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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM
20-F

|
|
|

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal
year ended December 31, 2004
Commission file number: 0-28556

MATAV  CABLE SYSTEMS MEDIA LTD.(Exact name of Registrant as specified in its charter)

Israel(Jurisdiction of incorporation or organization)

|                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------
|42
  Pinkas Street
  North Industrial Park
  P.O. Box 13600
  Netanya 42134
  Israel(Address of principal executive offices)
|                                                                                                                            
|                                                                                                                            

Securities
registered pursuant to Section 12(b) of the Act:

None

Securities
registered pursuant to Section 12(g) of the Act:

Title
of Each Class

| |                           
| | --------------------------
| | American Depositary Shares
| | Ordinary Shares*          

* Not for trading,
but only in connection with the registration of American Depositary Shares
representing such ordinary shares, pursuant to the requirements of the
Securities and Exchange Commission.

Securities for
which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of
outstanding shares of each of the issuers classes of capital or common stock
as of the close of the period covered by the annual report:

Ordinary Shares of NIS 1.00
each     30,220,476

Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days:

Yes x   No o

Indicate by check mark which
financial statement item the Registrant has elected to follow:

Item 17 o   Item 18 x

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TABLE OF CONTENTS

|       |                                                              |     
|------ | ------------------------------------------------------------ | ----
|       |                                                              | Page
|       | PART 1                                                       |     
|      
|ITEM 1 | IDENTITY OF DIRECTORS, SENIOR
  MANAGEMENT AND ADVISERS      | 5   
|ITEM 2 | OFFER STATISTICS AND EXPECTED
  TIMETABLE                    | 5   
|ITEM 3 | KEY INFORMATION                                              | 5   
|       | A. Selected Financial Data                                   | 5   
|       | B. Capitalization and
  Indebtedness                         | 7   
|       | C. Reasons for the Offer and Use
  of Proceeds               | 8   
|       | D. Risk Factors                                              | 9   
|ITEM 4 | INFORMATION ON THE COMPANY                                   | 21  
|       | A. History and Development of the
  Company                  | 21  
|       | B. Business Overview                                         | 29  
|       | C. Organizational Structure                                  | 68  
|       | D. Property, Plants and Equipment                            | 69  
|ITEM 5 | OPERATING AND FINANCIAL REVIEW
  AND PROSPECTS               | 70  
|       | A. Operating Results                                         | 73  
|       | B. Liquidity and Capital
  Resources                         | 81  
|       | C. Research and Development,
  Patents and Licenses          | 84  
|       | D. Trend Information                                         | 84  
|       | E. Off-Balance Sheet Arrangements                            | 85  
|       | F. Tabular Disclosure of
  Contractual Obligations           | 86  
|ITEM 6 | DIRECTORS, SENIOR MANAGEMENT AND
  EMPLOYEES                 | 87  
|       | A. Directors and Senior
  Management                         | 87  
|       | B. Compensation                                              | 90  
|       | C. Board Practices                                           | 90  
|       | D. Employees                                                 | 94  
|       | E. Share Ownership                                           | 95  
|ITEM 7 | MAJOR SHAREHOLDERS AND RELATED
  PARTY TRANSACTIONS          | 96  
|       | A. Major Shareholders                                        | 96  
|       | B. Related Party Transactions                                | 97  
|       | C. Interests of Experts and
  Counsel                        | 99  
|ITEM 8 | FINANCIAL INFORMATION                                        | 99  
|       | A. Consolidated Statements and
  Other Financial Information | 99  
|       | B. Significant Changes                                       | 105 

