borrowing bearing fixed interest         |   |                                                     | 487    |   |                                                     |   | 514 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 2.75 | % |
| Long-term bank borrowing bearing fixed interest         |   |                                                     | 504    |   |                                                     |   | 509 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 3.42 | % |
|                                                    |   |                                                     |   |   |                                                     |   |   |   |
| NIS-denominated debt not linked to the CPI              |   |                                                     |   |   |                                                     |   |   |   |
| Long-term fixed Notes payable series D due 2021         |   |                                                     | 473    |   |                                                     |   | 540 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 4.25 | % |
| Long-term fixed Notes payable series E due 2017         |   |                                                     | 944    |   |                                                     |   | 917 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 5.5 | % |
| Long-term bank borrowing bearing variable interest (2)  |   |                                                     | 300    |   |                                                     |   | 300 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 4.03 | % |
| Long-term bank borrowing bearing variable interest (2)  |   |                                                     | 400    |   |                                                     |   | 400 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 4.54 | % |
| Long-term bank borrowing bearing fixed interest         |   |                                                     | 470    |   |                                                     |   | 450 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   | 5.70 | % |
|                                                    |   |                                                     |   |   |                                                     |   |   |   |
| Payables-trade (2)                                      |   |                                                     | 708    |   |                                                     |   | 708 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   |   |   |
| Debt denominated in foreign currencies (mainly USD) (2) |   |                                                     |   |   |                                                     |   |   |   |
|                                                    |   |                                                     |   |   |                                                     |   |   |   |
| Payables-trade                                          |   |                                                     | 205    |   |                                                     |   | 205 |   |
| Finance lease (2)                                       |   |                                                     | 3      |   |                                                     |   | 3 |   |
| Weighted average interest rate payable                  |   |                                                     |   |   |                                                     |   |   |   |
|                                                    |   |                                                     |   |   |                                                     |   |   |   |
| Total                                                   |   |                                                     | 6,029  |   |                                                     |   | 6,087 |   |

| (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, 2011. |
|-----|----------------------------------------------------------|

----

|                                                                   |   | As ofDecember 31,2011        |   |   | As ofDecember31, 2010 |   |   | Fair ValueatDecember 31,2011 |   |
|------------------------------------------------------------------------|--------|------------------------------|--------|--------|-----------------------|--------|--------|------------------------------|--------|
|                                                                   |   | (NIS equivalent in millions) |   |
| Forward transactions - pay NIS, receive NIS linked to Israeli CPI      |   |                         | -      |   |                  |   | 80     |                         |   |   | - |   |
| Forward transactions - for the exchange of NIS  into Dollars |   |                         | 382    |   |                  |   | 334    |                         |   |   | 23 |   |
| Forward transactions-for the exchange of Euros into Dollars            |   |                         | 100    |   |                  |   | -      |                         |   |   | 1 |   |
| Embedded derivatives - for the exchange of Dollars into NIS            |   |                         | 56     |   |                  |   | 144    |                         |   |   | (3 | ) |

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

----

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

ITEM 

----

ITEM 

ITEM 

ITEM 

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

----

ITEM 

ITEM 

ITEM 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 2010            |   |   | 2011           |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|--------|----------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | (NIS thousands) |   |   | (NISthousands) |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |            |   |   |           |   |
| Audit Fees (1)                                                                                                           |   |            | 2,680  |   |           |   | 3,403 |   |
| Audit-related Fees (2)                                                                                                   |   |            | 1,122  |   |           |   | 668 |   |
| Tax Fees (3)                                                                                                             |   |            | 398    |   |           |   | 454 |   |
| TOTAL                                                                                                                    |   |            | 4,200  |   |           |   | 4,525 |   |

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

----

ITEM 

ITEM 

ITEM 

ITEM 

ITEM 

ITEM 

ITEM 

| Exhibit No.               | Description                                                                                                                                                                                                                                                                            |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                                                                                                                                                                   |
| >>>>1.1       | Articles of Association last updated and approved on October 22, 2009                                                                                                                                                                                                                  |
| **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).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#>>>>4.(a).69#4.(a).70#4.(a).71 | [reserved]Facility Agreement dated November 24, 2009[reserved][reserved]                                                                                                                                                                                                                                                                                                                           |
| >>>>>4.(a) 72                         | 012 Smile Share Purchase Agreement                                                                                                                                                                                                                                                                                                                                                                 |
| >>>>>4.(a) 73                         | English translation of the original Hebrew language 012 Smile Credit Facility, dated January 31, 2010                                                                                                                                                                                                                                                                                              |
| 4.(a).74                                             | Amendment No. 58 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                        |
| 4.(a).75                                             | Amendment No. 59 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                        |
| 4.(a).76                                             | Amendment No. 60 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                        |
| 4.(a).77                                             | Amendment No. 61 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                        |
| 4.(a).78                                             | Amendment No. 62 to our License from the Israeli Ministry of Communications                                                                                                                                                                                                                                                                                                                        |
| #>>>>4.(b).1>>>>4.(b).2      | Addendum to Lease Agreements from November 1, 2002 and Lease Agreements in Beit OfekRegistration Rights Agreement with Scailex                                                                                                                                                                                                                                                                     |
| 6.                                                   | See note 2x to our 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 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                                           |

----

| **                   | 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. |
| #                    | Confidential treatment requested.                                                                        |

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

----

|   | Partner Communications Company Ltd. |
|--------|-------------------------------------|
|   |                                |   |
|   | By: /s/  Haim Romano      |   |
|   |                                |   |
|   | Chief Executive Officer             |   |
|   |                                |   |
|   | March 22, 2012                      |   |
|   |                                |   |
|   | By: /s/  Ziv Leitman      |   |
|   |                                |   |
|   | Chief Financial Officer             |   |
|   |                                |   |
|   | March 22, 2012                      |   |

----

----

|                                                                                         | Page       |
|----------------------------------------------------------------------------------------------|------------|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                      | F-2-F-3    |
| CONSOLIDATED FINANCIAL STATEMENTS:                                                           |       |
| Statements of Financial Position as of December 31, 2010 and 2011                            | F-4-F-5    |
| Statements of Income for the years ended December 31, 2009, 2010 and 2011               | F-6        |
| Statements of Comprehensive Income for the years ended December 31, 2009, 2010 and 2011 | F-7        |
| Statements of Changes in Equity for the years ended December 31, 2009, 2010 and 2011    | F-8        |
| Statements of Cash Flows for the years ended December 31, 2009, 2010 and 2011           | F-9-F-11   |
| Notes to financial statements                                                                | F-12-F-110 |

----

Report of Independent Registered Public Accounting Firm

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

----

| Tel-Aviv, Israel                       |   |   |   | Kesselman & Kesselman                               |
|----------------------------------------|--------|--------|--------|---------------------------------------------------------|
|     March 21, 2012 |   |   |   | Certified Public Accountants (Isr.)                     |
|                                   |   |   |   | A member of PricewaterhouseCoopersInternational Limited |

----

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

|                                                       |   |   |    |   | New Israeli Shekels |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|------------------------------------------------------------|--------|--------|---------|--------|---------------------|--------|--------|----------------------------------------------------|--------|
|                                                       |   |   |    |   | December 31,        |   |
|                                                       |   |   |    |   | 2010                |   |   | 2011                                               |   |   | 2011 |   |
|                                                       |   | Note   |    |   | In millions         |   |
| CURRENT ASSETS                                             |   |   |    |   |                |   |   |                                               |   |   |   |   |
| Cash and cash equivalents                                  |   |   |    |   |                | 321    |   |                                               |   | 532 |   |   |   | 139 |   |
| Trade receivables                                          |   |   | 8       |   |                |   | 1,331  |                                               |   |   | 1,518 |   |   |   | 397 |   |
| Other receivables and prepaid expenses                     |   |   | 9       |   |                |   | 71     |                                               |   |   | 41 |   |   |   | 11 |   |
| Deferred expenses – right of use                     |   |   | 14      |   |                |   |   |                                               |   |   | 19 |   |   |   | 5 |   |
| Inventories                                                |   |   | 10      |   |                |   | 101    |                                               |   |   | 162 |   |   |   | 43 |   |
| Income tax receivable                                      |   |   |    |   |                |   |   |                                               |   |   | 12 |   |   |   | 3 |   |
| Derivative financial instruments                           |   |   | 7       |   |                |   | 6      |                                               |   |   | 24 |   |   |   | 6 |   |
|                                                       |   |   |    |   |                |   | 1,830  |                                               |   |   | 2,308 |   |   |   | 604 |   |
| NON CURRENT ASSETS                                         |   |   |    |   |                |   |   |                                               |   |   |   |   |   |   |   |   |
| Trade Receivables                                          |   |   | 8       |   |                |   | 632    |                                               |   |   | 856 |   |   |   | 224 |   |
| Deferred expenses – right of use                     |   |   | 14      |   |                |   |   |                                               |   |   | 142 |   |   |   | 37 |   |
| Assets held for employee rights upon retirement, net       |   |   | 19      |   |                |   |   |                                               |   |   | 3 |   |   |   | 1 |   |
| Advance payment in respect of the acquisition of 012 smile |   |   | 5       |   |                |   | 30     |                                               |   |   |   |   |   |   |   |   |
| Property and equipment                                     |   |   | 11      |   |                |   | 2,058  |                                               |   |   | 2,051 |   |   |   | 537 |   |
| Licenses and other intangible assets                       |   |   | 12      |   |                |   | 1,077  |                                               |   |   | 1,290 |   |   |   | 338 |   |
| Goodwill                                                   |   |   | 12(c),5 |   |                |   |   |                                               |   |   | 407 |   |   |   | 107 |   |
| Deferred income tax asset                                  |   |   | 27      |   |                |   |   |                                               |   |   | 30 |   |   |   | 8 |   |
|                                                       |   |   |    |   |                |   | 3,797  |                                               |   |   | 4,779 |   |   |   | 1,252 |   |
|                                                       |   |   |    |   |                |   |   |                                               |   |   |   |   |   |   |   |   |
| TOTAL ASSETS                                               |   |   |    |   |                |   | 5,627  |                                               |   |   | 7,087 |   |   |   | 1,856 |   |

|                    |   |                    |   |                      |
|-------------------------|--------|-------------------------|--------|---------------------------|
| 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,                    |   |
|                                                                                                                                                         |   |   |     |   | 2010                            |   |   | 2011                                               |   |   | 2011 |   |
|                                                                                                                                                         |   | Note   |     |   | In millions                     |   |
| CURRENT LIABILITIES                                                                                                                                          |   |   |     |   |                            |   |   |                                               |   |   |   |   |
| Current maturities of notes payable and other liabilities and current borrowings                                                                             |   |   | 16,17,18 |   |                            |   | 628    |                                               |   |   | 498 |   |   |   | 130 |   |
| Trade payables                                                                                                                                               |   |   |     |   |                            |   | 771    |                                               |   |   | 913 |   |   |   | 239 |   |
| Parent group - trade                                                                                                                                         |   |   | 28       |   |                            |   | 72     |                                               |   |   | 142 |   |   |   | 37 |   |
| Other payables                                                                                                                                               |   |   | 13       |   |                            |   | 264    |                                               |   |   | 216 |   |   |   | 57 |   |
| Deferred revenue                                                                                                                                             |   |   |     |   |                            |   | 51     |                                               |   |   | 52 |   |   |   | 14 |   |
| Provisions                                                                                                                                                   |   |   | 15       |   |                            |   | 26     |                                               |   |   | 65 |   |   |   | 17 |   |
| Derivative financial instruments                                                                                                                             |   |   | 7        |   |                            |   | 3      |                                               |   |   | 3 |   |   |   | 1 |   |
| Income tax payable                                                                                                                                           |   |   |     |   |                            |   | 11     |                                               |   |   |   |   |   |   |   |   |
|                                                                                                                                                         |   |   |     |   |                            |   | 1,826  |                                               |   |   | 1,889 |   |   |   | 495 |   |
|                                                                                                                                                         |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| NON CURRENT LIABILITIES                                                                                                                                      |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| Notes payable                                                                                                                                                |   |   | 17       |   |                            |   | 1,836  |                                               |   |   | 2,605 |   |   |   | 682 |   |
| Bank borrowings                                                                                                                                              |   |   | 16       |   |                            |   | 1,252  |                                               |   |   | 2,068 |   |   |   | 541 |   |
| Liability for employee rights upon retirement, net                                                                                                           |   |   | 19       |   |                            |   | 54     |                                               |   |   | 48 |   |   |   | 13 |   |
| Dismantling and restoring sites obligation                                                                                                                   |   |   | 15       |   |                            |   | 23     |                                               |   |   | 25 |   |   |   | 7 |   |
| Other non-current liabilities                                                                                                                                |   |   | 18       |   |                            |   | 8      |                                               |   |   | 10 |   |   |   | 2 |   |
| Deferred tax liability                                                                                                                                       |   |   | 27       |   |                            |   | 2      |                                               |   |   | 17 |   |   |   | 4 |   |
|                                                                                                                                                         |   |   |     |   |                            |   | 3,175  |                                               |   |   | 4,773 |   |   |   | 1,249 |   |
|                                                                                                                                                         |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| TOTAL LIABILITIES                                                                                                                                            |   |   |     |   |                            |   | 5,001  |                                               |   |   | 6,662 |   |   |   | 1,744 |   |
|                                                                                                                                                         |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| EQUITY                                                                                                                                                       |   |   | 23       |   |                            |   |   |                                               |   |   |   |   |   |   |   |   |
| Share capital - ordinary shares of NIS 0.01 par value: authorized - December 31, 2010 and 2011 - 235,000,000 shares; issued and outstanding - |   |   |     | 2      |                            |   |   | 2                                                  |   |   |   | 1 |   |
| December 31, 2010 – *155,249,176 shares                                                                                                                |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |
| December 31, 2011 – ­*155,645,708 shares                                                                                                          |   |   |     |   |                            |   |   |                                               |   |   |   |   |   |
| Capital surplus                                                                                                                                              |   |   |     |   |                            |   | 1,099  |                                               |   |   | 1,100 |   |   |   | 288 |   |
| Accumulated deficit                                                                                                                                          |   |   |     |   |                            |   | (124   | )                                                  |   |   | (326 | ) |   |   | (85 | ) |
| Treasury shares, at cost - December 31, 2010            and 2011 - 4,467,990 shares                   |   |   |     | (351   | )                               |   |   | (351                                               | )      |   |   | (92 | ) |
| TOTAL EQUITY                                                                                                                                                 |   |   |     |   |                            |   | 626    |                                               |   |   | 425 |   |   |   | 112 |   |
| TOTAL LIABILITIES AND EQUITY                                                                                                                                 |   |   |     |   |                            |   | 5,627  |                                               |   |   | 7,087 |   |   |   | 1,856 |   |

----

CONSOLIDATED STATEMENTS OF INCOME

|                                |   |   |      |   |                                    |   |   |      |   |   |   |   |   | Convenience       |   |
|-------------------------------------|--------|--------|-----------|--------|-----------------------------------------|--------|--------|-----------|--------|--------|--------|--------|--------|-------------------|--------|
|                                |   |   |      |   |                                    |   |   |      |   |   |   |   |   | translation       |   |
|                                |   |   |      |   |                                    |   |   |      |   |   |   |   |   | Into U.S. Dollars |   |
|                                |   |   |      |   | New Israeli Shekels                     |   |   | (note 2a) |   |
|                                |   |   |      |   | Year ended December 31                  |   |
|                                |   |   |      |   | 2009                                    |   |   | 2010      |   |   | 2011   |   |   | 2011              |   |
|                                |   | Note   |      |   | In millions (except earnings per share) |   |
| Revenues, net                       |   |   | 6         |   |                                    |   | 6,079  |      |   |   | 6,674  |   |   |              | 6,998  |   |   |   | 1,831 |   |
| Cost of revenues                    |   |   | 6, 12, 24 |   |                                    |   | 3,770  |      |   |   | 4,093  |   |   |              | 4,978  |   |   |   | 1,303 |   |
| Gross profit                        |   |   |      |   |                                    |   | 2,309  |      |   |   | 2,581  |   |   |              | 2,020  |   |   |   | 528 |   |
|                                |   |   |      |   |                                    |   |   |      |   |   |   |   |   |              |   |   |   |   |   |   |
| Selling and marketing expenses      |   |   | 24, 12    |   |                                    |   | 387    |      |   |   | 479    |   |   |              | 711    |   |   |   | 186 |   |
| General and administrative expenses |   |   | 24        |   |                                    |   | 290    |      |   |   | 306    |   |   |              | 291    |   |   |   | 76 |   |
| Impairment of goodwill              |   |   | 12(c)     |   |                                    |   |   |      |   |   |   |   |   |              | 87     |   |   |   | 23 |   |
| Other income, net                   |   |   | 25        |   |                                    |   | 69     |      |   |   | 64     |   |   |              | 105    |   |   |   | 28 |   |
| Operating profit                    |   |   |      |   |                                    |   | 1,701  |      |   |   | 1,860  |   |   |              | 1,036  |   |   |   | 271 |   |
| Finance income                      |   |   | 26        |   |                                    |   | 28     |      |   |   | 28     |   |   |              | 39     |   |   |   | 10 |   |
| Finance expenses                    |   |   | 26        |   |                                    |   | 204    |      |   |   | 209    |   |   |              | 333    |   |   |   | 87 |   |
| Finance costs, net                  |   |   | 26        |   |                                    |   | 176    |      |   |   | 181    |   |   |              | 294    |   |   |   | 77 |   |
| Profit before income tax            |   |   |      |   |                                    |   | 1,525  |      |   |   | 1,679  |   |   |              | 742    |   |   |   | 194 |   |
| Income tax expenses                 |   |   | 27        |   |                                    |   | 384    |      |   |   | 436    |   |   |              | 299    |   |   |   | 78 |   |
| Profit for the year                 |   |   |      |   |                                    |   | 1,141  |      |   |   | 1,243  |   |   |              | 443    |   |   |   | 116 |   |
|                                |   |   |      |   |                                    |   |   |      |   |   |   |   |   |              |   |   |   |   |   |   |
| Earnings per share                  |   |   |      |   |                                    |   |   |      |   |   |   |   |   |              |   |   |   |   |   |   |
| Basic                               |   |   |      |   |                                    |   | 7.42   |      |   |   | 8.03   |   |   |              | 2.85   |   |   |   | 0.75 |   |
| Diluted                             |   |   | 29        |   |                                    |   | 7.37   |      |   |   | 7.95   |   |   |              | 2.84   |   |   |   | 0.74 |   |