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|                           |                                                                                |    
|-------------------------- | ------------------------------------------------------------------------------ | ---
|ITEM 9                     | THE OFFER AND LISTING                                                          | 106
|                           | A. Offer and Listing Details                                                   | 106
|                           | B. Plan of Distribution                                                        | 108
|                           | C. Markets                                                                     | 108
|                           | D. Selling Shareholders                                                        | 108
|                           | E. Dilution                                                                    | 108
|                           | F. Expenses of the Issue                                                       | 108
|ITEM 10                    | ADDITIONAL INFORMATION                                                         | 109
|                           | A. Share Capital                                                               | 109
|                           | B. Memorandum and Articles of
  Association                                    | 109
|                           | C. Material Contracts                                                          | 111
|                           | D. Exchange Controls                                                           | 112
|                           | E. Taxation                                                                    | 112
|                           | F. Dividends and Paying Agents                                                 | 119
|                           | G. Statement by Experts                                                        | 119
|                           | H. Documents on Display                                                        | 119
|                           | I. Subsidiary Information                                                      | 119
|ITEM 11                    | QUANTITATIVE AND QUALITATIVE
  DISCLOSURES ABOUT MARKET RISK                   | 120
|ITEM 12                    | DESCRIPTION OF SECURITIES OTHER
  THAN EQUITY SECURITIES                       | 121
|                           |                                                                                |    
|                           | PART II                                                                        |    
|ITEM 13                    | DEFAULTS, DIVIDEND ARREARAGES AND
  DELINQUENCIES                              | 121
|ITEM 14                    | MATERIAL MODIFICATIONS TO THE
  RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 121
|ITEM 15                    | CONTROLS AND PROCEDURES                                                        | 121
|ITEM 16                    | [RESERVED]                                                                     | 121
|ITEM 16A                   | AUDIT COMMITTEE FINANCIAL EXPERT                                               | 121
|ITEM 16B                   | CODE OF ETHICS                                                                 | 121
|ITEM 16C                   | PRINCIPAL ACCOUNTANT FEES AND
  SERVICES                                       | 122
|ITEM 16D                   | EXEMPTIONS FROM LISTING STANDARDS
  FOR AUDIT COMMITTEES                       | 123
|ITEM 16E                   | PURCHASES OF EQUITY SECURITIES BY
  THE ISSUER AND AFFILIATED PURCHASERS       | 123
|                           |                                                                                |    
|                           | PART III                                                                       |    
|ITEM 17                    | FINANCIAL STATEMENTS                                                           | 123
|ITEM 18                    | FINANCIAL STATEMENTS                                                           | 123
|ITEM 19                    | EXHIBITS                                                                       | 124
|                           |                                                                                |    
|GLOSSARY OF SELECTED TERMS | 126                                                                           

3

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INTRODUCTION

As
used herein, references to we, our, us, Matav or the Company are
references to Matav-Cable Systems Media Ltd., Matav Investments Ltd., Cable
Systems Media Haifa-Hadera Ltd., Nonstop Internet (1999) Ltd., Matav Assets
Ltd., Matav Infrastructure Ltd. and Matav Infrastructure 2001, L.P., all of
which are wholly owned subsidiaries, and Nonstop Ventures, Ltd., except as the
context otherwise requires

In
this document, references to $, US$, US dollars and dollars are to
United States dollars and references to NIS and shekels are to New Israeli
Shekels. This annual report contains translations of NIS amounts into US
dollars at specified rates solely for the convenience of the reader. No representation is made that the amounts
referred to in this annual report as convenience translations could have been
or could be converted from NIS into US dollars at these rates, at any
particular rate or at all. The
translations of NIS amounts into US dollars appearing throughout this annual
report have been made at the representative exchange rate on December 31, 2004
of NIS 4.308= US$ 1.00 as published by the Bank of Israel, unless otherwise
specified. See Item 3A. Key Information  Selected Financial Data  Exchange
Rate Data.

We
maintain our financial books and records in shekels and present our financial
statements in conformity with generally accepted accounting principles in
Israel, or Israeli GAAP. As applicable
to our financial statements, Israeli GAAP and U.S. GAAP vary in certain
respects, as described in Note 26 to the financial statements. We present our historical statements in
shekels that have been adjusted to reflect changes in purchasing power due to
changes in the Israeli consumer price index. Unless otherwise specified in this
annual report, all financial data relating to us are presented in shekels
adjusted to December 31, 2004 purchasing power (adjusted NIS). See Item 5B. Liquidity and Capital
Resources - Impact of Inflation and Exchange Rate Fluctuations and Note 23 to
the financial statements.



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FORWARD-LOOKING STATEMENTS

This
annual report includes forward-looking statements within the meaning of Section
27A of the US Securities Act of 1933, as amended, Section 21E of the US
Securities Exchange Act of 1934, as amended, and the safe harbor provisions of
the US Private Securities Litigation Reform Act of 1995. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us.

Words
such as believe, anticipate, expect, intend, seek, will,
plan,
could, may, project, goal, target and similar expressions often
identify forward-looking statements but are not the only way we identify these
statements. All statements other than statements of historical fact included in
this annual report, including the statements in the sections of this annual
report entitled Item 3D. Key Information  Risk Factors, Item 4. Information
on the Company and Item 5. Operating and Financial Review and Prospects and
located elsewhere in the annual report regarding our future performance, plans
to increase revenues or margins or preserve or expand market share in existing
or new markets, reduce expenses and any statements regarding other future
events or our future prospects, are forward-looking statements.

We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including all the
risks discussed in Item 3D. Key Information  Risk Factors, Item 4.
Information on the Company and Item 5. Operating and Financial Review and
Prospects. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
annual report might not occur.

4

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PART I

|                  |                                                      
|----------------- | -----------------------------------------------------
|ITEM 1.           | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|                  |                                                      
|Not
  applicable.
|                  |                                                      
|ITEM 2.           | OFFER STATISTICS AND EXPECTED TIMETABLE              
|                  |                                                      
|Not
  applicable.
|                  |                                                      
|ITEM
  3.         | KEY
  INFORMATION                                    
|                  |                                                      

|    |                        
|--- | -----------------------
|3A. | SELECTED FINANCIAL DATA

The
following table sets forth our selected consolidated financial data as at and
for each of the years in the five-year period ended December 31, 2004. The
selected consolidated financial data for the years ended December 31,  2000, 2001, 2002, 2003 and 2004 are based on
consolidated financial statements that have been prepared in accordance with
Israeli generally accepted accounting principles, or GAAP. As applied to our
consolidated financial statements, Israeli GAAP and U.S. GAAP vary in certain
respects, as described in Note 26 to the financial statements.

We
were incorporated on June 28, 1987. The selected consolidated financial data
set forth below should be read in conjunction with Item 5. Operating and Financial Review and
Prospects, and the financial statements and notes thereto included elsewhere
in this report on Form 20-F. The
financial data for the year ended at December 31, 2004 have been translated
into US dollars using the representative rate of exchange of the US dollar to
the New Israeli Shekel, as published by the Bank of Israel, at December 31,
2004 (NIS4.308 = US$ 1.00). The
translation is solely for convenience and should not be construed as a
representation that Israeli currency amounts actually represent, or could be
converted into US dollars.

Significant
changes in accounting

The
financial statements as of December 31, 2003 and for reported periods through
that date were presented on the basis of the historical cost convention
adjusted for the changes in the general purchasing power of the Israeli
currency (New Israeli Shekel or NIS).
The Company and its subsidiaries maintain their accounts in nominal
NIS. The nominal figures were adjusted
to NIS of equivalent purchasing power (NIS of December 2003) in conformity with
principles prescribed by Statements of the Institute of Certified Public
Accountants in Israel, on the basis of changes in the Consumer Price Index
(CPI).

During
the reported period, we recorded equity in losses of HOT Telecom L.P., which
commenced its operations during 2004.