----

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

|                                                                                               |   |   |   |   | New Israeli Shekels    |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|----------------------------------------------------------------------------------------------------|--------|--------|--------|--------|------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                                               |   |   |   |   | Year ended December 31 |   |
|                                                                                               |   |   |   |   | 2009                   |   |   | 2010                                               |   |   | 2011 |   |   | 2011 |   |
|                                                                                               |   | Note   |   |   | In millions            |   |
| Profit for the year                                                                                |   |   |   |   |                   | 1,141  |   |                                               |   | 1,243 |   |   |   | 443 |   |   |   | 116 |   |
| Other comprehensive income  (losses):                                                    |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Actuarial gains (losses) on defined benefit plan                                                   |   |   | 19     |   |                   |   | 16     |                                               |   |   | (8 | ) |   |   | (21 | ) |   |   | (5 | ) |
| Income taxes relating to actuarial gains (losses) on defined benefit plan                          |   |   | 27     |   |                   |   | (4     | )                                                  |   |   | 2 |   |   |   | 5 |   |   |   | 1 |   |
| Other comprehensive income (losses)     for the year, net of income taxes |   |   |   |   |                   |   | 12     |                                               |   |   | (6 | ) |   |   | (16 | ) |   |   | (4 | ) |
|                                                                                               |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL COMPREHENSIVE INCOME FOR THE YEAR                                                            |   |   |   |   |                   |   | 1,153  |                                               |   |   | 1,237 |   |   |   | 427 |   |   |   | 112 |   |

----

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

|                                                                                                                  |   |   |   |   | Share capital   |        |        |                     |   |   |          |   |   |              |   |   |           |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|-----------------|-------------|-------------|--------------------------|--------|--------|---------------|--------|--------|-------------------|--------|--------|----------------|--------|
|                                                                                                                  |   |   |   |   |  Number of |        |        |                     |   |   |  Capital |   |   |  Accumulated |   |   |  Treasury |   |   |   |   |
|                                                                                                                  |   |   |   |   | Shares**        |        |        | Amount                   |   |   | surplus       |   |   | deficit           |   |   | shares         |   |   | Total |   |
|                                                                                                                  |   | Note   |   |   |            |        |        | I n m i l l i o n s |   |
| New Israeli  Shekels:                                                                                       |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |
| BALANCE AT JANUARY 1, 2009                                                                                            |   |   |   |   |            | 153,419,394 |        |                     |   | 2      |          |   |   | 2,446             |   |   |           | (365   | ) |   |   | (351 | ) |   |   | 1,732 |   |
|                                                                                                                  |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31,2009                                                                        |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |
|              Total comprehensive income for the year |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           | 1,153  |   |   |   |   |   |   |   | 1,153 |   |
| Exercise of options granted to employees                                                                              |   |   |   |   |            | 1,020,742   |        |                     |   | *      |          |   |   | 37                |   |   |           |   |   |   |   |   |   |   |   | 37 |   |
| Employee share-based compensation expenses                                                                            |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           | 22     |   |   |   |   |   |   |   | 22 |   |
| Dividend                                                                                                              |   |   | 23     |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | (982 | ) |   |   |   |   |   |   | (982 | ) |
| BALANCE AT DECEMBER 31, 2009                                                                                          |   |   |   |   |            |        | 154,440,136 |                     |   |   | 2             |   |   |              | 2,483  |   |           |   | (172 | ) |   |   | (351 | ) |   |   | 1,962 |   |
|                                                                                                                  |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2010                                                                       |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                                               |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | 1,237 |   |   |   |   |   |   |   | 1,237 |   |
| Exercise of options granted to employees                                                                              |   |   |   |   |            |        | 809,040     |                     |   |   | *             |   |   |              | 16     |   |           |   |   |   |   |   |   |   |   |   | 16 |   |
| Employee share-based compensation expenses                                                                            |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | 23 |   |   |   |   |   |   |   | 23 |   |
| Capital reduction (see note 23(d))                                                                                    |   |   |   |   |            |        |        |                     |   |   |          |   |   |              | (1,400 | )      |           |   |   |   |   |   |   |   |   |   | (1,400 | ) |
| Dividend                                                                                                              |   |   | 23     |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | (1,212 | ) |   |   |   |   |   |   | (1,212 | ) |
| BALANCE AT DECEMBER 31, 2010                                                                                          |   |   |   |   |            |        | 155,249,176 |                     |   |   | 2             |   |   |              | 1,099  |   |           |   | (124 | ) |   |   | (351 | ) |   |   | 626 |   |
|                                                                                                                  |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2011                                                                       |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                                               |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | 427 |   |   |   |   |   |   |   | 427 |   |
| Exercise of options granted to employees                                                                              |   |   | 23     |   |            |        | 396,532     |                     |   |   | *             |   |   |              | 1      |   |           |   |   |   |   |   |   |   |   |   | 1 |   |
| Employee share-based compensation expenses                                                                            |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | 19 |   |   |   |   |   |   |   | 19 |   |
| Dividend                                                                                                              |   |   | 23     |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | (648 | ) |   |   |   |   |   |   | (648 | ) |
| BALANCE AT DECEMBER 31, 2011                                                                                          |   |   |   |   |            |        | 155,645,708 |                     |   |   | 2             |   |   |              | 1,100  |   |           |   | (326 | ) |   |   | (351 | ) |   |   | 425 |   |
|                                                                                                                  |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |   |
| Convenience translation into U.S. Dollars (note 2a):                                                                  |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE AT JANUARY 1, 2011                                                                                            |   |   |   |   |            |        | 155,249,176 |                     |   |   | 1             |   |   |              | 288    |   |           |   | (32 | ) |   |   | (92 | ) |   |   | 165 |   |
|        CHANGES DURING THE YEAR ENDED DECEMBER 31, 2011                             |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                                               |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | 112 |   |   |   |   |   |   |   | 112 |   |
| Exercise of options granted to employees                                                                              |   |   | 23     |   |            |        | 396,532     |                     |   |   | *             |   |   |              | *      |   |           |   |   |   |   |   |   |   |   |   | * |   |
| Employee share-based compensation expenses                                                                            |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | 5 |   |   |   |   |   |   |   | 5 |   |
| Dividend                                                                                                              |   |   |   |   |            |        |        |                     |   |   |          |   |   |              |   |   |           |   | (170 | ) |   |   |   |   |   |   | (170 | ) |
| BALANCE AT DECEMBER 31, 2011                                                                                          |   |   |   |   |            |        | 155,645,708 |                     |   |   | 1             |   |   |              | 288    |   |           |   | (85 | ) |   |   | (92 | ) |   |   | 112 |   |

----

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                          |   |   |   |   | New Israeli Shekels    |   |   | Convenience translation into U.S. dollars(note 2a) |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                          |   |   |   |   | Year ended December 31 |   |
|                                                                          |   |   |   |   | 2009                   |   |   | 2010                                               |   |   | 2011 |   |   | 2011 |   |
|                                                                          |   | Note   |   |   | In millions            |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                         |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |
| Cash generated from operations (Appendix A)                                   |   |   |   |   |                   | 2,092  |   |                                               |   | 2,384 |   |   |   | 1,881 |   |   |   | 491 |   |
| Income tax paid                                                               |   |   | 27     |   |                   |   | (339   | )                                                  |   |   | (426 | ) |   |   | (311 | ) |   |   | (81 | ) |
| Net cash provided by operating activities                                     |   |   |   |   |                   |   | 1,753  |                                               |   |   | 1,958 |   |   |   | 1,570 |   |   |   | 410 |   |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                         |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition of property and equipment                                         |   |   | 11     |   |                   |   | (526   | )                                                  |   |   | (361 | ) |   |   | (349 | ) |   |   | (91 | ) |
| Acquisition of intangible assets                                              |   |   | 12     |   |                   |   | (231   | )                                                  |   |   | (105 | ) |   |   | (155 | ) |   |   | (41 | ) |
| Advance payment in respect of the acquisition of 012 Smile                    |   |   |   |   |                   |   |   |                                               |   |   | (30 | ) |   |   |   |   |   |   |   |   |
| Acquisition of 012 smile, net of cash acquired of NIS 23 million (Appendix B) |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   | (597 | ) |   |   | (156 | ) |
| Interest received                                                             |   |   | 26     |   |                   |   | 1      |                                               |   |   | 5 |   |   |   | 12 |   |   |   | 3 |   |
| Proceeds from sale of property and equipment                                  |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   | 3 |   |   |   | 1 |   |
| Proceeds from derivative financial instruments, net                           |   |   | 7      |   |                   |   | 24     |                                               |   |   | 5 |   |   |   | 1 |   |   |   | * |   |
| Net cash used in investing activities                                         |   |   |   |   |                   |   | (732   | )                                                  |   |   | (486 | ) |   |   | (1,085 | ) |   |   | (284 | ) |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                         |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from exercise of stock options granted to employees                  |   |   |   |   |                   |   | 37     |                                               |   |   | 16 |   |   |   | 1 |   |   |   | * |   |
| Non-current bank borrowings received                                          |   |   | 16     |   |                   |   | 300    |                                               |   |   | 1,000 |   |   |   | 900 |   |   |   | 236 |   |
| Proceeds from issuance of notes payable, net of issuance costs                |   |   | 17     |   |                   |   | 446    |                                               |   |   | 990 |   |   |   | 1,136 |   |   |   | 297 |   |
| Dividend paid                                                                 |   |   | 23     |   |                   |   | (986   | )                                                  |   |   | (1,209 | ) |   |   | (659 | ) |   |   | (172 | ) |
| Capital reduction (see note 23(d))                                            |   |   |   |   |                   |   |   |                                               |   |   | (1,400 | ) |   |   |   |   |   |   |   |   |
| Repayment of finance lease                                                    |   |   |   |   |                   |   | (7     | )                                                  |   |   | (3 | ) |   |   | (4 | ) |   |   | (1 | ) |
| Interest paid                                                                 |   |   | 26     |   |                   |   | (89    | )                                                  |   |   | (118 | ) |   |   | (235 | ) |   |   | (62 | ) |
| Repayment of current borrowings                                               |   |   | 16     |   |                   |   | (20    | )                                                  |   |   |   |   |   |   | (128 | ) |   |   | (33 | ) |
| Repayment of non-current bank borrowings                                      |   |   | 16     |   |                   |   |   |                                               |   |   |   |   |   |   | (699 | ) |   |   | (183 | ) |
| Repayment of notes payable                                                    |   |   | 17     |   |                   |   | (557   | )                                                  |   |   | (756 | ) |   |   | (586 | ) |   |   | (153 | ) |
| Net cash used in financing activities                                         |   |   |   |   |                   |   | (876   | )                                                  |   |   | (1,480 | ) |   |   | (274 | ) |   |   | (71 | ) |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |   |   |   |   |                   |   | 145    |                                               |   |   | (8 | ) |   |   | 211 |   |   |   | 55 |   |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS ATBEGINNING OF YEAR                                 |   |   |   |   |                   |   | 184    |                                               |   |   | 329 |   |   |   | 321 |   |   |   | 84 |   |
|                                                                          |   |   |   |   |                   |   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                      |   |   |   |   |                   |   | 329    |                                               |   |   | 321 |   |   |   | 532 |   |   |   | 139 |   |

----

|                                                                      |   |   |      |   |   New Israeli Shekels |   |   | Convenience translation intoU.S. dollars(note 2a) |   |
|---------------------------------------------------------------------------|--------|--------|-----------|--------|---------------------------------|--------|--------|---------------------------------------------------|--------|
|                                                                      |   |   |      |   | Year ended December 31,    |   |
|                                                                      |   |   |      |   | 2009                            |   |   | 2010                                              |   |   | 2011 |   |   | 2011 |   |
|                                                                      |   | Note   |      |   | In millions                     |   |
|                                                                      |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |
| Cash generated from operations:                                           |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |
| Profit for the year                                                       |   |   |      |   |                            | 1,141  |   |                                              |   | 1,243 |   |   |   | 443 |   |   |   | 116 |   |
|                                                                      |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |
| Adjustments for:                                                          |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                             |   |   | 11, 12    |   |                            |   | 577    |                                              |   |   | 669 |   |   |   | 743 |   |   |   | 194 |   |
| Amortization of deferred expenses- Right of use                           |   |   | 14        |   |                            |   |   |                                              |   |   |   |   |   |   | 29 |   |   |   | 7 |   |
| Impairment of deferred expenses- Right of use                             |   |   | 14, 12(b) |   |                            |   |   |                                              |   |   |   |   |   |   | 148 |   |   |   | 38 |   |
| Impairment of goodwill                                                    |   |   | 12(c)     |   |                            |   |   |                                              |   |   |   |   |   |   | 87 |   |   |   | 23 |   |
| Impairment of intangible assets                                           |   |   | 12        |   |                            |   |   |                                              |   |   | 16 |   |   |   | 114 |   |   |   | 30 |   |
| Employee share based compensation expenses                                |   |   | 23        |   |                            |   | 22     |                                              |   |   | 23 |   |   |   | 19 |   |   |   | 5 |   |
| Liability for employee rights upon retirement, net                        |   |   | 19        |   |                            |   | 1      |                                              |   |   | 8 |   |   |   | (26 | ) |   |   | (7 | ) |
| Finance costs, net                                                        |   |   | 26        |   |                            |   | 84     |                                              |   |   | 53 |   |   |   | 71 |   |   |   | 19 |   |
| Gain (loss) from change in fair value of derivative financial instruments |   |   | 7         |   |                            |   | (18    | )                                                 |   |   | 6 |   |   |   | (19 | ) |   |   | (5 | ) |
| Interest paid                                                             |   |   | 26        |   |                            |   | 89     |                                              |   |   | 118 |   |   |   | 235 |   |   |   | 62 |   |
| Interest received                                                         |   |   | 26        |   |                            |   | (1     | )                                                 |   |   | (5 | ) |   |   | (12 | ) |   |   | (3 | ) |
| Deferred income taxes                                                     |   |   | 27        |   |                            |   | 63     |                                              |   |   | 18 |   |   |   | 2 |   |   |   | 1 |   |
| Income tax paid                                                           |   |   | 27        |   |                            |   | 339    |                                              |   |   | 426 |   |   |   | 311 |   |   |   | 81 |   |
| Capital loss from property and equipment                                  |   |   | 11        |   |                            |   | 3      |                                              |   |   | 3 |   |   |   | 2 |   |   |   | 1 |   |
| Changes in operating assets and liabilities:                              |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in accounts receivable:                               |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                                     |   |   | 8         |   |                            |   | (229   | )                                                 |   |   | (214 | ) |   |   | (190 | ) |   |   | (50 | ) |
| Other                                                                     |   |   |      |   |                            |   | 2      |                                              |   |   | (40 | ) |   |   | 44 |   |   |   | 11 |   |
| Increase (decrease) in accounts payable and accruals:                     |   |   |      |   |                            |   |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Parent group - trade                                                      |   |   | 28        |   |                            |   | (17    | )                                                 |   |   | 38 |   |   |   | 70 |   |   |   | 18 |   |
| Trade                                                                     |   |   |      |   |                            |   | 43     |                                              |   |   | (40 | ) |   |   | (37 | ) |   |   | (10 | ) |
| Other payables                                                            |   |   | 13        |   |                            |   | 6      |                                              |   |   | 27 |   |   |   | (91 | ) |   |   | (24 | ) |
| Provisions                                                                |   |   | 15        |   |                            |   | 34     |                                              |   |   | (8 | ) |   |   | 36 |   |   |   | 9 |   |
| Deferred revenue                                                          |   |   |      |   |                            |   | 8      |                                              |   |   | (5 | ) |   |   | * |   |   |   | * |   |
| Increase in deferred expenses - Right of use                              |   |   | 14        |   |                            |   |   |                                              |   |   |   |   |   |   | (27 | ) |   |   | (7 | ) |
| Current income tax liability                                              |   |   | 27        |   |                            |   | (22    | )                                                 |   |   | (9 | ) |   |   | (13 | ) |   |   | (3 | ) |
| Decrease (increase) in inventories                                        |   |   | 10        |   |                            |   | (33    | )                                                 |   |   | 57 |   |   |   | (58 | ) |   |   | (15 | ) |
| Cash generated from operations:                                           |   |   |      |   |                            |   | 2,092  |                                              |   |   | 2,384 |   |   |   | 1,881 |   |   |   | 491 |   |

----

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

----

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

|   | (1) | Cellular communication services: airtime and content; |
|--------|-----|-------------------------------------------------------|

|   | (2) | Fixed-line communication services, that include: (1) Internet services ("ISP") that provides access to the internet as well as home WiFi networks, including Value Added Services ("VAS") such as anti-virus and anti-spam filtering; (2) Transmission services; (3) fixed-line voice communication services provided through Voice Over Broadband ("VOB") and Primary Rate Interface ("PRI"); (4) International Long Distance services ("ILD"): outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

|   | The license authorizes the Company to provide mobile telephone services within the State of Israel as well as offer roaming services outside the State of Israel. In May 2000, the Company was also granted a license from the Israeli Civil Administration, to provide mobile services to the Israeli populated areas in the West Bank. The license is effective until April 7, 2013. The Company believes that it will be able to receive an extension to this license upon request. The Company provided a bank guarantee in NIS equivalent of USD 0.5 million to the State of Israel to secure the Company's adherence to the terms of the license. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | In March 2001, the Company received a special license granted by the MOC, allowing the Company through its own facilities to provide internet access to land-line network customers: Internet Service Provider (ISP). The license was renewed in April 2008 and is valid until April 2013. The Company believes that it will be able to receive an extension to this license upon request. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

----

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

|   | Partner Land-line Communication Solutions - Limited Partnership, which is fully owned by the Company, holds a license for the provision of domestic land-line telecommunications services including the right to offer VOB services using the infrastructure of Bezeq The Israel Telecommunication corp. Ltd and HOT- Telecommunication Systems Ltd (leading fixed communication infrastructure services providers in Israel) to access customers and to provide them with land-line telephony service and the provision of transmission and data communications services that were previously provided for under a transmission license that was granted in July 2006. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The license expires in 20 years but may be extended by the MOC for successive periods of 10 years provided that the licensee has complied with the terms of the license and has acted consistently for the enhancement of telecom services. The Company deposited a bank guarantee in the amount of NIS 10 million with the MOC upon receiving the license which shall be used to secure the Company's obligations under the License. In addition it holds a domestic land-line license to provide land-line services to the Israeli populated areas in the West Bank. The last license is effective until March 2019. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

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

|   | (1)  | Reduction of interconnect tariffs to be paid to cellular operators |
|--------|-----------|--------------------------------------------------------------------|

|   | · | the maximum interconnect tariff payable by a telecommunications operator to a cellular operator for the completion of a call on its cellular network was reduced from the previous 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 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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 then current 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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | New operators |
|--------|-----|---------------|