5

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|                                                                                        |  |                       |           |                       |  |                       |   |                       |           |                       |  |                     |   |  |           |     |  |         |  
|--------------------------------------------------------------------------------------- |  | --------------------- | --------- | --------------------- |  | --------------------- | - | --------------------- | --------- | --------------------- |  | ------------------- | - |  | --------- | --- |  | ------- | -
|                                                                                        |  | 2000                  |           | 2001                  |  | 2002                  |   | 2003                  |           | 2004                  |  | 2004                |  
|                                                                                        |  |                       |           |                       |  |                       |   |                       |           |                       |  |                     |  
|(adjusted NIS)                                                                          |  | NIS (in
  thousands)* |           | NIS (in
  thousands)* |  | NIS (in
  thousands)* |   | NIS (in
  thousands)* |           | NIS (in
  thousands)* |  | $ (in
  thousands)* |  
|                                                                                        |  |                       |           |                       |  |                       |   |                       |           |                       |  |                     |   |  |           |     |  |         |  
|Revenues                                                                                |  |                       | 474,670   |                       |  | 469,389               |   |                       | 495,536   |                       |  | 545,480             |   |  | 584,564   |     |  | 135,693 |  
|Operating income
  (loss)                                                               |  |                       | (61,612   | )                     |  | (129,851              | ) |                       | (98,681   | )                     |  | (7,819              | ) |  | 3,009     |     |  | 698     |  
|Financial
  expenses, net                                                               |  |                       | 34,324    |                       |  | 52,088                |   |                       | 48,089    |                       |  | 83,958              |   |  | 50,333    |     |  | 11,684  |  
|Other income  (expenses), net                                                           |  |                       | 1,007     |                       |  | 3,053                 |   |                       | 278,535   |                       |  | 80,996              |   |  | (42,680   | )   |  | (9,907  | )
|Income (loss)
  before taxes on income                                                  |  |                       | (94,930   | )                     |  | (178,886              | ) |                       | 131,765   |                       |  | (10,781             | ) |  | (90,004   | )   |  | (20,893 | )
|Equity in
  earnings (losses) of affiliated companies, net                              |  |                       | (128,554  | )                     |  | (78,822               | ) |                       | 10,910    |                       |  | 40,907              |   |  | 14,301    |     |  | 3,320   |  
|                                                                                        |  |                       |           |                       |  |                       |   |                       |           |                       |  |                     |   |  |           |     |  |         |  
|Net income
  (loss), under Israeli GAAP                                                 |  |                       | (223,654  | )                     |  | (257,274              | ) |                       | 33,824    |                       |  | (5,450              | ) |  | (82,984   | )   |  | (19,263 | )
|Net income
  (loss) per ordinary share, under Israeli GAAP                              |  |                       | (7.7      | )                     |  | (8.9                  | ) |                       | 1.2       |                       |  | (0.2                | ) |  | (2.74     | )   |  | (0.64   | )
|Net income
  (loss) per ADS, under Israeli GAAP                                         |  |                       | (15.4     | )                     |  | (17.8                 | ) |                       | 2.4       |                       |  | (0.4                | ) |  | (5.48     | )   |  | (1.28   | )
|Weighted average
  number of shares outstanding in thousands, basic, under Israeli GAAP |  |                       | 28,914    |                       |  | 28,834                |   |                       | 28,860    |                       |  | 29,347              |   |  | 30,217    |     |  | 30,217  |  
|ADS shares
  outstanding in thousands, basic  under Israeli GAAP                       |  |                       | 14,457    |                       |  | 14,417                |   |                       | 14,430    |                       |  | 14,674              |   |  | 15,108    |     |  | 15,108  |  
|Net income