----

|   | e. | Main recent regulatory developments (continued) |
|--------|----|-------------------------------------------------|

|   |  (3) | Termination of structural separation period |
|--------|-----------|---------------------------------------------|

|   | (4) | Consumer protection regulations |
|--------|-----|---------------------------------|

|   |  In August 2011, an additional 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 5000, 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 Company recorded an impairment of subscriber acquisition costs, see note 2(j) and 2(g)(5) and 12(2). |
|--------|-----------------------------------------------------------------------------------------------------------------------|

|   | (5)  | Increase in future corporate tax rate: see note 27. |
|--------|-----------|-----------------------------------------------------|

|   | (6) | Royalty payments: see note 20. |
|--------|-----|--------------------------------|

----

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

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

|   | (2) | Use of estimates and judgments |
|--------|-----|--------------------------------|

----

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

|   | (3)  | Basis of measurement |
|--------|-----------|----------------------|

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

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

|   | (c) | Assets held and liability for employee rights upon retirement, net, is valued based on the present value of the defined benefit obligation less fair value of the plan assets, see note 19. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

|   | (4) | Convenience translation into U.S. Dollars (USD or $) |
|--------|-----|------------------------------------------------------|

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

|   | (1) | Functional and presentation currency |
|--------|-----|--------------------------------------|

----

|   | b. | Foreign currency translations (continued) |
|--------|----|-------------------------------------------|

|   | (2) | Transactions and balances |
|--------|-----|---------------------------|

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

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

----

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

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

----

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

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

----

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

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

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

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

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

----

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

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

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

|   | · | customer relationships with carriers and customer relationships with business customers were acquired in a business combination in 2006, |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | customer relationships as of the acquisition date of 012 Smile on March 3, 2011. (See note 5) |
|--------|--------|-----------------------------------------------------------------------------------------------|

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

----

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

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

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

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

----

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

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

|   | Assets that are subject to depreciation and amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If such indications exist an impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value-in-use. Value-in-use is determined by discounting expected future cash flows using a pre-tax discount rate. For the purposes of assessing impairment, assets are grouped to at the lowest levels for which there are separately identifiable cash flows (cash-generating units (CGUs)). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | When an impairment loss subsequently reverses due to favorable changes in circumstances, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, not exceeding the carrying amount that would have been determined had no impairment loss been recognized for the asset (or CGU). A reversal of an impairment loss is recognized immediately in the statement of income. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | See note 12 in respect of impairment charges recorded. |
|--------|--------------------------------------------------------|

----

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

|   | 1. | Financial instruments at fair value through profit or loss category: |
|--------|----|----------------------------------------------------------------------|

|   | 2. | Loans and receivables category: |
|--------|----|---------------------------------|

----

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

|   | 3. | Financial liabilities and borrowings at amortized cost category: |
|--------|----|------------------------------------------------------------------|

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

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

----

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

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

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

|   | (i) | Post employment benefits: |
|--------|-----|---------------------------|

|   | 1. | Defined contribution plan |
|--------|----|---------------------------|

----

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

|   | (i) | Post employment benefits (continued) |
|--------|-----|--------------------------------------|

|   | 2. | Defined benefit plan |
|--------|----|----------------------|

----

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

|   | (ii) | Termination benefits |
|--------|------|----------------------|

|   | (iii) | Short term employee benefits |
|--------|-------|------------------------------|

|   | 1.  | Vacation and recreation benefits |
|--------|----------|----------------------------------|

|   | 2.  | Profit-sharing and bonus plans |
|--------|----------|--------------------------------|

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

----

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

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

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

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

----

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

|   | (1) | Revenues from services: |
|--------|-----|-------------------------|

----

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

|   | (2) | Revenues from sales of equipment: |
|--------|-----|-----------------------------------|

|   | (3) | Revenues from non-current credit arrangements: |
|--------|-----|------------------------------------------------|

----

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

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

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

----

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

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

|   | (a) | The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning January 1, 2011 |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (1) | In May 2010 the IASB issued Improvements to IFRSs that includes amendments to existing IFRSs, the amendments are effective for annual periods beginning on or after January 2011. The improvements include an amendment to IFRS7 Financial Instruments: Disclosures – Clarification of disclosures. The amendment added a declaration that the interaction between the qualitative and quantitative disclosures enables the users of the financial statements to better assess the Group's exposure to risks arising from financial instruments. Furthermore, the clause stating that quantitative disclosures are not required when the risk is immaterial was removed, and certain disclosures regarding credit risk were amended while others were removed. The application of the amendments did not have a material impact on the financial statements. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | IAS 24 (revised), Related party disclosures, issued in November 2009. It supersedes IAS 24, related party disclosures, issued in 2003. IAS 24 (revised) is mandatory for periods beginning on or after 1 January 2011. The application of the amendments did not have a material impact on the financial statements. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Amendments to IFRIC 14 Prepayments of a minimum funding requirement, the amendments correct an unintended consequence of IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’. Without the amendments, entities are not permitted to recognize as an asset some voluntary prepayments for minimum funding contributions. The application of the amendments did not have a material impact on the financial statements. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (b) | The following new standards, amendments to standards or interpretations have been issued, but are not effective for the financial year beginning 1 January 2011, and have not been early adopted |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | (2) | In October 2010, an amendment to IFRS 7 Financial instruments: Disclosures, Transfers of Financial Assets was published. The amendment broadens the disclosures requirement regarding financial assets that were transferred to other parties, and will be effective for reporting periods commencing on July 1, 2011 or beyond. The Group is yet to assess the full impact of the amendment. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | In December 2011 the IASB issued amendments to IFRS 7 Disclosures—Offsetting Financial Assets and Financial Liabilities, it amended the required disclosures to include information that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity’s recognized financial assets and recognized financial liabilities, on the entity’s financial position. The amendment is effective for annual and interim periods beginning on or after 1 January 2013. The Group is yet to assess the full impact of the amendment. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | In May 2011 the IASB issued IFRS 10 Consolidated financial statements. IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. IFRS 10 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The standard was not early adopted. The Group is yet to assess the full impact of the standard. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (b) | The following new standards, amendments to standards or interpretations have been issued, but are not effective for the financial year beginning 1 January 2011, and have not been early adopted (continued) |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | In May 2011 the IASB issued IFRS 11 replaces IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities - Non Monetary Contributions by Venturers. IFRS 11 defines a joint arrangement as an arrangement where two or more parties contractually agree to share control. Joint control exists only when the decisions about activities that significantly affect the returns of an arrangement require the unanimous consent of the parties sharing control. IFRS 11 eliminates the existing policy choice of proportionate consolidation for jointly controlled entities. In addition, the standard categorizes joint arrangements as one of the following: Joint operations or Joint ventures. IFRS 11 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted .The standard was not early adopted. The Group is yet to assess the full impact of the standard. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | In May 2011 the IASB issued IFRS 12 Disclosures of interests in other entities. IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.  IFRS 12 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The standard was not early adopted. The Group is yet to assess the full impact of the standard. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | In May 2011, the IASB issued IFRS 13, Fair Value Measurement. IFRS 13 defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. IFRS 13 applies when other IFRSs require or permit fair value measurements. IFRS 13 is effective from 1 January 2013. Early application is permitted. The standard was not early adopted. The Group is yet to assess the full impact of the standard. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (8) | In June 2011, the IASB issued an amendment to IAS 1, Financial statements presentation, regarding the presentation of Other Comprehensive Income (OCI). The amendment requires to group items presented in OCI on the basis of whether they are potentially recycled to profit or loss. The amendment is effective for annual periods beginning on or after 1 July 2012. Early application is permitted. The standard was not early adopted. The Group is yet to assess the full impact of the amendment. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (9) | In June 2011, the IASB issued an amendment to IAS 19, Employee benefits. The amendment eliminates the corridor approach, and requires to recognize all actuarial gains and losses in OCI as they occur; and to immediately recognize all past service costs; and to replace interest costs and expected returns on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (assets). The amendment is effective for annual periods beginning on or after 1 January 2013. Early application is permitted. The standard was not early adopted. The Group is yet to assess the full impact of the amendment. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|   | (1) | Useful economic lives of assets: |
|--------|-----|----------------------------------|

|   | (2) | Impairment tests of assets with finite useful economic lives: |
|--------|-----|---------------------------------------------------------------|

|   | (3) | Allowance for doubtful accounts: |
|--------|-----|----------------------------------|

|   | (4) | Uncertain tax positions: |
|--------|-----|--------------------------|

----

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

|   | (5) | Business combinations: |
|--------|-----|------------------------|

|   | (6) | Purchase price allocation: |
|--------|-----|----------------------------|

|   | (7) | Impairment tests of goodwill: |
|--------|-----|-------------------------------|

----

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

|   | (1) | Provisions for legal claims and litigations: |
|--------|-----|----------------------------------------------|

|   | (2) | Revenue from services recognition: |
|--------|-----|------------------------------------|

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

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

----

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

----

|                                                                      |   | March 3, 2011   |   |
|---------------------------------------------------------------------------|--------|-----------------|--------|
|                                                                      |   | NIS in millions |   |
| Current assets                                                            |   |            | 295    |   |
| Deferred expenses – right of use                                    |   |            | 282    |   |
| Property and equipment                                                    |   |            | 159    |   |
| Intangible assets                                                         |   |            | 408    |   |
| Goodwill                                                                  |   |            | 494    |   |
| Other non-current assets                                                  |   |            | 21     |   |
| Short term bank borrowings and current maturities of long-term borrowings |   |            | (201   | ) |
| Accounts payables and provisions                                          |   |            | (229   | ) |
| Long term bank borrowings                                                 |   |            | (579   | ) |
|                                                                      |   |            | 650    |   |
| Less: Advance payment in respect of the acquisition of 012 Smile          |   |            | (30    | ) |
| Less: cash acquired                                                       |   |            | (23    | ) |
| Net cash used in the acquisition of 012 Smile                             |   |            | 597    |   |

----

|   | b. | Pro-forma information |
|--------|----|-----------------------|

|   | (1) | The purchase price of NIS 650 million consisted of NIS 30 million in a form of advance payment which was paid prior to the acquisition date. The reminder NIS 620 million is assumed paid on January 1, 2011. As a result, an increase in interest expenses of approximately NIS 5 million for the year ended December 31, 2011 was included in the pro-forma information, based on an average annual interest rate of 3.35%, and on linkage differences to the Consumer Price Index in Israel ("CPI") (principal and interest). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | 012 Smile has prepaid its loan from the Seller on January 1, 2011. As a result, interest expenses of approximately NIS 10 million previously recorded by 012 Smile, based on an average annual interest rate of 10% and on linkage differences to the CPI (principal and interest), were eliminated in the pro-forma information. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Pro-forma adjustments were made to reflect elimination of inter-company transactions between the Company and 012 Smile. Accordingly, revenues in an amount of approximately NIS 18 million, and cost of revenues in an amount of approximately NIS 18 million were eliminated for the presentation of the pro-forma information. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | The tax expenses were adjusted in respect of the above assumptions based on the corporate tax rate for the year 2011, and the deferred taxes are based on the corporate tax rates for the years the temporary differences are expected to be utilized. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Claims against 012 Smile Communications Ltd ("012") and 012 Smile Telecom Ltd ("012 Smile") |
|--------|----|---------------------------------------------------------------------------------------------|

----

|   | (a) | Cellular business – consists mainly of cellular services as: airtime, interconnect and content. In addition, this segment includes selling of related equipments: mainly handsets cellular phones, and related equipment. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Fixed line business - consist of a number of services provided over fixed-line networks: Transmission services; Primary Rate Interface ("PRI") lines for business sector customers; Voice over Broadband ("VoB") telephony services; Outgoing and Incoming international telephony, hubbing, roaming and signaling and calling card services (ILD); and Internet service provider ("ISP") services, including value added services, specialized data services and server hosting, and WiFi network of hotspots across Israel. In addition, this segment includes selling of related equipments such as routers and phones. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                                |   | 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 EBITDA                                                                               |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization                                                  |   |                              | 590    |   |   |   | 182 |   |   |   |   |   |   |   | 772 |   |
|      – Impairment of intangible assets, deferred expenses and goodwill (see note 12) |   |                              |   |   |   |   | 349 |   |   |   |   |   |   |   | 349 |   |
|     –Other (1)                                                                            |   |                              | 19     |   |   |   | 2 |   |   |   |   |   |   |   | 21 |   |
| EBITDA (2)                                                                                                          |   |                              | 1,896  |   |   |   | 282 |   |   |   |   |   |   |   | 2,178 |   |
|                                                                                                                |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of EBITDA to profit before tax                                                                       |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization                                                       |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (772 | ) |
|     - Impairment of intangible assets,  deferred expenses and goodwill                |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (349 | ) |
|     -  Finance costs, net                                                             |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (294 | ) |
|     -  Other (1)                                                                      |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (21 | ) |
| Profit before income tax                                                                                            |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 742 |   |

----

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

----

|                                                          |   | New Israeli Shekels               |   |
|---------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                          |   | Year ended December 31, 2009 |   |
|                                                          |   | In millions                       |   |
|                                                          |   | Cellular segment                  |   |   | Fixed line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue - Services                                    |   |                              | 5,369  |   |   |   | 55 |   |   |   |   |   |   | 5,424 |   |
| Inter-segment revenue - Services                              |   |                              | 11     |   |   |   | 33 |   |   |   | (44 | ) |   |   |   |   |
| Segment revenue - Equipment                                   |   |                              | 628    |   |   |   | 27 |   |   |   |   |   |   |   | 655 |   |
| Total revenues                                                |   |                              | 6,008  |   |   |   | 115 |   |   |   | (44 | ) |   |   | 6,079 |   |
| Segment cost of revenues – Services                     |   |                              | 3,091  |   |   |   | 115 |   |   |   |   |   |   |   | 3,206 |   |
| Inter-segment cost of  revenues- Services           |   |                              | 33     |   |   |   | 11 |   |   |   | (44 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                          |   |                              | 518    |   |   |   | 46 |   |   |   |   |   |   |   | 564 |   |
| Cost of revenues                                              |   |                              | 3,642  |   |   |   | 172 |   |   |   | (44 | ) |   |   | 3,770 |   |
| Gross profit (loss)                                           |   |                              | 2,366  |   |   |   | (57 | ) |   |   |   |   |   |   | 2,309 |   |
| Operating expenses                                            |   |                              | 626    |   |   |   | 51 |   |   |   |   |   |   |   | 677 |   |
| Other income                                                  |   |                              | 69     |   |   |   |   |   |   |   |   |   |   |   | 69 |   |
| Operating profit (loss)                                       |   |                              | 1,809  |   |   |   | (108 | ) |   |   |   |   |   |   | 1,701 |   |
| Adjustments to presentation of EBITDA                         |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     –Depreciation and amortization  |   |                              | 552    |   |   |   | 25 |   |   |   |   |   |   |   | 577 |   |
|     –Other (1)                      |   |                              | 26     |   |   |   |   |   |   |   |   |   |   |   | 26 |   |
| EBITDA (2)                                                    |   |                              | 2,387  |   |   |   | (83 | ) |   |   |   |   |   |   | 2,304 |   |
|                                                          |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of EBITDA to profit before tax                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      - Depreciation and amortization |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (577 | ) |
|     -  Finance costs, net       |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (176 | ) |
|     -  Other (1)                |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | (26 | ) |
| Profit before income tax                                      |   |                              |   |   |   |   |   |   |   |   |   |   |   |   | 1,525 |   |

----

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

|   | 1. | Risk Management |
|--------|----|-----------------|

|   | 2. | Market risks |
|--------|----|--------------|

|   | (a) | Description of market risks |
|--------|-----|-----------------------------|

----

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

|   | 2. | Market risks (continued) |
|--------|----|--------------------------|

|   | (a) | Description of market risks (continued) |
|--------|-----|-----------------------------------------|

|   | (b) | Analysis of linkage terms of financial instruments balances |
|--------|-----|-------------------------------------------------------------|

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

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

----

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

|   | 2. | Market risks (continued) |
|--------|----|--------------------------|

|   | (b) | Analysis of linkage terms of financial instruments balances (continued) |
|--------|-----|-------------------------------------------------------------------------|

|                                                                                |   | December 31, 2010                               |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                |   | In or linked to foreign currencies (mainly USD) |   |   | NIS linked to CPI |   |   | NIS unlinked |   |
|                                                                                |   | New Israeli Shekels In millions                 |   |
| Current assets                                                                      |   |                                            |   |   |   |   |   |   |   |
|    Cash and cash equivalents                                         |   |                                            |   |   |   |   |   |   | 321 |   |
|    Trade receivables                                                 |   |                                            |   |   |   |   |   |   | 1,331 |   |
|    Other receivables                                                 |   |                                            |   |   |   | 38 |   |   |   | 33 |   |
|    Derivative financial instruments (*)                              |   |                                            | 3      |   |   |   | 3 |   |   |   |   |   |
| Non- current assets                                                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |
|    Trade receivables                                                 |   |                                            |   |   |   |   |   |   |   |   | 632 |   |
| Total assets                                                                        |   |                                            | 3      |   |   |   | 41 |   |   |   | 2,317 |   |
|                                                                                |   |                                            |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |
| Current maturities of notes payable and of other liabilities and current borrowings |   |                                            |   |   |   |   | 578 |   |   |   | 50 |   |
| Trade payables                                                                      |   |                                            | 183    |   |   |   |   |   |   |   | 588 |   |
| Other payables                                                                      |   |                                            |   |   |   |   | 1 |   |   |   | 263 |   |
| Parent group - trade                                                                |   |                                            | 43     |   |   |   |   |   |   |   | 29 |   |
|    Derivative financial instruments (*)                              |   |                                            | 3      |   |   |   |   |   |   |   |   |   |
| Non- current liabilities                                                            |   |                                            |   |   |   |   |   |   |   |   |   |   |
| Non-current borrowings                                                              |   |                                            |   |   |   |   | 502 |   |   |   | 750 |   |
| Notes payable                                                                       |   |                                            |   |   |   |   | 1,043 |   |   |   | 793 |   |
| Total liabilities                                                                   |   |                                            | 229    |   |   |   | 2,124 |   |   |   | 2,473 |   |

----

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

|   | 2. | Market risks (continued) |
|--------|----|--------------------------|

|   | (c)  | Sensitivity analysis |
|--------|-----------|----------------------|

|                   |   | Change |   |   | Equity                          |   |   | Profit |   |
|------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|--------|--------|
|                   |   |   |   |   | New Israeli Shekels In millions |   |
| December 31, 2009      |   |   |   |   |                            |   |   |   |   |
| Increase in the CPI of |   |   | 2.0    | %      |                            |   | (41    | )      |   |   | (41 | ) |
| Decrease in the CPI of |   |   | (2.0   | )%     |                            |   | 41     |   |   |   | 41 |   |
|                   |   |   |   |   |                            |   |   |   |   |   |   |   |
| December 31, 2010      |   |   |   |   |                            |   |   |   |   |   |   |   |
| Increase in the CPI of |   |   | 2.0    | %      |                            |   | (40    | )      |   |   | (40 | ) |
| Decrease in the CPI of |   |   | (2.0   | )%     |                            |   | 40     |   |   |   | 40 |   |
|                   |   |   |   |   |                            |   |   |   |   |   |   |   |
| December 31, 2011      |   |   |   |   |                            |   |   |   |   |   |   |   |
| Increase in the CPI of |   |   | 2.0    | %      |                            |   | (51    | )      |   |   | (51 | ) |
| Decrease in the CPI of |   |   | (2.0   | )%     |                            |   | 51     |   |   |   | 51 |   |

|                   |   | Change |   |   | Equity                          |   |   | Profit |   |
|------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|--------|--------|
|                   |   |   |   |   | New Israeli Shekels In millions |   |
| December 31, 2009      |   |   |   |   |                            |   |   |   |   |
| Increase in the USD of |   |   | 5.0    | %      |                            |   | (12    | )      |   |   | (12 | ) |
| Decrease in the USD of |   |   | (5.0   | )%     |                            |   | 10     |   |   |   | 10 |   |
|                   |   |   |   |   |                            |   |   |   |   |   |   |   |
| December 31, 2010      |   |   |   |   |                            |   |   |   |   |   |   |   |
| Increase in the USD of |   |   | 5.0    | %      |                            |   | 1      |   |   |   | 1 |   |
| Decrease in the USD of |   |   | (5.0   | )%     |                            |   | (1     | )      |   |   | (1 | ) |
|                   |   |   |   |   |                            |   |   |   |   |   |   |   |
| December 31, 2011      |   |   |   |   |                            |   |   |   |   |   |   |   |
| Increase in the USD of |   |   | 5.0    | %      |                            |   | 6      |   |   |   | 6 |   |
| Decrease in the USD of |   |   | (5.0   | )%     |                            |   | (6     | )      |   |   | (6 | )  |

----

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

|   | 2. | Market risks (continued) |
|--------|----|--------------------------|

|   | (c)  | Sensitivity analysis (continued) |
|--------|-----------|----------------------------------|

|                                 |   | Exchange    |   |   | Exchange    |   |   |          |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|---------------|--------|
|                                 |   | rate of one |   |   | rate of one |   |   | Israeli       |   |
|                                 |   | Dollar      |   |   | Euro        |   |   | CPI*          |   |
| At December 31:                      |   |        |   |   |        |   |   |          |   |
| 2011                                 |   | NIS 3.821   |   |   | NIS 4.938   |   |   | 216.27 points |   |
| 2010                                 |   | NIS 3.549   |   |   | NIS 4.738   |   |   | 211.67 points |   |
| 2009                                 |   | NIS 3.775   |   |   | NIS 5.442   |   |   | 206.19 points |   |
| Increase (decrease) during the year: |   |        |   |   |        |   |   |          |   |
| 2011                                 |   |        | 7.7    | %      |        |   | 4.2    | %             |   |   | 2.2 | % |
| 2010                                 |   |        | (6     | )%     |        |   | (12.9  | )%            |   |   | 2.7 | % |
| 2009                                 |   |        | (0.7   | )%     |        |   | 2.7    | %             |   |   | 3.9 | % |

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

|                                                                  |   | New Israeli Shekels |   |
|-----------------------------------------------------------------------|--------|---------------------|--------|
|                                                                  |   | December 31         |   |
|                                                                  |   | 2009                |   |   | 2010 |   |   | 2011 |   |
|                                                                  |   | In millions         |   |
| Forward transactions  pay NIS, receive NIS linked to Israeli CPI |   |                | 430    |   |   |   | 80 |   |   |   | - |   |
| Forward transactions  pay NIS, receive USD                       |   |                | 113    |   |   |   | 334 |   |   |   | 382 |   |
| Forward transactions  pay Euro, receive USD                      |   |                | -      |   |   |   | - |   |   |   | 100 |   |
| Embedded derivatives  pay USD, receive NIS                       |   |                | 163    |   |   |   | 144 |   |   |   | 56 |   |

----

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

|   | 3. | Credit risk |
|--------|----|-------------|

|                                             |   | New Israeli Shekels |   |
|--------------------------------------------------|--------|---------------------|--------|
|                                             |   | December 31         |   |
|                                             |   | 2010                |   |   | 2011 |   |
|                                             |   | In millions         |   |
| Cash and cash equivalents                        |   |                | 321    |   |   |   | 532 |   |
| Trade receivables including non-current amounts  |   |                | 1,963  |   |   |   | 2,374 |   |
| Forward exchange contracts on foreign currencies |   |                | -      |   |   |   | 24 |   |
| Forward exchange contracts on CPI                |   |                | 3      |   |   |   | - |   |
| Other receivables                                |   |                | 12     |   |   |   | 15 |   |
|                                             |   |                | 2,299  |   |   |   | 2,945 |   |

----

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

|   | 4. | Liquidity risk |
|--------|----|----------------|

| December 31, 2011                     |   | 1st year                        |   |   | 2nd year |   |   | 3rd year |   |   | 4 to 5 years |   |   | More than5 years |   |   | Total  |   |
|---------------------------------------|--------|---------------------------------|--------|--------|----------|--------|--------|----------|--------|--------|--------------|--------|--------|------------------|--------|--------|--------|--------|
|                                  |   | New Israeli Shekels In millions |   |
| Notes payable series A                |   |                            | 399    |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   | 399 |   |
| Notes payable series B                |   |                            | 16     |   |     |   | 134    |     |   |   | 130          |   |   |             | 248    |   |   |   |   |   |   | 528 |   |
| Notes payable series C                |   |                            | 23     |   |     |   | 23     |     |   |   | 23           |   |   |             | 273    |   |   |   | 477 |   |   |   | 819 |   |
| Notes payable series D                |   |                            | 20     |   |     |   | 20     |     |   |   | 20           |   |   |             | 41     |   |   |   | 607 |   |   |   | 708 |   |
| Notes payable series E                |   |                            | 51     |   |     |   | 238    |     |   |   | 228          |   |   |             | 425    |   |   |   | 197 |   |   |   | 1,139 |   |
| Bank borrowings                       |   |                            | 190    |   |     |   | 431    |     |   |   | 368          |   |   |             | 620    |   |   |   | 967 |   |   |   | 2,576 |   |
| Trade and other payables              |   |                            | 1,031  |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 1,031 |   |
| Parent group  - trade       |   |                            | 142    |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 142 |   |
| Other liabilities                     |   |                            | 2      |   |     |   | 1      |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 3 |   |
| Foreign currency embedded derivatives |   |                            | 3      |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 3 |   |
|                                  |   |                            | 1,877  |   |     |   | 847    |     |   |   | 769          |   |   |             | 1,607  |   |   |   | 2,248 |   |   |   | 7,348 |   |

----

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

|   | 4. | Liquidity risk (continued) |
|--------|----|----------------------------|

| December 31, 2010                                   |   | 1st year                        |   |   | 2nd year |   |   | 3rd year |   |   | 4 to 5 years |   |   | More than5 years |   |   | Total  |   |
|-----------------------------------------------------|--------|---------------------------------|--------|--------|----------|--------|--------|----------|--------|--------|--------------|--------|--------|------------------|--------|--------|--------|--------|
|                                                |   | New Israeli Shekels In millions |   |
| Notes payable series A                              |   |                            | 600    |   |     |   | 389    |     |   |   |         |   |   |             |   |   |   |   |   | 989 |   |
| Notes payable series B                              |   |                            | 16     |   |     |   | 16     |     |   |   | 131          |   |   |             | 250    |   |   |   | 119 |   |   |   | 532 |   |
| Notes payable series C                              |   |                            | 7      |   |     |   | 7      |     |   |   | 7            |   |   |             | 14     |   |   |   | 220 |   |   |   | 255 |   |
| Notes payable series D                              |   |                            | 15     |   |     |   | 15     |     |   |   | 15           |   |   |             | 29     |   |   |   | 455 |   |   |   | 529 |   |
| Notes payable series E                              |   |                            | 22     |   |     |   | 22     |     |   |   | 102          |   |   |             | 191    |   |   |   | 173 |   |   |   | 510 |   |
| Bank borrowings                                     |   |                            | 101    |   |     |   | 99     |     |   |   | 395          |   |   |             | 166    |   |   |   | 822 |   |   |   | 1,583 |   |
| Trade and other payables                            |   |                            | 920    |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 920 |   |
| Parent group  - trade                     |   |                            | 72     |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 72 |   |
| Other liabilities                                   |   |                            | 3      |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 3 |   |
| Foreign currency forward   contracts |   |                            | 3      |   |     |   |   |     |   |   |         |   |   |             |   |   |   |   |   |   |   |   | 3 |   |
|                                                |   |                            | 1,759  |   |     |   | 548    |     |   |   | 650          |   |   |             | 650    |   |   |   | 1,789 |   |   |   | 5,396 |   |

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

----

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

|                                                       |         |   | December 31, 2010               |   |   | December 31, 2011 |   |
|------------------------------------------------------------|--------------|--------|---------------------------------|--------|--------|-------------------|--------|
|                                                       | 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      |   |                            | 321    |   |              |   | 321 |   |   |   |   |   |   | 532 |   |   |   | 532 |   |   |   |   |
| Trade receivables                                          | L&R      |   |                            | 1,963  |   |              |   | 1,956 |   |   |   | 5.50 | % |   |   | 2,374 |   |   |   | 2,395 |   |   |   | 7.55 | % |
| Other receivables (*)                                      | L&R      |   |                            | 40     |   |              |   | 40 |   |   |   |   |   |   |   | 15 |   |   |   | 15 |   |   |   |   |   |
| Derivative financial instruments                           | FVTPLLevel 2 |   |                            | 6      |   |              |   | 6 |   |   |   |   |   |   |   | 24 |   |   |   | 24 |   |   |   |   |   |
| Liabilities                                                |         |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable series A                                     | AC           |   |                            | 956    |   |              |   | 986 |   |   | Market quote |   |   |   | 393 |   |   |   | 394 |   |   | Market quote |   |
| Notes payable series B                                     | AC           |   |                            | 458    |   |              |   | 484 |   |   | Market quote |   |   |   | 470 |   |   |   | 475 |   |   | Market quote |   |
| Notes payable series C                                     | AC           |   |                            | 205    |   |              |   | 209 |   |   | Market quote |   |   |   | 678 |   |   |   | 666 |   |   | Market quote |   |
| Notes payable series D                                     | AC           |   |                            | 396    |   |              |   | 393 |   |   | Market quote |   |   |   | 540 |   |   |   | 473 |   |   | Market quote |   |
| Notes payable series E                                     | AC           |   |                            | 397    |   |              |   | 405 |   |   | Market quote |   |   |   | 917 |   |   |   | 944 |   |   | Market quote |   |
| Trade payables (*)                                         | AC           |   |                            | 771    |   |              |   | 771 |   |   |   |   |   |   |   | 913 |   |   |   | 913 |   |   |   |   |   |
| Bank borrowing bearing variable interest (*)               | AC           |   |                            | 300    |   |              |   | 300 |   |   |   |   |   |   |   | 700 |   |   |   | 700 |   |   |   |   |   |
| Bank borrowings bearing fixed interest- unlinked           | AC           |   |                            | 500    |   |              |   | 524 |   |   |   | 5.29 | % |   |   | 450 |   |   |   | 470 |   |   |   | 5.29 | % |
| Bank borrowings bearing fixed interest - linked to the CPI | AC           |   |                            | 502    |   |              |   | 490 |   |   |   | 3.16 | % |   |   | 514 |   |   |   | 487 |   |   |   | 3.80 | % |
| Bank borrowings bearing fixed interest - linked to the CPI | AC           |   |                            |   |   |              |   |   |   |   |   |   |   |   |   | 509 |   |   |   | 504 |   |   |   | 3.64 | % |
| Parent group – trade (*)                             | AC           |   |                            | 72     |   |              |   | 72 |   |   |   |   |   |   |   | 142 |   |   |   | 142 |   |   |   |   |   |
| Finance lease obligation (*)                               | AC           |   |                            | 3      |   |              |   | 3 |   |   |   |   |   |   |   | 3 |   |   |   | 3 |   |   |   |   |   |
| Derivative financial instruments                           | FVTPLLevel 2 |   |                            | 3      |   |              |   | 3 |   |   |   |   |   |   |   | 3 |   |   |   | 3 |   |   |   |   |   |

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

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

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

----

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

|                            |   | New Israeli Shekels |
|---------------------------------|--------|---------------------|
|                            |   | December 31         |
|                            |   | 2010                |   |   | 2011 |
|                            |   | In millions         |
| Trade (current and non-current) |   |                | 2,294 |   |   |   | 2,743 |   |
| Deferred interest income        |   |                | (75 | ) |   |   | (125 | ) |
| Allowance for doubtful accounts |   |                | (256 | ) |   |   | (244 | ) |
|                            |   |                | 1,963 |   |   |   | 2,374 |   |
| Current                         |   |                | 1,331 |   |   |   | 1,518 |   |
| Non – current             |   |                | 632 |   |   |   | 856 |   |

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

|                                                     |   | New Israeli Shekels |   |
|----------------------------------------------------------|--------|---------------------|--------|
|                                                     |   | Year ended          |   |
|                                                     |   | 2009                |   |   | 2010 |   |   | 2011 |   |
|                                                     |   | In millions         |   |
| Balance at beginning of year                             |   |                | 250    |   |   |   | 249 |   |   |   | 256 |   |
| Receivables written-off during the year as uncollectible |   |                | (72    | ) |   |   | (43 | ) |   |   | (55 | ) |
| Change during the year                                   |   |                | 71     |   |   |   | 50 |   |   |   | 43 |   |
| Balance at end of year                                   |   |                | 249    |   |   |   | 256 |   |   |   | 244 |   |

----

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

|                        |   | Gross                           |   |   | Allowance |   |   | Gross  |   |   | Allowance |   |
|-----------------------------|--------|---------------------------------|--------|--------|-----------|--------|--------|--------|--------|--------|-----------|--------|
|                        |   | New Israeli Shekels In millions |   |
|                        |   | December 31                     |   |
|                        |   | 2010                            |   |   | 2011      |   |
| Not past due                |   |                            | 1,950  |   |      |   | 58     |   |   |   | 2,350     |   |   |   | 41 |   |
| Past due less than one year |   |                            | 110    |   |      |   | 37     |   |   |   | 211       |   |   |   | 68 |   |
| Past due more than one year |   |                            | 234    |   |      |   | 161    |   |   |   | 182       |   |   |   | 135 |   |
|                        |   |                            | 2,294  |   |      |   | 256    |   |   |   | 2,743     |   |   |   | 244 |   |

|                                        |   | New Israeli Shekels |   |
|---------------------------------------------|--------|---------------------|--------|
|                                        |   | December 31         |   |
|                                        |   | 2010                |   |   | 2011 |   |
|                                        |   | In millions         |   |
| Ministry of Communications (see note 20(2)) |   |                | 38     |   |   |   | - |   |
| Prepaid expenses                            |   |                | 21     |   |   |   | 23 |   |
| Sundry                                      |   |                | 12     |   |   |   | 18 |   |
|                                        |   |                | 71     |   |   |   | 41 |   |

----

|   | a. | Composition |
|--------|----|-------------|

|                                     |   | New Israeli Shekels |   |
|------------------------------------------|--------|---------------------|--------|
|                                     |   | December 31         |   |
|                                     |   | 2010                |   |   | 2011 |   |
|                                     |   | In millions         |   |
| Handsets                                 |   |                | 62     |   |   |   | 129 |   |
| Accessories and other                    |   |                | 19     |   |   |   | 14 |   |
| Spare parts                              |   |                | 15     |   |   |   | 12 |   |
| ISP modems, routers, servers and related |   |                |   |   |   |   |   |   |
|     equipment        |   |                | 5      |   |   |   | 7 |   |
|                                     |   |                | 101    |   |   |   | 162 |   |

|   |   | b.   Inventories at December 31, 2011, are presented net of write offs due to decline in value in the amount of NIS 5 million (December 31, 2010 - NIS 5 million). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                         |   | Communication network (**)(*)   |   |   | Computers and information systems(*) |   |   | Optic fibers and related assets |   |   | Office furniture and equipment |   |   | Property and leaseholdimprovements |   |   | Total  |   |
|------------------------------|--------|---------------------------------|--------|--------|--------------------------------------|--------|--------|---------------------------------|--------|--------|--------------------------------|--------|--------|------------------------------------|--------|--------|--------|--------|
|                         |   | New Israeli Shekels In millions |   |
| Cost                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |
| Balance at January 1, 2009   |   |                            | 1,660  |   |                                 |   | 138    |                            |   |   | 242                            |   |   |                               | 18     |   |   |   | 180 |   |   |   | 2,238 |   |
| Additions                    |   |                            | 316    |   |                                 |   | 85     |                            |   |   | 59                             |   |   |                               | 9      |   |   |   | 20 |   |   |   | 489 |   |
| Disposals                    |   |                            | 45     |   |                                 |   | 1      |                            |   |   | -                              |   |   |                               | -      |   |   |   | - |   |   |   | 46 |   |
| Balance at December 31, 2009 |   |                            | 1,931  |   |                                 |   | 222    |                            |   |   | 301                            |   |   |                               | 27     |   |   |   | 200 |   |   |   | 2,681 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Additions                    |   |                            | 224    |   |                                 |   | 99     |                            |   |   | 27                             |   |   |                               | 4      |   |   |   | 28 |   |   |   | 382 |   |
| Disposals                    |   |                            | 26     |   |                                 |   | 4      |                            |   |   | -                              |   |   |                               | 10     |   |   |   | - |   |   |   | 40 |   |
| Balance at December 31, 2010 |   |                            | 2,129  |   |                                 |   | 317    |                            |   |   | 328                            |   |   |                               | 21     |   |   |   | 228 |   |   |   | 3,023 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Acquisition of 012 Smile     |   |                            | 101    |   |                                 |   | 27     |                            |   |   |                           |   |   |                               | 7      |   |   |   | 24 |   |   |   | 159 |   |
| Additions                    |   |                            | 217    |   |                                 |   | 45     |                            |   |   | 37                             |   |   |                               | 5      |   |   |   | 37 |   |   |   | 341 |   |
| Disposals                    |   |                            | 57     |   |                                 |   | 35     |                            |   |   | 1                              |   |   |                               | 3      |   |   |   | 24 |   |   |   | 120 |   |
| Balance at December 31, 2011 |   |                            | 2,390  |   |                                 |   | 354    |                            |   |   | 364                            |   |   |                               | 30     |   |   |   | 265 |   |   |   | 3,403 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Accumulated Depreciation     |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2009   |   |                            | 234    |   |                                 |   | 26     |                            |   |   | 11                             |   |   |                               | 5      |   |   |   | 27 |   |   |   | 303 |   |
| Depreciation for the year    |   |                            | 267    |   |                                 |   | 39     |                            |   |   | 14                             |   |   |                               | 9      |   |   |   | 28 |   |   |   | 357 |   |
| Disposals                    |   |                            | 42     |   |                                 |   | 1      |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   | 43 |   |
| Balance at December 31, 2009 |   |                            | 459    |   |                                 |   | 64     |                            |   |   | 25                             |   |   |                               | 14     |   |   |   | 55 |   |   |   | 617 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Depreciation for the year    |   |                            | 278    |   |                                 |   | 50     |                            |   |   | 19                             |   |   |                               | 9      |   |   |   | 29 |   |   |   | 385 |   |
| Disposals                    |   |                            | 23     |   |                                 |   | 4      |                            |   |   | -                              |   |   |                               | 10     |   |   |   | - |   |   |   | 37 |   |
| Balance at December 31, 2010 |   |                            | 714    |   |                                 |   | 110    |                            |   |   | 44                             |   |   |                               | 13     |   |   |   | 84 |   |   |   | 965 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Depreciation for the year    |   |                            | 369    |   |                                 |   | 66     |                            |   |   | 26                             |   |   |                               | 6      |   |   |   | 35 |   |   |   | 502 |   |
| Disposals                    |   |                            | 55     |   |                                 |   | 35     |                            |   |   |                           |   |   |                               | 2      |   |   |   | 23 |   |   |   | 115 |   |
| Balance at December 31, 2011 |   |                            | 1,028  |   |                                 |   | 141    |                            |   |   | 70                             |   |   |                               | 17     |   |   |   | 96 |   |   |   | 1,352 |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| Carrying amounts, net        |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
|                         |   |                            |   |   |                                 |   |   |                            |   |   |                           |   |   |                               |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2009         |   |                            | 1,472  |   |                                 |   | 158    |                            |   |   | 276                            |   |   |                               | 13     |   |   |   | 145 |   |   |   | 2,064 |   |
| At December 31, 2010         |   |                            | 1,415  |   |                                 |   | 207    |                            |   |   | 284                            |   |   |                               | 8      |   |   |   | 144 |   |   |   | 2,058 |   |
| At December 31, 2011         |   |                            | 1,362  |   |                                 |   | 213    |                            |   |   | 294                            |   |   |                               | 13     |   |   |   | 169 |   |   |   | 2,051 |   |