  (loss), under US GAAP                                                      |  |                       | (219,400  | )                     |  | (215,639              | ) |                       | 27,451    |                       |  | (38,093             | ) |  | (98,434   | )   |  | (22,849 | )
|Net income
  (loss) per ordinary share, under US GAAP                                   |  |                       | (7.7      | )                     |  | (7.4                  | ) |                       | 1.0       |                       |  | (1.3                | ) |  | (3.26     | )   |  | (0.76   | )
|Net income
  (loss) per ADS, under US GAAP                                              |  |                       | (15.4     | )                     |  | (14.8                 | ) |                       | 2.0       |                       |  | (2.6                | ) |  | (6.52     | )   |  | (1.52   | )
|Weighted average
  number of shares outstanding in thousands, basic, under US GAAP      |  |                       | 28,604    |                       |  | 29,286                |   |                       | 28,860    |                       |  | 29,347              |   |  | 30,217    |     |  | 30,217  |  
|ADS shares
  outstanding in thousands, basic, under US GAAP                             |  |                       | 14,302    |                       |  | 14,643                |   |                       | 14,430    |                       |  | 14,674              |   |  | 15,108    |     |  | 15,108  |  
|Capital
  expenditures                                                                  |  |                       | 394,206   |                       |  | 272,817               |   |                       | 116,841   |                       |  | 55,655              |   |  | 95,428    |     |  | 22,151  |  
|Balance Sheet
  Data:                                                                   |  |                       |           |                       |  |                       |   |                       |           |                       |  |                     |   |  |           |     |  |         |  
|Fixed assets,
  net                                                                     |  |                       | 912,346   |                       |  | 1,038,087             |   |                       | 991,998   |                       |  | 876,825             |   |  | 825,511   |     |  | 191,623 |  
|Total assets,
  net                                                                     |  |                       | 1,163,059 |                       |  | 1,183,732             |   |                       | 1,132,626 |                       |  | 1,142,552           |   |  | 1,078,882 |     |  | 250,437 |  
|Short-term
  credit (including current maturities of bank loans and debentures)         |  |                       | 249,657   |                       |  | 561,365               |   |                       | 547,853   |                       |  | 469,104             |   |  | 499,344   |     |  | 115,911 |  
|Long-term bank
  loans                                                                  |  |                       | 233,300   |                       |  | 186,154               |   |                       | 142,085   |                       |  | 127,403             |   |  | 101,457   |     |  | 23,551  |  
|Debentures                                                                              |  |                       | 142,479   |                       |  | 132,457               |   |                       | 99,462    |                       |  | 66,145              |   |  | 33,201    |     |  | 7,707   |  
|Shareholders
  equity under Israeli GAAP                                                |  |                       | 367,694   |                       |  | 112,273               |   |                       | 147,072   |                       |  | 180,748             |   |  | 97,781    |     |  | 22,698  |  
|Shareholders
  equity under US GAAP                                                     |  |                       | 299,831   |                       |  | 102,552               |   |                       | 281,409   |                       |  | 352,601             |   |  | 273,549   |     |  | 63,498  |  
|Accumulated
  other comprehensive income under US GAAP                                  |  |                       |          |                       |  |                      |   |                       | 150,376   |                       |  | 220,338             |   |  | 237,212   |     |  | 55,063  |  
|Total assets,
  net under US GAAP                                                       |  |                       | 1,103,642 |                       |  | 1,186,468             |   |                       | 1,353,161 |                       |  | 1,425,233           |   |  | 1,363,356 |     |  | 316,471 |  
|EBITDA**                                                                                |  |                       | 44,504    |                       |  | 256                   |   |                       | 56,735    |                       |  | 146,992             |   |  | 139,644   | *** |  | 32,415  |  
|                                                                                        |  |                       |           |                       |  |                       |   |                       |           |                       |  |                     |   |  |           |     |  |         |  

6

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*        The
data set forth in the table above is expressed in NIS or US dollars, as
applicable, except for data set forth in the table regarding numbers of shares
and ADSs, as applicable.

**      EBITDA
is presented because it is a measure commonly used in the telecommunications
industry and is presented solely in order to improve the understanding of the
Companys operating results and to provide perspective regarding these
results. EBITDA, however, should not be
considered as an alternative to operating income or income for the period or as
an alternative to cash flow from operating activities or as a measure of
liquidity. EBITDA is not a measure of financial
performance under generally accepted accounting principles and may not be
comparable to other similarly titled measures for other companies.

          EBITDA
may not be indicative of the historic operating results of the Company nor is
it meant to be predictive of potential future results. Reconciliation between the operating profit
in the financial statements and EBITDA is presented in Item 5A. Operating and Financial Review and Prospects
 Operating Results.

***    Since
the results for the year 2003 do not include proportional consolidation with
HOT Vision Ltd., for comparison purposes, the EBITDA is presented assuming no
consolidation with HOT Vision Ltd. For
information regarding HOT Vision Ltd., see also Item 4B. Business Overview.

Exchange Rate Data

The
following table sets forth, for the years indicated, exchange rates between the
shekel and the US dollar, expressed as shekels per US dollar and based upon the
daily representative rate of exchange on the last day of each year as published
by the Bank of Israel.

|              |  |      |       |      |  |       |  |      |       |      |  |         |  |  |       |  |  |       | 
|------------- |  | ---- | ----- | ---- |  | ----- |  | ---- | ----- | ---- |  | ------- |  |  | ----- |  |  | ----- | 
|              |  | 2000 |       | 2001 |  | 2002  |  | 2003 |       | 2004 |  | 2005(2) | 
|              |  |      |       |      |  |       |  |      |       |      |  |         | 
|Average(1)    |  |      | 4.077 |      |  | 4.214 |  |      | 4.736 |      |  | 4.512   |  |  | 4.483 |  |  | 4.364 | 
|High          |  |      | 4.198 |      |  | 4.416 |  |      | 4.994 |      |  | 4.924   |  |  | 4.634 |  |  | 4.416 | 
|Low           |  |      | 3.967 |      |  | 4.041 |  |      | 4.437 |      |  | 4.283   |  |  | 4.308 |  |  | 4.299 | 
|End of period |  |      | 4.041 |      |  | 4.416 |  |      | 4.737 |      |  | 4.379   |  |  | 4.308 |  |  | 4.416 | 



---

|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Calculated based on the average of the exchange
  rates on the last day of each month during the relevant period.
|(2) | Through May 31, 2005.                                                                                            

|     |  |          |  |         |  |          |  |       |       |       |  |      |  |       |  |  |  |       | 
|---- |  | -------- |  | ------- |  | -------- |  | ----- | ----- | ----- |  | ---- |  | ----- |  |  |  | ----- | 
|     |  | December |  | January |  | February |  | March |       | April |  | May  | 
|     |  |          |  |         |  |          |  |       |       |       |  |      | 
|     |  | 2004     |  | 2005    |  | 2005     |  | 2005  |       | 2005  |  | 2005 | 
|     |  |          |  |         |  |          |  |       |       |       |  |      | 
|High |  |          |  | 4.374   |  |          |  |       | 4.414 |       |  |      |  | 4.392 |  |  |  | 4.379 | 
|Low  |  |          |  | 4.308   |  |          |  |       | 4.352 |       |  |      |  | 4.357 |  |  |  | 4.299 | 

At
May 31, 2005, the representative rate of exchange was NIS 4.416 per US dollar,
as published by the Bank of Israel.
Changes in the exchange rate between the shekel and the US dollar could
affect our financial results.

Payment of Dividends to Shareholders

Our
board of directors decided, on December 27, 1999, to distribute an interim cash
dividend to our shareholders who held shares on January 11, 2000, in the
nominal amount of NIS 7.576 (approximately US$ 1.82) per ordinary share, for a
total nominal amount of approximately NIS 222.0 million paid to the
shareholders on January 26, 2000.
Distribution of this dividend was approved as a final dividend for the
year 1999 at our annual general meeting of shareholders held on December 31,
2000. No dividends were declared in
2000, 2001, 2002, 2003 or 2004.

|                  |                                 
|----------------- | --------------------------------
|3B.               | CAPITALIZATION AND INDEBTEDNESS.
|                  |                                 
|Not
  applicable.

7

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|                  |                                             
|----------------- | --------------------------------------------
|3C.               | REASONS FOR THE OFFER AND USE OF
  PROCEEDS.
|                  |                                             
|Not
  applicable.

8

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|3D. | RISK
FACTORS
|--- | ------------

Risks relating to our
business and our industry

In order to operate our business,
we must have and maintain valid licenses.

We
conduct our operations pursuant to two general non-exclusive cable broadcast licenses,
referred to as the Cable Broadcasting Licenses, granted by the Council of Cable and
Satellite Broadcasting, or the Council, on April 30, 2002, and a special broadcasting
HeadEnd license, referred to as the Broadcasting HeadEnd License, granted by the Israeli
Minister of Communications on May 2, 2002. In addition, we received a non-exclusive
telecommunications infrastructure license, referred to as the Telecommunications
Infrastructure License, from the Minister of Communications in March 27, 2002. On November
2003, the Minister of Communications granted to HOT Telecom L.P., or HOT Telecom, a
limited partnership owned approximately 26.6% by us, with the remainder owned by the other
two Israeli cable television operators, Tevel Israel International Ltd. Group, or Tevel,
and Golden Channels & Co. Group, or Golden Channels, an infrastructure license,
referred to as the HOT Telecom Infrastructure License, covering the same services covered
by the Telecommunications Infrastructure License and also including the provision of
domestic fixed communications services over cable networks including basic telephony
services, to subscribers. The HOT Telecom Infrastructure License replaced and cancelled
the Telecommunications Infrastructure License granted to us in 2002.