----

|   | a. | Intangible assets with finite economic useful lives |
|--------|----|-----------------------------------------------------|

|                                    |   | Licenses                        |   |   | Trade name |   |   | Customer relationships |   |   | Subscriber acquisition and retention costs |   |   | Computer software(*) |   |   | Total  |   |
|-----------------------------------------|--------|---------------------------------|--------|--------|------------|--------|--------|------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------|--------|--------|--------|--------|
|                                    |   | New Israeli Shekels In millions |   |
| Cost                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |
| Balance at January 1, 2009              |   |                            | 2,104  |   |       |   |   |                   |   | 18     |                                       |   |   |                 |   |   | 639    |   |   |   | 2,761 |   |
| Additions                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   | 199                  |   |   |   | 33     |   |   |   | 232 |   |
| Disposals                               |   |                            | 12     |   |       |   |   |                   |   |   |                                       |   |   | 18                   |   |   |   | 265    |   |   |   | 295 |   |
| Balance at December 31, 2009            |   |                            | 2,092  |   |       |   |   |                   |   | 18     |                                       |   |   | 181                  |   |   |   | 407    |   |   |   | 2,698 |   |
| Additions                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   | 72                   |   |   |   | 52     |   |   |   | 124 |   |
| Disposals                               |   |                            | 7      |   |       |   |   |                   |   |   |                                       |   |   | 187                  |   |   |   | 45     |   |   |   | 239 |   |
| Balance at December 31, 2010            |   |                            | 2,085  |   |       |   |   |                   |   | 18     |                                       |   |   | 66                   |   |   |   | 414    |   |   |   | 2,583 |   |
| Acquisition of 012 Smile                |   |                            | 3      |   |       |   | 73     |                   |   |   | 258                                        |   |   |                 | 35     |   |   |   | 39 |   |   |   | 408 |   |
| Additions                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 33     |   |   |   | 127 |   |   |   | 160 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 51     |   |   |   | 112 |   |   |   | 163 |   |
| Balance at December 31, 2011            |   |                            | 2,088  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 83     |   |   |   | 468 |   |   |   | 2,988 |   |
|                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Accumulated amortization and impairment |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2009              |   |                            | 1,017  |   |       |   |   |                   |   |   | 7                                          |   |   |                 |   |   |   |   | 477 |   |   |   | 1,501 |   |
| Amortization for the year               |   |                            | 76     |   |       |   |   |                   |   |   | 3                                          |   |   |                 | 88     |   |   |   | 53 |   |   |   | 220 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 18     |   |   |   | 265 |   |   |   | 283 |   |
| Balance at December 31, 2009            |   |                            | 1,093  |   |       |   |   |                   |   |   | 10                                         |   |   |                 | 70     |   |   |   | 265 |   |   |   | 1,438 |   |
| Amortization for the year               |   |                            | 80     |   |       |   |   |                   |   |   | 3                                          |   |   |                 | 141    |   |   |   | 60 |   |   |   | 284 |   |
| Impairment charge                       |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 16     |   |   |   |   |   |   |   | 16 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 187    |   |   |   | 45 |   |   |   | 232 |   |
| Balance at December 31, 2010            |   |                            | 1,173  |   |       |   |   |                   |   |   | 13                                         |   |   |                 | 40     |   |   |   | 280 |   |   |   | 1,506 |   |
| Amortization for the year               |   |                            | 81     |   |       |   | 4      |                   |   |   | 29                                         |   |   |                 | 52     |   |   |   | 75 |   |   |   | 241 |   |
| Impairment charge                       |   |                            |   |   |       |   | 14     |                   |   |   | 73                                         |   |   |                 | 27     |   |   |   |   |   |   |   | 114 |   |
| Disposals                               |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 51     |   |   |   | 112 |   |   |   | 163 |   |
| Balance at December 31, 2011            |   |                            | 1,254  |   |       |   | 18     |                   |   |   | 115                                        |   |   |                 | 68     |   |   |   | 243 |   |   |   | 1,698 |   |
|                                    |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Carrying amounts, net                   |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2009                    |   |                            | 999    |   |       |   |   |                   |   |   | 8                                          |   |   |                 | 111    |   |   |   | 142 |   |   |   | 1,260 |   |
| At December 31, 2010                    |   |                            | 912    |   |       |   |   |                   |   |   | 5                                          |   |   |                 | 26     |   |   |   | 134 |   |   |   | 1,077 |   |
| At December 31, 2011                    |   |                            | 834    |   |       |   | 55     |                   |   |   | 161                                        |   |   |                 | 15     |   |   |   | 225 |   |   |   | 1,290 |   |

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

----

|   | b.  | Impairments of assets with finite useful economic lives |
|--------|----------|---------------------------------------------------------|

|   | (1) | The Group recorded in 2010 impairment of intangible asset of cellular subscriber acquisition and retention costs (cellular segment) in an amount of NIS 16 million. The Group recorded in 2011 impairment of intangible asset of VOB and ISP subscriber acquisition costs (fixed-line segment) in an amount of NIS 27 million. The impairments were charged to cost of revenues. The impairments were a result of new regulations effective as of February 2011, and August 2011 respectively. See also notes 1(e)(4) and 2(g)(5). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | 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 that lead 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. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (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 14) by NIS 148 million, recorded in cost of revenues. |
|--------|-----|------------------------------------------------------------------------------|

----

|   | c.  | Goodwill impairment |
|--------|----------|---------------------|

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

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

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

----

|                                      |   | New Israeli Shekels |   |
|-------------------------------------------|--------|---------------------|--------|
|                                      |   | December 31         |   |
|                                      |   | 2010                |   |   | 2011 |   |
|                                      |   | In millions         |   |
| Employees and employee institutions       |   |                | 149    |   |   |   | 118 |   |
| Liability for vacation and recreation pay |   |                | 15     |   |   |   | 25 |   |
| Government institutions                   |   |                | 59     |   |   |   | 39 |   |
| Interest payable                          |   |                | 18     |   |   |   | 23 |   |
| Sundry                                    |   |                | 23     |   |   |   | 11 |   |
|                                      |   |                | 264    |   |   |   | 216 |   |

|                                    |   | New Israeli Shekels in millions |   |
|-----------------------------------------|--------|---------------------------------|--------|
| Cost                                    |   |                            |   |
| Balance at January 1, 2011              |   |                            | -      |   |
| Acquisition of 012 Smile                |   |                            | 311    |   |
| Additional payments during the year     |   |                            | 27     |   |
| Balance at December 31, 2011            |   |                            | 338    |   |
|                                    |   |                            |   |   |
| Accumulated amortization and impairment |   |                            |   |   |
| Balance at January 1, 2011              |   |                            | -      |   |
| Amortization during the period (*)      |   |                            | 29     |   |
| Impairment charge (see note 12(b))      |   |                            | 148    |   |
| Balance at December 31, 2011            |   |                            | 177    |   |
|                                    |   |                            |   |   |
| Carrying amount, net                    |   |                            |   |   |
| At December 31, 2011                    |   |                            | 161    |   |
| Current                                 |   |                            | 19     |   |
| Non current                             |   |                            | 142    |   |

----

|                                          |   | Dismantling and restoring sites obligation |   |   |  Legal claims** |   |   | Handset warranty |   |
|-----------------------------------------------|--------|--------------------------------------------|--------|--------|----------------------|--------|--------|------------------|--------|
|                                          |   | New Israeli Shekels In millions            |   |
| Balance as at January 1, 2011                 |   |                                       | 23     |   |                 |   | 22     |             |   |   | 4 |   |
| Acquisition of subsidiary                     |   |                                       |   |   |                 |   | 3      |             |   |   |   |   |
| Additions during the year                     |   |                                       | *      |   |                 |   | 39     |             |   |   | 26 |   |
| Change in dismantling costs and discount rate |   |                                       | 1      |   |                 |   |   |             |   |   |   |   |
| Reductions during the year                    |   |                                       | *      |   |                 |   | (10    | )                |   |   | (19 | ) |
| Unwind of discount                            |   |                                       | 1      |   |                 |   |   |             |   |   |   |   |
| Balance as at December 31, 2011               |   |                                       | 25     |   |                 |   | 54     |             |   |   | 11 |   |
| Non-current                                   |   |                                       | 25     |   |                 |   | -      |             |   |   | - |   |
| Current                                       |   |                                       | -      |   |                 |   | 54     |             |   |   | 11 |   |
|                                          |   |                                       |   |   |                 |   |   |             |   |   |   |   |
| Balance as at December 31, 2010               |   |                                       | 23     |   |                 |   | 22     |             |   |   | 4 |   |
| Non-current                                   |   |                                       | 23     |   |                 |   | -      |             |   |   | - |   |
| Current                                       |   |                                       | -      |   |                 |   | 22     |             |   |   | 4 |   |

----

|   | (1) | On November 24, 2009, Facility D was received from a leading Israeli commercial bank in the amount of NIS 700 million for a maximum period of 3 years, in wholesale interest rate plus a margin of 0.85%, effective from January 1, 2010. The facility is used for short term financing. The wholesale interest rate of the bank as of December 31, 2010 and 2011 was 2.15% and 2.9% per year respectively. The Company is charged a commitment fee of 0.4% per year for undrawn amounts. As of December 31, 2011, no amounts had been drawn under this credit facility. During 2011, the Company used part of this credit facility to refinance part of 012 Smile's bank borrowings and for other operational needs. In addition, 012 Smile obtained a credit facility from a leading bank in the amount of NIS 80 million, which the bank is committed to until December 31, 2012. As of December 31, 2011 this credit facility is partially used to secure bank guarantees. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Loan A: On November 11, 2010, a new long-term loan was established with a leading Israeli commercial bank in the amount of NIS 500 million. The loan is linked (principal and interest) to increases in the Israeli CPI. The principal amount is repayable in three equal annual installments between 2016 and 2018 and bear interest at an annual rate of 2.75%. The interest is payable on a semi-annual basis. The Company may, at its discretion, at any time, prepay the loan, in whole or in part, subject to the following conditions: the amount to be prepaid shall not be less than NIS 5 million; and the Company shall reimburse the bank for any loss sustained by the bank, if any, as a result of the prepayment in an amount based on the difference between the interest rate that the Company otherwise will have to pay through the end of the loan on its original due date, and the current market interest rate on the prepayment date. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3)  | Loan B: On December 28, 2009, a loan was received from a leading Israeli commercial bank in the amount of NIS 300 million for a period of 4 years, bearing variable interest at the rate of the Israeli Prime interest rate minus a margin of 0.35%. The interest is payable quarterly. The principal is payable in one payment at the end of the loan period. The Israeli Prime interest rate as of December 31, 2010 and 2011 was 3.5% and 4.25% per year respectively. The Israeli Prime interest rate is determined by the Bank of Israel and updated on a monthly basis. The Company may, at its discretion, at any time, prepay the loan, in whole or in part, provided that the Company shall reimburse the bank for losses sustained by the bank, as a result of the prepayment, in an amount based on the difference between the interest rate that the Company otherwise will have to pay through the end of the loan on its original due date, and the current market interest rate on the prepayment date. The loan contract requires that at any time the loan principal will not exceed 20% of all bank credits, loans, facilities (both utilized and committed facilities) and any other indebtedness of the company to the banks. |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | Loan C: On June 8, 2010, a new long-term loan was established with a leading Israeli commercial bank in the amount of NIS 250 million for a period of 10 years, bearing fixed interest at the rate of 5.7%. The principal and interest are payable annually. The Company may, at its discretion, at any time, prepay the loan, in whole or in part, provided that the Company shall reimburse the bank for any loss sustained by the bank, if any, as a result of the prepayment in an amount based on the difference between the interest rate that the Company otherwise will have to pay through the end of the loan on its original due date, and the current market interest rate on the prepayment date. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | Loan D: On June 9, 2010, a new long-term loan was established with a leading Israeli commercial bank in the amount of NIS 250 million for a period of 10 years, bearing fixed interest at the rate of 5.7%. The principal and interest are payable annually. The Company may, at its discretion, at any time, prepay the loan, in whole or in part, subject to the following conditions: the amount to be prepaid shall not be less than NIS 5 million; and the Company shall reimburse the bank for any loss sustained by the bank, if any, as a result of the prepayment in an amount based on the difference between the interest rate that the Company otherwise will have to pay through the end of the loan on its original due date, and the current market interest rate on the prepayment date. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (6) | Loan E: On May 8, 2011 the Company received a long-term loan from a leading Israeli commercial bank, in the principal loan amount of NIS 400 million, bearing a variable interest rate equal to the Prime Rateminus margin of 0.025%, per annum. The Israeli Prime interest rate as of December 31, 2011 was 4.25% per year. The interest is payable every three months. The Principal is payable in four installments, as follows: NIS 24 million on May 8, 2012, NIS 112 million on May 8, 2014, NIS 112 million on May 8, 2015, and NIS 152 million on May 8, 2019. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7)  | Loan F: On March 3, 2011 the Company completed the acquisition of all of the issued and outstanding shares of 012 Smile from Merhav-Ampal Energy Ltd. (“Ampal”). As part of 012 Smile acquisition, the Company guaranteed bank loans and other bank guarantees, which have been provided to 012 Smile, in a total amount of approximately NIS 800 million. See also note 5. On April 10, 2011, 012 Smile prepaid its long term bank loans and obtained a new loan from a leading Israeli bank in a principal amount of NIS 500 million, bearing an annual interest of 3.42%. The interest is payable quarterly, and the loan is linked to the CPI (principal and interest). The principal is payable as follows (linked to the CPI as of December 2011): NIS 31 million on December 31, 2012, NIS 142 million on December 31, 2014, NIS 142 million on December 31, 2015, and NIS 194 million on December 31, 2019. 012 Smile may, at its discretion, at any time, prepay the loan, in whole or in part, provided that 012 Smile shall reimburse the bank for losses sustained by the bank (excluding losses deriving from loss of future income), as a result of the prepayment. As a result of the above mentioned, and in respect of 012 Smile's credit facility described in (1) above, the bank guarantee the Company provided to 012 Smile has decreased to NIS 580 million as of December 31, 2011. |
|--------|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (8)  | 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) Earnings Before Interest costs, Tax, Depreciation and Amortization expenses ("EBITDA") after deducting Capital Expenditures shall not exceed 6.5 (the ratio as of December 31, 2010 and 2011 was 1.83 and 3.14, 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, 2010 and 2011 was 1.47 and 2.42, respectively). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (9) | Negative pledge: |
|--------|-----|------------------|

|   | (10) | Summary of bank borrowings as of December 31, 2011, in NIS millions: |
|--------|------|----------------------------------------------------------------------|

|       |   | Total principal |   |   | Current maturities |   |   | Non-current principal |   | linkage terms |   | Annual interest rate |   |
|------------|--------|-----------------|--------|--------|--------------------|--------|--------|-----------------------|--------|---------------|--------|----------------------|--------|
| Loan A (*) |   |            | 514    |   |               |   |   |                  |   | 514           |   | CPI                  |   |   | 2.75 | % |
| Loan B     |   |            | 300    |   |               |   |   |                  |   | 300           |   |                 |   | Prime minus 0.35 | % |
| Loan C     |   |            | 225    |   |               |   | 25     |                  |   |          | 200    |                 |   |   |   | 5.7 | % |
| Loan D     |   |            | 225    |   |               |   | 25     |                  |   |          | 200    |                 |   |   |   | 5.7 | % |
| Loan E     |   | 400             |   |   |               | 24     |   |                  |   | 376           |   |                 |   | Prime minus 0.025 | %  |
| Loan F (*) |   |            | 509    |   |               |   | 31     |                  |   |          | 478    |                 | CPI    |   |   | 3.42 | % |
|       |   |            | 2,173  |   |               |   | 105    |                  |   |          | 2,068  |                 |   |   |   |   |   |

----

|                                |   | New Israeli Shekels |   |
|-------------------------------------|--------|---------------------|--------|
|                                |   | December 31         |   |
|                                |   | 2010                |   |   | 2011 |   |
|                                |   | In millions         |   |
| Year ending December 31:            |   |                |   |   |   |   |
| 2011                                |   |                | 575    |   |   |   | - |   |
| 2012                                |   |                | 383    |   |   |   | 393 |   |
|                                |   |                | 958    |   |   |   | 393 |   |
| Less - offering expenses            |   |                | 2      |   |   |   | * |   |
| Less - current maturities           |   |                | 575    |   |   |   | 393 |   |
| Included in non-current liabilities |   |                | 381    |   |   |   | - |   |

----

----

|                                |   | New Israeli Shekels |   |
|-------------------------------------|--------|---------------------|--------|
|                                |   | December 31         |   |
|                                |   | 2010                |   |   | 2011 |   |
|                                |   | In millions         |   |
| Year ending December 31:            |   |                |   |   |   |   |
| 2013                                |   |                | 115    |   |   |   | 118 |   |
| 2014                                |   |                | 115    |   |   |   | 118 |   |
| 2015                                |   |                | 115    |   |   |   | 118 |   |
| 2016                                |   |                | 115    |   |   |   | 118 |   |
|                                |   |                | 460    |   |   |   | 472 |   |
| Less - offering expenses            |   |                | 2      |   |   |   | 2 |   |
| Included in non-current liabilities |   |                | 458    |   |   |   | 470 |   |

|                                |   | New Israeli Shekels |   |
|-------------------------------------|--------|---------------------|--------|
|                                |   | December 31         |   |
|                                |   | 2010                |   |   | 2011 |   |
|                                |   | In millions         |   |
| Year ending December 31:            |   |                |   |   |   |   |
| 2016                                |   | 68.67               |   |   |   | 227 |   |
| 2017                                |   |                | 68.67  |   |   |   | 227 |   |
| 2018                                |   |                | 68.66  |   |   |   | 227 |   |
|                                |   |                | 206    |   |   |   | 681 |   |
| Less - offering expenses            |   |                | 2      |   |   |   | 3 |   |
| Included in non-current liabilities |   |                | 204    |   |   |   | 678 |   |

----

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

|   | · | From July 1, 2010 to September 30, 2010: 3.288%. |
|--------|--------|--------------------------------------------------|

|   | · | From October 1, 2010 to December 31, 2010: 3.616%. |
|--------|--------|----------------------------------------------------|

|   | · | From January 1, 2011 to March 31, 2011: 3.67%. |
|--------|--------|------------------------------------------------|

|   | · | From April 1, 2011 to June 30, 2011: 4.47%. |
|--------|--------|---------------------------------------------|

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

|   | · | From October 1, 2011 to December 31, 2011: 4.15%. |
|--------|--------|---------------------------------------------------|

|                                                               |   | New Israeli Shekels |   |
|--------------------------------------------------------------------|--------|---------------------|--------|
|                                                               |   | December 31         |   |
|                                                               |   | 2010                |   |   | 2011 |   |
|                                                               |   | In millions         |   |
| Year ending December 31:                                           |   |                |   |   |   |   |
| 2017                                                               |   |                | 80     |   |   |   | 109 |   |
| 2018                                                               |   |                | 80     |   |   |   | 109 |   |
| 2019                                                               |   |                | 80     |   |   |   | 109 |   |
| 2020                                                               |   |                | 80     |   |   |   | 109 |   |
| 2021                                                               |   |                | 80     |   |   |   | 109 |   |
|                                                               |   |                | 400    |   |   |   | 545 |   |
| Less - offering expenses and     discount |   |                | 4      |   |   |   | 5 |   |
| Included in non-current liabilities                                |   |                | 396    |   |   |   | 540 |   |

----

|                                                               |   | New Israeli Shekels |   |
|--------------------------------------------------------------------|--------|---------------------|--------|
|                                                               |   | December 31         |   |
|                                                               |   | 2010                |   |   | 2011 |   |
|                                                               |   | In millions         |   |
| Year ending December 31:                                           |   |                |   |   |   |   |
| 2013                                                               |   |                | 80     |   |   |   | 186 |   |
| 2014                                                               |   |                | 80     |   |   |   | 187 |   |
| 2015                                                               |   |                | 80     |   |   |   | 187 |   |
| 2016                                                               |   |                | 80     |   |   |   | 187 |   |
| 2017                                                               |   |                | 80     |   |   |   | 187 |   |
|                                                               |   |                | 400    |   |   |   | 934 |   |
| Less - offering expenses and     discount |   |                | 3      |   |   |   | 17 |   |
| Included in non-current liabilities                                |   |                | 397    |   |   |   | 917 |   |

----

|        |   | New Israeli Shekels |   |
|-------------|--------|---------------------|--------|
|        |   | December 31         |   |
|        |   | 2010                |   |   | 2011 |   |
|        |   | In millions         |   |
| Current     |   |                | 2      |   |   |   | 1 |   |
| Non current |   |                | 8      |   |   |   | 10 |   |
|        |   |                | 10     |   |   |   | 11 |   |

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

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

|                                                                                            |   | New Israeli Shekels |   |
|-------------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                            |   | December 31         |   |
|                                                                                            |   | 2010                |   |   | 2011 |   |
|                                                                                            |   | In millions         |   |
| Present value of funded obligations                                                             |   |                | 178    |   |   |   | 177 |   |
| Less: fair value of plan assets                                                                 |   |                | 124    |   |   |   | 132 |   |
| Liability in the statement of financial position, net– presented as non-current liability |   |                | 54     |   |   |   | 45 |   |
| Assets held for employee rights upon retirement, net                                            |   |                | -      |   |   |   | 3 |   |
| Liability for employee rights upon retirement, net                                              |   |                | -      |   |   |   | 48 |   |

----

|                        |   | New Israeli Shekels |   |
|-----------------------------|--------|---------------------|--------|
|                        |   | December 31         |   |
|                        |   | 2010                |   |   | 2011 |   |
|                        |   | In millions         |   |
| Balance at January 1        |   |                | 151    |   |   |   | 178 |   |
| Acquisition of subsidiary   |   |                |   |   |   |   | 19 |   |
| Current service cost   |   |                | 41     |   |   |   | 31 |   |
| Interest cost          |   |                | 7      |   |   |   | 9 |   |
| Actuarial losses            |   |                | 8      |   |   |   | 10 |   |
| Benefits paid               |   |                | (29    | ) |   |   | (70 | ) |
| Balance at December 31 |   |                | 178    |   |   |   | 177 |   |

|                           |   | New Israeli Shekels |   |
|--------------------------------|--------|---------------------|--------|
|                           |   | December 31         |   |
|                           |   | 2010                |   |   | 2011 |   |
|                           |   | In millions         |   |
| Balance at January 1           |   |                | 113    |   |   |   | 124 |   |
| Acquisition of subsidiary      |   |                |   |   |   |   | 23 |   |
| Expected return on plan assets |   |                | 6      |   |   |   | 6 |   |
| Actuarial losses               |   |                | *      |   |   |   | (11 | ) |
| Employer contributions         |   |                | 26     |   |   |   | 29 |   |
| Benefits paid                  |   |                | (21    | ) |   |   | (39 | ) |
| Balance at December 31    |   |                | 124    |   |   |   | 132 |   |

----

|                                                                                      |   | New Israeli Shekels    |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                      |   | Year ended December 31 |   |
|                                                                                      |   | 2009                   |   |   | 2010 |   |   | 2011 |   |
|                                                                                      |   | In millions            |   |
| Current service cost                                                                 |   |                   | 32     |   |   |   | 41 |   |   |   | 31 |   |
| Interest cost                                                                        |   |                   | 9      |   |   |   | 7 |   |   |   | 9 |   |
| Expected return on plan assets                                                            |   |                   | (6     | ) |   |   | (6 | ) |   |   | (6 | ) |
| Total expenses recognized in the income statement                                         |   |                   | 35     |   |   |   | 42 |   |   |   | 34 |   |
| Charged to the statement of income as follows:                                            |   |                   |   |   |   |   |   |   |   |   |   |   |
|          Cost of revenues                    |   |                   | 21     |   |   |   | 25 |   |   |   | 19 |   |
|          Selling and marketing expenses      |   |                   | 7      |   |   |   | 10 |   |   |   | 9 |   |
|          General and administrative expenses |   |                   | 4      |   |   |   | 6 |   |   |   | 3 |   |
|          Finance costs, net                  |   |                   | 3      |   |   |   | 1 |   |   |   | 3 |   |
|                                                                                      |   |                   | 35     |   |   |   | 42 |   |   |   | 34 |   |
| Actuarial losses recognized in the statement of comprehensive income, before tax          |   |                   | (16    | ) |   |   | 8 |   |   |   | 21 |   |
| Actual return on plan assets                                                              |   |                   | 15     |   |   |   | 6 |   |   |   | (5 | ) |

|                           |   | December 31 |    |
|--------------------------------|--------|-------------|---------|
|                           |   | 2010        |    |   | 2011 |   |
|                           |   | %           |    |   | % |   |
|                           |   |        |    |   |   |   |
| Interest rate                  |   |        | 5.23    | % |   |   | 4.76%, 5.02 | % |
| Inflation rate                 |   |        | 3.02    | % |   |   | 2.2%, 2.49 | % |
| Expected return on plan assets |   |        | 3.23    | % |   |   | 3.08%, 5.02 | % |
| Expected turnover rate         |   |        | 8% - 32 | % |   |   | 1% - 60 | % |
| Future salary increases        |   |        | 1% - 6  | % |   |   | 1% - 6 | % |

----

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

|   | (2) | Under the Telegraph Regulations the Company is committed to pay an annual fixed fee for each frequency used. The Company paid a total amount of approximately NIS 55 million, NIS 59 million for the years 2009, 2010 respectively. 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 a Court's decision; the amount due before the reduction was NIS 58 million. See also note 22(c)(1). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (3) | At December 31, 2011, the Group is committed to acquire property and equipment and software elements for approximately NIS 275 million, including future payments in respect of the Ericsson contract, (see note 2(f)), that are cancellable provided compensation would be paid to the supplier. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | At December 31, 2011, the Group is committed to acquire inventory for approximately NIS 220 million. Of which an amount of NIS 36 million is from the parent company. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                |   | New Israeli Shekels in millions |   |
|---------------------|--------|---------------------------------|--------|
| 2012                |   |                            | 37     |   |
| 2013                |   |                            | 40     |   |
| 2014                |   |                            | 43     |   |
| 2015                |   |                            | 46     |   |
| 2016 and thereafter |   |                            | 7      |   |
|                |   |                            | 173    |   |

|   | (6) | Liens and guarantees |
|--------|-----|----------------------|

|   | (7) | See note 16(8) regarding financial covenants and note 16 (9) regarding negative pledge. |
|--------|-----|-----------------------------------------------------------------------------------------|

|   | (8) | See note 21 in respect of operating leases. |
|--------|-----|---------------------------------------------|

----

|   | (9) | License for the use of the orange brand |
|--------|-----|-----------------------------------------|

----

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

|   | (2) | 012 Smile leases an office facility in Petach Tikva for its headquarter. The lease expires on July 31, 2012, with an option to extend the lease for an additional five years period. The rental payments are linked to the Israeli CPI. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | (5) | As of December 31, 2011 operating lease agreements in respect of vehicles are for periods of up to three years. The rental payments are linked to the Israeli CPI. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                                        |   | New Israeli Shekels |   |
|-------------------------------------------------------------|--------|---------------------|--------|
|                                                        |   | December 31, 2011   |   |
|                                                        |   | In millions         |   |
| No later than one year                                      |   |                | 263    |   |
| Later than one year and no later than  five years |   |                | 733    |   |
| Later than five years                                       |   |                | 370    |   |
|                                                        |   |                | 1,366  |   |

|   | (7) | The rental expenses for the years ended December 31, 2011, 2010 and 2009 were approximately NIS 296 million, NIS 268 million, and NIS 247 million, respectively. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below: |
|--------|----|-------------------------------------------------------------------------------------|

|   | (1) | On August 8, 2006, a claim was filed against the Company and other cellular telecommunication companies together with a request to recognize this claim as a class action for collecting undue payment from its customers on calls to land line companies when the receiver of the call hangs up first. The amount of the claims against all the defendants, if the claim was recognized as a class action, was estimated at approximately NIS 100 million for the seven year period leading up to the filing of the claim. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | On November 11, 2006, a claim and a motion to certify the claim as a class action were filed against the Company in the Tel-Aviv District Court. The claim alleges that the Company unlawfully charged subscribers for incoming short messages (SMS( for a dating service ("Pupik service"), while they did not agree to get nor to pay 5 NIS for each short message. The plaintiffs demanded the sum they paid for the service and in addition they demanded a compensation of 1000 NIS for each group member for mental anguish. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below (continued): |
|--------|----|-------------------------------------------------------------------------------------------------|

|   | (3)  | On November 26, 2006, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company has unlawfully obliged subscribers who bought certain handsets to buy cellular data package as well. 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 35 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | On December 16, 2007 a claim and a motion to certify the claim as a class action was filed against the Company and two other cellular communications companies. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below (continued): |
|--------|----|-------------------------------------------------------------------------------------------------|

|   | (5) | On May 5, 2008, a claim and a motion to certify the claim as a class action were filed against the Company. The plaintiffs claim that the Company should not have charged them for repairing their mobile handset. 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 46 million. The claim is still in its preliminary stage of the motion to be certified as a class action. The parties filed a request to approve a settlement agreement. On July 2010, the court appointed an independent expert to examine the settlement. After the Company received the expert's comments, the Company decided to withdraw from the current settlement agreement. The parties try to seek and negotiate alternative settlements. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | On June 26, 2008, a claim and a motion to certify the claim as a class action were filed against the Company. The claim is that the Company is charging consumers for providing special numbers, allegedly in breach of the Company's license. If the claim is recognized as a class action, the total amount claimed from the defendants, is estimated by the plaintiffs to be approximately NIS 90 million. During a preliminary hearing that took place on June 22, 2009, the court asked the plaintiff to consider the continuation of his legal procedure. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | 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 claim is still in the preliminary stage of the motion to certify it as a class action. On December 13, 2011 the parties filed a request to approve a settlement agreement. The Company has accrued in the 2011 financial statements an amount to settle this claim based on the proposed agreement. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (8) | On March 15, 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 175 million. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (9) | 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. The claim is still in the preliminary stage of the motion to certify it as a class action. On December 18, 2011, the parties filed a request to approve a settlement agreement. Following the courts' remarks, the parties were instructed to file a revised agreement, which was filled on March 18, 2012. The Company has accrued in the 2011 financial statements an amount to settle this claim based on the proposed agreement.  |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below (continued): |
|--------|----|-------------------------------------------------------------------------------------------------|

|   | (10) | 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. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (11) | 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 the Company 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 (inter alia incoming calls, Call back calls, outgoing short text messages).  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 the Company for roaming services that were consumed abroad (total amount is not specified, nor estimation of that amount). The plaintiff also pursues an injunction that will order the Company to stop charging VA.T for roaming services that are consumed abroad. On December 5, 2010 the court decided that the State of Israel shall be added as a defendant in the claim and as a respondent in the motion to certify the claim as a class action. On October 25, 2011, the State of Israel announced that the Company should stop charging V.A,T for incoming calls and for call-back calls. The claim is still in the preliminary stage of the motion to certify it as a class action. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (12) | 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 the Company charged some of its subscribers for a time unit which is longer than 12 seconds while this charge was inconsistent with the Company’s license. If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be more than the minimum amount for the authority of the District Court in Israel, which is NIS 2.5 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below (continued): |
|--------|----|-------------------------------------------------------------------------------------------------|

|   | (13) | On July 28, 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 overcharged its subscribers who were registered to a certain voice discount package, as a result of miscalculating the discount. 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 106 million. The claim is still in its preliminary stage of the motion to be certified as a class action. On January 31, 2012, the parties filed a request to approve a settlement agreement. The Company has accrued in the 2011 financial statements an amount to settle this claim based on the proposed agreement. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (14) | On August 5, 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 has not complied with legal obligations that apply to handing over to customers of warranty certificate and to handset repairs during the manufacturer's warranty period. 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 45 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (15) | On September 5, 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 illegally charges its customers for cellular data usage abroad and that the bills and call details presented to the customers do not meet the regulatory requirements. If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to reach hundreds of millions of NIS. On November 3,2011, the Plaintiff announced of a withdrawal from the specific arguments with regards to the charge for cellular date usage. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (16) | 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. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (17) | On September 14, 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 has not complied with legal obligations that apply to handset repairs during the manufacturer's warranty period. 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 100 million. On November 22, 2011, following an agreed request of withdrawal the claim was dismissed. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (18) | On September 21, 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 did not comply with the requirements of the Israeli Consumer Protection Law regarding continuous transactions. 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 98 million. On September 19, 2011, following a recommendation by the court during a preliminary hearing, the plaintiff announced of a withdrawal of the claim and the request to certify the claim as a class action. The court dismissed the claim and the request. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below (continued): |
|--------|----|-------------------------------------------------------------------------------------------------|

|   | (19) | On November 8, 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 did not grant its subscribers certain benefits that they were entitled to according to the Company's license. 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 80 million.. On November 24, 2011, the plaintiff announced of a withdrawal of the claim and the request to certify the claim as a class action. The court dismissed the claim and the request. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (20) | On November 30, 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 does not comply with the requirements set by Law and in the Company's license regarding the subscriber's right to review the subscriber agreement and to receive a copy of it. The claim further alleges that the subscriber agreement includes unduly disadvantageous conditions in a standard contract and therefore the court has the right to declare them void. 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 150 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (21) | 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. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (22) | On February 20, 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 subscriber agreement includes unduly disadvantageous conditions in a standard contract and therefore the court has the right to declare them void and/or to change them. The claim further alleges that the Company did not comply with the requirements set by Law with respect to the subscriber's right to review the subscriber agreement in advance and to receive a copy of it and with respect to the subscriber's signature on the agreement by an electronic pad. If the claim is recognized as a class action, the total amount claimed is estimated by the plaintiff to be approximately NIS 600 million. On November 25, 2011, the plaintiff announced of a withdrawal of the claim and the request to certify the claim as a class action. On November 28, 2011 the court dismissed the claim and the request. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (23)  | 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 overcharges its pre-paid subscribers for interconnect fees for calls to other operators' networks.. 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 200 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (24)  | 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 plaintiffs to be approximately NIS 140 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below (continued): |
|--------|----|-------------------------------------------------------------------------------------------------|