The
Cable Broadcast Licenses are effective for a period of fifteen years, and the HOT Telecom
Infrastructure License is effective for a period of twenty years, and each can be extended
by additional ten-year periods if the Council, in respect of the Cable Broadcast Licenses,
or the Minister of Communications, or the Minister, in respect of the HOT Telecom
Infrastructure License, determine that we, or HOT Telecom, as applicable, have:

| |  | complied
with the terms and conditions of the licenses and the applicable law and regulations;
| | - | ----------------------------------------------------------------------------------------------

| |  | complied
with the instructions of the Council and the Minister;
| | - | ---------------------------------------------------------------

| |  | continuously
acted in a manner to improve our broadcasts, the technology of the broadcasts
                  and the scope, availability and quality of our telecommunications
services and our network                   technology;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
ability to continue to provide the broadcasts and to invest in improvements of the
broadcasts in the future, and the ability to continue to provide the telecommunications
services and make necessary investments in order to update our technology and the scope,
availability and quality of our telecommunications services; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | continued
to comply with the conditions upon which our licenses were granted.
| | - | -----------------------------------------------------------------------------

Our
Broadcasting HeadEnd License is valid for so long as our Cable Broadcast Licenses remain
in force, but in any event no later than May 30, 2017, although we may apply for an
extension of the Broadcasting HeadEnd License beyond this date.

In
order to ensure compliance with our obligations pursuant to our Cable Broadcast Licenses,
applicable law and regulatory bodies, we have provided a bank guarantee in the amount of
NIS 9.3 million to the Council. In order to ensure compliance with the HOT Telecom
Infrastructure License, we and the other two Israeli cable television operators provided
bank guarantees in the aggregate amount of US$ 14 million to the Minister. The bank
guarantee provided by us was in the total amount of US$ 3.72 million.

Each
of the Minister and the Council has the authority to exercise the guarantees in the event
that the licensee does not fulfill its obligations, and to cover any damage, loss or cost
that the Council, the Minister or the government may incur as a result of any breach of
obligations under the licenses, and to ensure any payments by the licensee, including
royalty payments and payments of fines imposed by the Council or the Minister. The
exercise of the guarantee does not derogate from the authority of the Council or the
Minister to cancel the licenses, to amend the terms and conditions of the licenses or to
impose other sanctions, including fines for certain stipulated breaches or actions.

The
Council or the Minister, as applicable, have the authority to amend the terms of our
licenses or the HOT Telecom Infrastructure License, at any time, and, in relation to the
Cable Broadcast Licenses, the Council must take into account any prejudice to the licensee
that would result from such amendment. Further, the licenses may be cancelled for material
breach of their provisions, or non-compliance with legal requirements, or the failure to
remedy of an immaterial breach. The HOT Telecom Infrastructure License can further be
cancelled by the Minister for non-supply of services, non-fulfillment of the conditions of
receipt of the license, breach of the restrictions upon the means of control of HOT
Telecom, breach of cross ownership restrictions or breach of obligations to provide
information to the Minister. HOT Telecom is also required to meet certain requirements
pursuant to the HOT Telecom Infrastructure License regarding the laying down of network
infrastructure.

Although
we believe that we are currently in compliance with all material requirements of our
licenses, the interpretation and application of the standards used to measure these
requirements are not certain, and disagreements may arise in the future between us and the
Minister or the Council.

9

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We are subject to special
regulatory restrictions applicable to monopolies, which limit our ability to control the
conduct of our business.

On
November 8, 1999, the Controller of Restrictive Business Practices, or the Controller,
declared that we, and all the other cable television operators in Israel, constitute a
monopoly in the provision of multi-channel cable television services in our then
respective franchise areas (which are the same areas in which we operate pursuant to our
current licenses). On December 28, 1999, we filed an appeal of this declaration in the
Restrictive Business Practices Court, which was dismissed in October 2004. As a result, we
are and will continue to be subject to the supervision of the Restrictive Business
Practices Authority, in addition to the existing supervision of the Minister and the
Council, including in the areas of pricing, quality of broadcasting services, agreements
with our subscribers, agreements with content providers and the use of our cable
television network.