|   | (25) | On March 8, 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 discriminates it customers on a religion basis, when offers fine conditions to its ultra-orthodox Jew customers, that allegedly are not offered to its other customers. 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 60 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (26)  | On May 3, 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 should have informed its customers of the fact that Apple's "iPhone" cellular handsets with the IOS-4 operating system, which were sold since June 2010, store the user's location and when connecting to a computer, transfer the data to the computer, as an unprotected file. Aside from the remedy of monetary compensation, the plaintiff requests the court to instruct the Company to update the handset software in a manner that will prevent the data storage, and alternatively, if this is not possible, to allow customers to cancel their handset purchase transactions. 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 100 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (27)  | 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. 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 35 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (28)  | On May 22, 2011, a civil claim was filed against the Company. The claim alleges that the Company breaches copyrights that allegedly belong to the plaintiff. The total amount claimed from the Company approximately NIS 40 million. The claim is in the preliminary stage.  |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (29)  | On May 23, 2011, a claim and a motion to certify the claim as a class action were filed against the Company and the two other cellular operators. The claim alleges that the Company does not meet its obligation with respect to the customer service call centers' response time. Aside from the remedy of monetary compensation, the plaintiffs are requesting the court to grant a court order as to the required standard of the response time and are also requesting the court to instruct the defendants to take steps to ensure that the said standard is met. 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 100 million. On March 21, 2012, following the plaintiff's request to dismiss without prejudice the claim and the request to certify the claim as a class action, the court approved the request. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (30)  | On June 6, 2011, a claim and a motion to certify the claim as a class action were filed against the Company and the three other cellular operators. The claim alleges that the Company sell or supply accessories that are intended for carrying cellular handsets on the body, in a manner that contradicts the instructions and warnings of the cellular handset manufacturers and the recommendations of the Ministry of Health, all this without disclosing the risks entailed in the use of these accessories when they are sold or marketed. If the claim is recognized as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 1,010 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below(continued): |
|--------|----|------------------------------------------------------------------------------------------------|

|   | (31) | On July 4, 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 charges its customers, for SMS messages sent to them by the Company immediately after they start roaming on foreign networks. 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 58 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (32)  | On July 10, 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 misleads its subscribers with respect to the content of certain service packages that the Company offers to its subscribers. 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 6 billion. On February 2, 2012, after realizing that the claim is identical to a previous claim (see a(7) above) the plaintiff announced of a withdrawal of the claim and the request to certify the claim as a class action. On February 28, 2012 the court dismissed the claim and the request. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (33)  | On July 21, 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 overcharges its subscribers who purchase cellular handsets in payments and are entitled to monthly rebates, by charging the first monthly payment for the cellular handset at the beginning of the commitment period while granting the rebate for this payment only at the end of the commitment period, after 18 months, without paying interest and CPI linkage differences. 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 402 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (34)  | 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 the Company charge 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 the Company 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. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (35)  | 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 ("the Service") 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. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (36)  | On December 28, 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 supply a full Hebrew-translated operation guide together with the handsets sold to customers. 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 30 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | The main litigation and claims that the Company is involved in are described below(continued): |
|--------|----|------------------------------------------------------------------------------------------------|

|   | (37)  | 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. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (38)  | On January 19, 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 requirements set by the Israeli Communications Law (telecommunications and broadcast) (amendment 40), 2008, regarding transmission of advertisements through telecommunications 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 90 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (39)  | On February 6, 2012, a claim and a motion to certify the claim as a class action were filed against the Company and other telecommunication operators (the "Defendants"). The claim alleges that the 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 claimis recognized as a class action the total amount claimed against the Defendants, 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. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (40)  | On February 7, 2012, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company breached a statutory duty and did not comply with the provisions of the Israeli Consumer Protection Law by unlawfully charging "initiation fees" when changing tariff plans. 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 158 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (41)  | On February 7, 2012, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company misled its customers by misrepresenting to them the balance of unused minutes of the package of minutes, while in fact it charged them for minutes that exceeded the package. If the claim is recognized as a class action the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 475 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (42)  | On February 26, 2012, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company misled its customers with respect to power and battery specifications of certain handsets. 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 35 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (43) | Additional 12 claims were filed against the Company, together with a request to recognize these claims as class actions. The total amount of these claims against the Company, if the claims are recognized as a class action, is estimated at approximately NIS 346 million. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (44) | In addition to all the above mentioned claims the Company is a party to various claims arising in the ordinary course of its operations. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | The main litigations and claims against 012 Smile Communications Ltd ("012") and 012 Smile Telecom Ltd ("012 Smile") are involved in are described below: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | (2) | On November 20, 2008, a claim and a motion to certify the claim as a class action were filed against 012 in its former name Internet Gold Golden Lines Ltd.. The claim alleges that 012 unlawfully raised the monthly tariffs for its internet services. If the claim is recognized as a class action, the total amount claimed from 012 is estimated by plaintiff to be approximately NIS 81.5 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | b. | The main litigations and claims against 012 Smile Communications Ltd ("012") and 012 Smile Telecom Ltd ("012 Smile") are involved in are described below (continued): |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3)  | On November 4, 2009, a claim and a motion to certify the claim as a class action were filed against 012. The claim alleges that 012 has violated the Israeli "anti spam" law by sending advertising materials to its customers.  The amount of the plaintiff's personal claim is set at NIS 10,000 (approximately $2,700). The estimated amount of the entire claim is yet to be known. On November 29, 2009, the court granted a temporary order preventing 012 from deleting or changing data relating to specific messages which the plaintiff claims he sent to 012. On December 1, 2011 the Plaintiff filed a motion to dismiss the Suit and the Request. The court accepted the motion on December 4, 2011 and issued a verdict dismissing the Suit and the Request. |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | On January, 2010, a claim to certify a class action was filed against 012, 012 Smile and others. The claim alleges that the respondents unlawfully charge their customers for calls placed to the respondents support centers regarding certain Services. If the claim is recognized as a class action, the total amount claimed from 012 is estimated by plaintiff to be approximately NIS 48.6 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5)  | On July 2010, a claim and a motion to certify the claim as a class action were filed against 012 Smile (in this section "the request"). The claim alleges that 012 Smile's advertisements regarding certain tariffs did not include complete information as to possible additional tariffs charged of third parties. The amount of the personal claim is set by the plaintiff at NIS 397. As the plaintiff has not yet determined the size of the group, the estimated amount of the entire claim is not yet known. The claim is still in its preliminary stage of the motion to be certified as a class action. On October 27, 2011 the Court has ruled to dismiss the Request without prejudice and to dismiss the Suit with prejudice (the “Verdict”).  |
|--------|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | On September 21, 2010, a claim and a motion to certify the claim as a class action were filed against 012 Smile. The claim alleges that 012 Smile did not comply with certain requirements of the Israeli Consumer Protection Law regarding contractual documents. If the claim is recognized as a class action, the total amount claimed from 012 is estimated by plaintiff to be approximately NIS 39 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | On November 24, 2011, a claim and a motion to certify the claim as a class action were filed against 012 Smile. The claim alleges that 012 Smile did not comply with the requirements of the Israeli Consumer Protection Law regarding a transaction for a determinate period and a continuous transaction. If the claim is recognized as a class action, the total amount claimed from 012 is estimated by plaintiff to be approximately NIS 467 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | b. | The main litigations and claims against 012 Smile Communications Ltd ("012") and 012 Smile Telecom Ltd ("012 Smile") are involved in are described below (continued): |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (8) | On December 29, 2011, a claim and a motion to certify the claim as a class action were filed against 012 Smile. The claim alleges that 012 Smile operates information and premium services while utilizing international dialing codes and applying tariffs, not in accordance with its license and the requirements of the regulation for such services. The total amount claimed against 012 if the claim is recognized as a class action was not stated by the plaintiff. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (9) | On February 15, 2012, a claim and a motion to certify the claim as a class action were filed against 012 Smile and other telecommunication operators (the "defendants"). The claim alleges that the defendants misled the purchasers of prepaid calling cards designated for international calls with respect to certain bonus minutes. The total amount claimed against 012 (and against each of the other defendants) if the claim is recognized as a class action is estimated by the plaintiff to be NIS 2.7 billion. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (10) | Additional 3 claims were filed against 012 and 012 Smile, together with a request to recognize these claims as class actions. The total amount of these claims against 012 and 012 Smile together, if the claims are recognized as a class action, is estimated at approximately NIS 21 million. |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (11)  | In addition to all the above mentioned claims, 012 and 012 Smile is a party to variousclaims arising in the ordinary course of its operations. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|   | (1)  | Under the Telegraph Regulations the Company is committed to pay an annual fixed fee for each frequency used. Under the above Regulations should the Company choose to return a frequency, such payment is no longer due. Cost of revenue was reduced by approximately NIS 50 million in 2010 following a Supreme Court decision in December 2010 to fully accept the Company's petition against the Ministry of Communications regarding the amount of frequency fees that the Company should have paid for frequencies allocated to the Company. In addition, an amount of approximately NIS 10 million was recorded in other income in the financial statement. In December 28, 2011, the Company received an amount of approximately NIS 11 million as a final payment according to the Court's decision. This payment was recorded as a reduction of frequency fees and as other income (approximately NIS 6 million and NIS 5 million, respectively). See also note 20(2). |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

----

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

|   | (1) | In July 2004, the Company's Board of Directors approved a share option plan (hereafter - the "2004 Plan"), pursuant to which 5,775,000 ordinary shares were reserved for issuance upon the exercise of 5,775,000 options to be granted to employees, directors and officers of the Company without consideration. The option holder may exercise all or part of his options at any time after the vesting date but no later than the expiration date of the exercise period, which is determined by the Compensation Committee and will not exceed ten years from the grant date. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (2) | On February 23, 2009, the 2004 Share Option Plan, was further amended by the Board of Directors (the "Plan Amendments") to include the following two material amendments: (i) with respect to options granted on or after February 23, 2009, the date of approval of the Plan Amendments by the Board of Directors (the "Board Approval"), a dividend-adjustment mechanism, reducing the exercise price of such options following each dividend distribution in the ordinary course of business in an amount in excess of 40% (forty percent) or of another percent resolved by the Board of Directors, of the Company's net income for the relevant period ("the Excess Dividend") by an amount equal to the gross amount of the Excess Dividend per Ordinary Share. (ii) with respect to all options granted under the 2004 Share Option Plan, a dividend adjustment mechanism reducing the exercise price of such options following each dividend distribution other than in the ordinary course, by an amount which the Board of Directors considers as reflecting the impact that such distribution will have or will likely to have on the trading price of the Ordinary Shares, and provisions authorizing the Board of Directors to allow option holders to exercise their vested options during a fixed period, through a cashless exercise procedure, pursuant to which each vested option will entitle its holder to the right to purchase Ordinary Shares (subject to the adjustments). The Plan Amendments were approved by the Company's shareholders. The amendments to the 2004 plan on February 2009 did not have an effect on the Company's financial results regarding the grants made before that date. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (3) | The option plans described above are subject to the terms stipulated by Section 102 of the Israeli Income Tax Ordinance. Inter alia, these terms provide that the Company will be allowed to claim, as an expense for tax purposes the amounts credited to the employees as a benefit in respect of shares or options granted under the plans, as follows: |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | The expenses recognized in respect of the fair value of the options granted in the years ended December 31, 2009, 2010 and 2011 are NIS 22 million, NIS 23 million, and NIS 19 million respectively. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (5) | Following is a summary of the status of the plans as of December 31, 2009, 2010 and 2011 and the changes therein during the years ended on those dates: |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                   |   | Year ended December 31 |       |
|----------------------------------------|--------|------------------------|------------|
|                                   |   | 2009                   |       |   | 2010 |   |   | 2011 |   |
|                                   |   | Number                 |       |   | Weighted averageexercise price |   |   | Number |   |   | Weighted averageexercise price |   |   | Number |   |   | Weighted averageexercise price** |   |
|                                   |   |                   |       |   | NIS |   |   |   |   |   | NIS |   |   |   |   |   | NIS |   |
| Balance outstanding at beginning       |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| of year                                |   |                   | 2,231,187  |   |   |   | 39.21 |   |   |   | 5,315,945 |   |   |   | *56.47 |   |   |   | 6,826,275 |   |   |   | 55.88 |   |
| Changes during the year:               |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                |   |                   | 4,185,500  |   |   |   | *60.42 |   |   |   | 3,310,500 |   |   |   | **62.40 |   |   |   | 2,977,275 |   |   |   | 50.87 |   |
| Exercised ***                          |   |                   | (1,020,742 | ) |   |   | 37.28 |   |   |   | (1,529,795 | ) |   |   | *44.82 |   |   |   | (1,454,250 | ) |   |   | 47.57 |   |
| Forfeited                              |   |                   | (71,250    | ) |   |   | 29.1 |   |   |   | (270,375 | ) |   |   | *58.48 |   |   |   | (1,896,409 | ) |   |   | 56.59 |   |
| Expired                                |   |                   | (8,750     | ) |   |   | 27.35 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance outstanding at end of the year |   |                   | 5,315,945  |   |   |   | *56.47 |   |   |   | 6,826,275 |   |   |   | **55.88 |   |   |   | 6,452,891 |   |   |   | 52.98 |   |
| Balance exercisable at end of the year |   |                   | 928,945    |   |   |   | *45.25 |   |   |   | 2,243,022 |   |   |   | **47.91 |   |   |   | 2,145,389 |   |   |   | 53.49 |   |

|   | *  | After taking into account the dividend benefit. |
|--------|---------|-------------------------------------------------|

|   | ** | After taking into account the dividend benefit and the exercise price amendment on July 2010, see (1)(d) above. |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

|   | *** | The number of shares issued as a result of options exercised during 2011 is 396,532 due to the Cashless mechanism. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------|

----

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

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

|  Expire in |   | Number of options |      |   | Weighted average exercise price in NIS* |   |
|-----------------|--------|-------------------|-----------|--------|-----------------------------------------|--------|
| 2010            |   |              | 17,750    |   |                                    |   | 17.49 |   |
| 2011            |   |              | 18,750    |   |                                    |   | 21.72 |   |
| 2014            |   |              | 294,600   |   |                                    |   | 26.74 |   |
| 2015            |   |              | 29,325    |   |                                    |   | 30.73 |   |
| 2016            |   |              | 170,500   |   |                                    |   | 33.12 |   |
| 2017            |   |              | 635,250   |   |                                    |   | 53.08 |   |
| 2018            |   |              | 68,770    |   |                                    |   | 66.05 |   |
| 2019            |   |              | 4,081,000 |   |                                    |   | 60.47 |   |
|            |   |              | 5,315,945 |   |                                    |   | 56.47 |   |

|   | *  | After taking into account the dividend benefit. |
|--------|---------|-------------------------------------------------|

|   | ** | After taking into account the dividend benefit and the exercise price amendment on July 2010, see (1)(d) above. |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

----

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

|                                                  |   | For the year ended December 31, |   |
|-------------------------------------------------------|--------|---------------------------------|--------|
|                                                  |   | 2009                            |   |   | 2010 |   |   | 2011 |   |
|                                                  |   | Per sharein NIS                 |   |   | NIS in millions |   |   | Per sharein NIS |   |   | NIS in millions |   |   | Per sharein NIS |   |   | NIS in millions |   |
| Dividends declared during the year                    |   |                            | 6.38   |   |   |   | 982 |   |   |   | 7.82 |   |   |   | 1,212 |   |   |   | 4.17 |   |   |   | 648 |   |
| Tax withheld                                          |   |                            |   |   |   |   | (14 | ) |   |   |   |   |   |   | (17 | ) |   |   |   |   |   |   | (6 | ) |
| Previously withheld tax - paid during the year        |   |                            |   |   |   |   | 18 |   |   |   |   |   |   |   | 14 |   |   |   |   |   |   |   | 17 |   |
| Net Cash flow in respect of dividends during the year |   |                            |   |   |   |   | 986 |   |   |   |   |   |   |   | 1,209 |   |   |   |   |   |   |   | 659 |   |

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

----

| (a)  Cost of revenues                                                                             |   | New Israeli Shekels     |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                        |   | Year ended December 31, |   |
|                                                                                                        |   | 2009                    |   |   | 2010 |   |   | 2011 |   |
|                                                                                                        |   | In millions             |   |
| Payments to transmission, communication and content providers                                               |   |                    | 1,238  |   |   |   | 1,342 |   |   |   | 1,069 |   |
| Cost of handsets, accessories and ISP related  equipment                                          |   |                    | 564    |   |   |   | 746 |   |   |   | 1,368 |   |
| Wages, employee benefits expenses and car maintenance                                                       |   |                    | 557    |   |   |   | 575 |   |   |   | 705 |   |
| Depreciation, amortization and impairment charges                                                           |   |                    | 558    |   |   |   | 663 |   |   |   | 708 |   |
| Costs of handling, replacing or repairing handsets                                                          |   |                    | 212    |   |   |   | 199 |   |   |   | 152 |   |
| Operating lease, rent and overhead expenses                                                                 |   |                    | *269   |   |   |   | *301 |   |   |   | 308 |   |
| Network and cable maintenance                                                                               |   |                    | 147    |   |   |   | 63 |   |   |   | 142 |   |
| Payments to internet service providers (ISP)                                                                |   |                    |   |   |   |   |   |   |   |   | 124 |   |
| Carkit installation, IT support, and other operating expenses                                               |   |                    | 93     |   |   |   | 86 |   |   |   | 83 |   |
| Royalty expenses                                                                                            |   |                    | 65     |   |   |   | 43 |   |   |   | 63 |   |
| Amortization of rights of use                                                                               |   |                    |   |   |   |   |   |   |   |   | 29 |   |
| Impairment of deferred expenses – right of use       (see note 14) |   |                    |   |   |   |   |   |   |   |   | 148 |   |
| Other                                                                                                       |   |                    | *67    |   |   |   | *75 |   |   |   | 79 |   |
| Total cost of revenues                                                                                      |   |                    | 3,770  |   |   |   | 4,093 |   |   |   | 4,978 |   |

| (b)  Selling and marketing expenses            |   | New Israeli Shekels     |   |
|----------------------------------------------------------|--------|-------------------------|--------|
|                                                     |   | Year ended December 31, |   |
|                                                     |   | 2009                    |   |   | 2010 |   |   | 2011 |   |
|                                                     |   | In millions             |   |
| Wages, employee benefits expenses and car maintenance    |   |                    | 184    |   |   |   | 228 |   |   |   | 335 |   |
| Advertising and marketing                                |   |                    | 118    |   |   |   | 142 |   |   |   | 82 |   |
| Selling commissions, net                                 |   |                    | 8      |   |   |   | 25 |   |   |   | 82 |   |
| Depreciation and amortization                            |   |                    | 7      |   |   |   | 10 |   |   |   | 45 |   |
| Impairment of intangible assets (see  note 12) |   |                    |   |   |   |   |   |   |   |   | 87 |   |
| Other                                                    |   |                    | 70     |   |   |   | 74 |   |   |   | 80 |   |
| Total selling and marketing expenses                     |   |                    | 387    |   |   |   | 479 |   |   |   | 711 |   |

| (c)  General and administrative expenses    |   | New Israeli Shekels     |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   | Year ended December 31, |   |
|                                                  |   | 2009                    |   |   | 2010 |   |   | 2011 |   |
|                                                  |   | In millions             |   |
| Bad debts and allowance for doubtful accounts         |   |                    | 78     |   |   |   | 50 |   |   |   | 42 |   |
| Wages, employee benefits expenses and car maintenance |   |                    | 87     |   |   |   | 122 |   |   |   | 100 |   |
| Professional fees                                     |   |                    | 40     |   |   |   | 45 |   |   |   | 41 |   |
| Credit card and other commissions                     |   |                    | 32     |   |   |   | 33 |   |   |   | 42 |   |
| Depreciation                                          |   |                    | 12     |   |   |   | 12 |   |   |   | 17 |   |
| Other                                                 |   |                    | 41     |   |   |   | 44 |   |   |   | 49 |   |
| Total general and administrative expenses             |   |                    | 290    |   |   |   | 306 |   |   |   | 291 |   |

----

| (d)  Employee benefit expense                                                                                                     |   | New Israeli Shekels     |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                        |   | Year ended December 31, |   |
|                                                                                                                                        |   | 2009                    |   |   | 2010 |   |   | 2011 |   |
|                                                                                                                                        |   | In millions             |   |
| Wages and salaries including social benefits, social security costs and pension costs, defined contribution plans and defined benefit plans |   |                    | 745    |   |   |   | 823 |   |   |   | 1,028 |   |
| Expenses in respect of share options that were granted to employees                                                                         |   |                    | 22     |   |   |   | 23 |   |   |   | 19 |   |
|                                                                                                                                        |   |                    | 767    |   |   |   | 846 |   |   |   | 1,047 |   |

|                                     |   | New Israeli ShekelsYear ended December 31, |   |
|------------------------------------------|--------|--------------------------------------------|--------|
|                                     |   | 2009                                       |   |   | 2010 |   |   | 2011 |   |
|                                     |   | In millions                                |   |
| Unwinding of trade receivables           |   |                                       | 60     |   |   |   | 63 |   |   |   | 104 |   |
| Other income, net                        |   |                                       | 12     |   |   |   | 4 |   |   |   | 3 |   |
| Capital loss from property and equipment |   |                                       | (3     | ) |   |   | (3 | ) |   |   | (2 | ) |
|                                     |   |                                       | 69     |   |   |   | 64 |   |   |   | 105 |   |

|                                                                        |   | New Israeli Shekels     |   |
|-----------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                        |   | Year ended December 31, |   |
|                                                                        |   | 2009                    |   |   | 2010 |   |   | 2011 |   |
|                                                                        |   | In millions             |   |
| Fair value gain from derivative financial instruments, net                  |   |                    | 18     |   |   |   | - |   |   |   | 18 |   |
| Net foreign exchange rate gains                                             |   |                    | -      |   |   |   | 16 |   |   |   | - |   |
| Interest income from cash equivalents                                       |   |                    | 1      |   |   |   | 3 |   |   |   | 10 |   |
| Expected return on plan assets                                              |   |                    | 6      |   |   |   | 6 |   |   |   | 6 |   |
| Other                                                                       |   |                    | 3      |   |   |   | 3 |   |   |   | 5 |   |
| Finance income                                                              |   |                    | 28     |   |   |   | 28 |   |   |   | 39 |   |
|                                                                        |   |                    |   |   |   |   |   |   |   |   |   |   |
| Interest expenses                                                           |   |                    | 86     |   |   |   | 127 |   |   |   | 205 |   |
| Linkage expenses to CPI                                                     |   |                    | 88     |   |   |   | 54 |   |   |   | 77 |   |
| Interest costs in respect of liability for employees rights upon retirement |   |                    | 9      |   |   |   | 7 |   |   |   | 9 |   |
| Fair value loss from derivative financial instruments, net                  |   |                    | -      |   |   |   | 6 |   |   |   | - |   |
| Net foreign exchange rate losses                                            |   |                    | 9      |   |   |   | - |   |   |   | 18 |   |
| Factoring costs, net                                                        |   |                    | 4      |   |   |   | 1 |   |   |   | 2 |   |
| Other finance costs                                                         |   |                    | 8      |   |   |   | 14 |   |   |   | 22 |   |
| Finance expense                                                             |   |                    | 204    |   |   |   | 209 |   |   |   | 333 |   |
|                                                                        |   |                    | 176    |   |   |   | 181 |   |   |   | 294 |   |

----

|   | 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, 2009 |   |    | Charged to the income statement |   |   | Effect of change in corporate tax rate |   |   | Charged to other comprehensive income |    |   | As at December 31, 2009 |   |    | Charged to the income statement |   |   | Charged to other comprehensive income |   |    | As at December 31, 2010 |    |   | Acquisition of subsidiary |   |   | Charged to the income statement |   |   | Charged to other comprehensive income |   |   | Effect of change in corporate tax rate |    |   | As at December 31, 2011 |   |
|---------------------------------------------------------|--------|-----------------------|--------|---------|---------------------------------|--------|--------|----------------------------------------|--------|--------|---------------------------------------|---------|--------|-------------------------|--------|---------|---------------------------------|--------|--------|--------------------------------------------|--------|---------|-------------------------|---------|--------|---------------------------|--------|--------|---------------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------------------------|---------|--------|-------------------------|--------|
| Allowance for doubtful accounts                         |   |                  | 66     |    |                            |   | (3     | )                                 |   | (2     | )                                     |    |   |                    |   |    | 61                              |   |   |                                       | (1     | )  |                    |    |   |                      |   | 60     |                            |   | *      |                                       |   |   | (5                                     | )  |   |                    |   |   | 6 |   |   |   | 61 |   |
|                                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |                                       |   |   |                                   |    |   |                    |   |   |   |   |   |   |   |   |
| Provisions for employee rights                          |   |                  | 20     |    |                            |   | (1     | )                                 |   |   | (1                                    | )  |   |                    | (4     | )  |                            |   | 14     |                                       |   |    | 1                       |    |   |                      | 2      |   |                            |   | 17     |                                       |   |   | 1                                      |    |   |                    | (8     | ) |   |   | 5 |   |   |   | 2 |   |   |   | 17 |   |
|                                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |                                       |   |   |                                   |    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Subscriber acquisition costs                            |   |                  | 41     |    |                            |   | (30    | )                                 |   |   | (1                                    | )       |   |                    |   |    |                            |   | 10     |                                       |   |    | (10                     | )  |   |                      |   |   |                            |   |   |                                       |   |   | 1                                      |    |   |                    | (1     | )  |   |   |   |   |   |   | * |   |   |   | * |   |
|                                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |                                       |   |   |                                   |    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciable fixed assets and software                   |   |                  | (90    | )  |                            |   | (35    | )                                 |   |   | 26                                    |    |   |                    |   |    |                            |   | (99    | )                                          |   |    | (6                      | )       |   |                      |   |   |                            |   | (105   | )                                          |   |   | (2                                     | )  |   |                    | 10     |   |   |   |   |   |   |   | (26 | )  |   |   | (123 | )  |
|                                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |                                       |   |   |                                   |    |   |                    |   |   |   |   |   |   |   |
| Carry forward losses                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |  16                                   |   |   |                                   | 8       |   |                    |   |   |   |   |   | 5 |   |   |   | 29 |   |
|                                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |                                       |   |   |                                   |    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortized licenses and other intangibles                |   |                  | 11     |    |                            |   | 8      |                                   |   |   | (4                                    | )  |   |                    |   |    |                            |   | 15     |                                       |   |    | (2                      | )  |   |                      |   |   |                            |   | 13     |                                       |   |   | (3                                     | )  |   |                    | 7      |   |   |   |   |   |   |   | 2 |   |   |   | 19 |   |
|                                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |                                       |   |   |                                   |    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options granted to employees                            |   |                  | 22     |    |                            |   | (18    | )                                 |   |   |                                  |    |   |                    |   |    |                            |   | 4      |                                       |   |    | (2                      | )  |   |                      |   |   |                            |   | 2      |                                       |   |   |                                   |    |   |                    | (1     | )  |   |   |   |   |   |   | * |   |   |   | 1 |   |
|                                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |                                       |   |   |                                   |    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial instruments                                   |   |                  | 9      |    |                            |   | (5     | )                                 |   |   |                                  |    |   |                    |   |    |                            |   | 4      |                                       |   |    | (4                      | )       |   |                      |   |   |                            |   | *      |                                       |   |   |                                   |    |   |                    | *      |   |   |   |   |   |   |   | * |   |   |   | * |   |
|                                                    |   |                  |   |    |                            |   |   |                                   |   |   |                                  |    |   |                    |   |    |                            |   |   |                                       |   |    |                    |    |   |                      |   |   |                            |   |   |                                       |   |   |                                   |    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                                                   |   |                  | 2      |    |                            |   | 3      |                                   |   |   |                                  |    |   |                    |   |    |                            |   | 5      |                                       |   |    | 6                       |    |   |                      |   |   |                            |   | 11     |                                       |   |   | (1                                     | )  |   |                    |   |   |   |   |   |   |   |   | (1 | )  |   |   | 9 |   |
| Total                                                   |   |                  | 81     |    |                            |   | (81    | )                                 |   |   | 18                                    |    |   |                    | (4     | )  |                            |   | 14     |                                       |   |    | (18                     | )  |   |                      | 2      |   |                            |   | (2     | )                                     |   |   | 12                                     |    |   |                    | 10     |   |   |   | 5 |   |   |   | (12 | )  |   |   | 13 |   |

----

|                                                               |   | New Israeli Shekels |   |
|--------------------------------------------------------------------|--------|---------------------|--------|
|                                                               |   | December 31,        |   |
|                                                               |   | 2009                |   |   | 2010 |   |   | 2011 |   |
|                                                               |   | In millions         |   |
| Deferred tax assets                                                |   |                |   |   |   |   |   |   |   |
| Deferred tax assets to be recovered after more than 12 months      |   |                | 57     |   |   |   | 59 |   |   |   | 104 |   |
| Deferred tax assets to be recovered within 12 months               |   |                | 56     |   |   |   | 44 |   |   |   | 43 |   |
|                                                               |   |                | 113    |   |   |   | 103 |   |   |   | 147 |   |
| Deferred tax liabilities                                           |   |                |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |                |   |   |   |   |   |   |   |   |   |   |
| Deferred tax liabilities to be recovered after more than 12 months |   |                | 99     |   |   |   | 105 |   |   |   | 115 |   |
| Deferred tax liabilities to be recovered within 12 months          |   |                |   |   |   |   | * |   |   |   | 19 |   |
|                                                               |   |                | 99     |   |   |   | 105 |   |   |   | 134 |   |
| Deferred tax assets (liability), net                               |   |                | 14     |   |   |   | (2 | ) |   |   | 13 |   |

|   | 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 |   |
|                                                                                                          |   | 2009                   |   |   | 2010 |   |   | 2011 |   |
|                                                                                                          |   | In millions            |   |
| Profit before taxes on income,                                                                                |   |                   |   |   |   |   |   |   |   |
| as reported in the income statements                                                                          |   |                   | 1,525  |   |   |   | 1,679 |   |   |   | 742 |   |
| Theoretical tax expense                                                                                       |   |                   | 396    |   |   |   | 420 |   |   |   | 178 |   |
| Increase in tax resulting from disallowable deductions                                                        |   |                   |   |   |   |   |   |   |   |   |   |   |
| for the current year mainly relating to impairment charges                                                    |   |                   | 3      |   |   |   | 8 |   |   |   | 18 |   |
| Decrease (increase) in tax resulting from deferred taxes    calculated based on different tax rates |   |                   |   |   |   |   | (3 | ) |   |   | 7 |   |
| Temporary differences and tax losses for which no                                                             |   |                   |   |   |   |   |   |   |   |   |   |   |
|     deferred income tax asset was recognized                                                   |   |                   |   |   |   |   |   |   |   |   | 63 |   |
| Taxes on income in respect of previous years                                                                  |   |                   |   |   |   |   | 5 |   |   |   | 14 |   |
| Expenses deductible according to different tax rates                                                          |   |                   |   |   |   |   | 1 |   |   |   | * |   |
| Change in corporate tax rate, see b above                                                                     |   |                   | (18    | ) |   |   |   |   |   |   | 12 |   |
| Other                                                                                                         |   |                   | 3      |   |   |   | 5 |   |   |   | 7 |   |
| Income tax expenses                                                                                           |   |                   | 384    |   |   |   | 436 |   |   |   | 299 |   |

----

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

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

|                                                     |   | New Israeli Shekels    |   |
|----------------------------------------------------------|--------|------------------------|--------|
|                                                     |   | Year ended December 31 |   |
|                                                     |   | 2009                   |   |   | 2010 |   |   | 2011 |   |
|                                                     |   | In millions            |   |
| For the reported year:                                   |   |                   |   |   |   |   |   |   |   |
| Current                                                  |   |                   | 321    |   |   |   | 413 |   |   |   | 288 |   |
| Deferred, see d above                                    |   |                   | 76     |   |   |   | 14 |   |   |   | (15 | ) |
| Effect of change in corporate tax rate on deferred taxes |   |                   | (18    | ) |   |   |   |   |   |   | 12 |   |
| In respect of previous year:                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Current                                                  |   |                   | -      |   |   |   | 5 |   |   |   | 9 |   |
| Deferred, see d above                                    |   |                   | 5      |   |   |   | 4 |   |   |   | 5 |   |
|                                                     |   |                   | 384    |   |   |   | 436 |   |   |   | 299 |   |

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

|   | 1) | The Company has received final corporate tax assessments through the year ended December 31, 2006. The Company is under corporate income tax regular audit by the tax authority. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2) | As general rule, tax self-assessments filed by subsidiary through the year ended December 31, 2007, and another subsidiary through the year ended December 31, 2006 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, 2012. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

|                                                           |   | New Israeli Shekels                                    |   |
|----------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                           |   | Period from October 28, 2009 to December 31, 2009 |   |   | Year ended December 31, 2010 |   |   | Year ended December 31, 2011 |   |
| Transactions with Scailex group                                |   | In millions                                            |   |
| Service revenues                                               |   |                                                   | 0.9    |   |   |   | 1.5 |   |   |   | 0.8 |   |
| Acquisition of handsets                                        |   |                                                   | 14     |   |   |   | 143 |   |   |   | 478 |   |
| Selling commissions, maintenance and other expenses (revenues) |   |                                                   | 2      |   |   |   | 3.8 |   |   |   | (4 | ) |

|                                                  |   | New Israeli Shekels |   |
|-------------------------------------------------------|--------|---------------------|--------|
|                                                  |   | December 31,        |   |
|                                                  |   | 2010                |   |   | 2011 |   |
| Statement of financial position items - Scailex group |   | In millions         |   |
| Current liabilities: Scailex group                    |   |                | 72     |   |   |   | 142 |   |

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|   | b. | Transactions with Hutchison group |
|--------|----|-----------------------------------|

|   | Based on information provided to the Company by Advent, a wholly-owned subsidiary of Hutchison Telecom, Advent granted a one-time cash payment to selected employees of the Company, shortly following Advent’s sale of its controlling interest, in recognition of the contribution made by such employees to the value of the Company.  According to Advent, the aggregate value of such one-time payment to the Company’s executive officers was NIS 18.4 million.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                |   | Period from January 1, 2009 to October 28, 2009 |   |
|-----------------------------------------------------|--------|-------------------------------------------------|--------|
| Transactions with Hutchison group                   |   | NIS In millions                                 |   |
| Acquisition of handsets from related parties        |   |                                            | 11     |   |
|                                                |   |                                            |   |   |
| Selling commissions, maintenance and other expenses |   |                                            | 5      |   |

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|   | c. | Key management compensation |
|--------|----|-----------------------------|

|                                                              |   | New Israeli Shekels    |   |
|-------------------------------------------------------------------|--------|------------------------|--------|
|                                                              |   | Year ended December 31 |   |
|                                                              |   | 2009                   |   |   | 2010 |   |   | 2011 |   |
| Key management compensation     expenses comprised |   | In millions            |   |
|                                                              |   |                   |   |
| Salaries and short-term employee benefits                         |   |                   | 28     |   |   |   |  31 |   |   |   | 18 |   |
| Long term employment benefits                                     |   |                   | 5      |   |   |   | 37 |   |   |   | 13 |   |
| Employee share-based compensation expenses                        |   |                   | 16     |   |   |   | 16 |   |   |   | 12 |   |
|                                                              |   |                   | 49     |   |   |   | 84 |   |   |   | 43 |   |

|                                                                                |   | New Israeli Shekels |   |
|-------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                |   | December 31,        |   |
|                                                                                |   | 2010                |   |   | 2011 |   |
| Statement of financial position items -     key management |   | In millions         |   |
|                                                                                |   |                |   |
| Current liabilities:                                                                |   |                | 20     |   |   |   | 5 |   |
| Non-current liabilities:                                                            |   |                | 24     |   |   |   | 13 |   |

----

|   | d. | During 2009 the Company purchased a substantial portion of Nokia handsets from Eurocom Communications Ltd. On November 19, 2009, Eurocom sold shares of the Company it previously held to Suny Electronics Ltd. The Company believes that the purchase transactions of the handsets from Eurocom were done at arms length and on market terms. If need be, Nokia handsets can be purchased from both Israeli and international suppliers and thereby reduce the dependency on Eurocom. These purchase prices may be higher than the purchase prices from Eurocom. As part of the Hutchison group, the Company benefited from conditions and prices of Nokia handset purchases, that were agreed upon between Hutchison and Nokia. Since the Company was acquired by Scailex and is no longer part of the Hutchison group, the purchase conditions from Eurocom may be updated. Additional conditions and agreements between the Company and Eurocom are set from time to time. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                                   |   | New Israeli Shekels    |    |
|--------------------------------------------------------|--------|------------------------|---------|
|                                                   |   | Year ended December 31 |    |
|                                                   |   | 2009                   |    |   | 2010 |   |   | 2011 |   |
| Profit used for the computation of                |   |                   |    |   |   |   |   |   |   |
| basic and diluted EPS:                                 |   |                   |    |   |   |   |   |   |   |
| Profit (in millions)                                   |   |                   | 1,141   |   |   |   | 1,243 |   |   |   | 443 |   |
| Weighted average number of shares used            |   |                   |    |   |   |   |   |   |   |   |   |   |
| in computation of basic EPS (in thousands)        |   |                   | 153,809 |   |   |   | 154,866 |   |   |   | 155,542 |   |
| Add - net additional shares from assumed          |   |                   |    |   |   |   |   |   |   |   |   |   |
| exercise of employee stock options (in thousands) |   |                   | 1,008   |   |   |   | 1,430 |   |   |   | 237 |   |
| Weighted average number of shares used in         |   |                   |    |   |   |   |   |   |   |   |   |   |
| computation of diluted EPS (in thousands)              |   |                   | 154,817 |   |   |   | 156,296 |   |   |   | 155,779 |   |

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