There can be no assurance that the
operational merger will result in a successful integration of the operations of us, Tevel
and Golden Channels, or whether the operational merger will enhance our profits and
competitiveness.

As
of 2001, the cable television operators are acting in order to merge their activities. The
purpose of the merger, among other things, is to enable us to provide additional
telecommunications services, to increase our ability to compete successfully with Bezeq in
the field of domestic fixed line services, including telephony, and, to cooperate in
various areas, including purchase of content, marketing, sales and unified networks and
effect substantial cost savings. In order to strengthen the cooperation of the three
Israeli cable television operators, we, Tevel and Golden Channels agreed to perform an
operational merger in June 2004. To this effect, a joint management was appointed to
oversee the joint operation of the marketing, sales, engineering, customer service,
operations and information systems activities of the three cable television operators. The
joint management conducts and manages the Companys activities in the ordinary course
of business in the areas of the joint activities. Material decisions applicable to the
operational merger require our approval as well as the approval of Tevel and Golden
Channels. Our approval is subject to the decision of our board of directors and other
corporate bodies, as required by law. Since the appointment of the joint management and
the commencement of the operational merger, we, Tevel and Golden Channels have operated
jointly on a regular basis. The three cable television operators have agreed in principle
that the allocation of the expenses deriving from the joint activity among themselves
shall be proportional to the number of subscribers of each party. The operational merger
does not include transfer of assets from any of the three cable television operators to a
merged entity or from any of the three cable television operators to another cable
operator. Each of the three cable television operators remains the sole owner of its
assets and is entitled to the revenue generated from its own subscribers. Furthermore, the
joint activity does not include transfer of liabilities owed to third parties, including,
inter alia, banks or other creditors. There can be no assurance that the operational
merger will result in a successful integration of the operations of us, Tevel and Golden
Channels, or whether the operational merger will enhance our profits and competitiveness
or whether it will result in a legal merger among the parties, as described in the annual
report. In addition, should the operational merger not be successful, our overall expenses
may increase, since we may no longer benefit from reduced costs, which result from our
joint activities with the other two cable television operators, and we may need to
incur additional capital expenditures in order to operate our business as a separate
entity, independent from the other two cable television operators.

We and the other cable television
operators have agreed on the terms of a merger. The legal merger might not be consummated,
and if it is, we might not be able to realize any anticipated benefits from the merger.

In
February 2003, we and the other Israeli cable television operators agreed on a final
version of an agreement outlining the structure and conditions of a merger among us. To
date, the final merger agreement has not been signed, and we cannot predict when and if it
will be signed.

Prior
to the merger we will need to reach an agreement with the major Israeli banks, which are
creditors of the parties to the merger, addressing among other things, the assignment of
certain of the current debts and securities to the merged entity, and its future
financing. The merger must also receive approvals under applicable law, including the
approvals of the Council, the Income Tax Commission, the Controller, and by an Israeli
court, after receiving the approvals of certain creditors and the relevant corporate
bodies of the relevant parties. To date, approvals have been granted, subject to terms and
conditions, from the Council, the Controller and the Income Tax Commission. Subject to the
final terms of the merger, further approval of the Income Tax Commission to the merger may
be required. The Supervisor of Banks of the Bank of Israel, or the Supervisor of Banks,
has yet to agree that the proposed merger is not in breach of certain limitations under
Israeli banking laws applicable to the Israeli banks, which are creditors of the merged
entity.

According
to the position of the Supervisor of Banks, the merger of the cable television operators
and the formation of a merged cable entity would constitute a deviation from the
directives of the Bank of Israel and of Proper Bank Management Directives of
the Supervisor of Banks regarding, among other things, restriction on debt amounts to a
Group of Borrowers as such term is defined in the Proper Bank Management
Directives. The relevant directives deal with certain limits applicable to loan
amounts given by banking corporations to Sole Borrower and/or Group of
Borrowers and as a result, attribution of the merged companys debts, among
other things, to an indirect controlling shareholder of us and the other cable television
operators.

10

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In
November 2004, we concluded preliminary discussions with Tevel and its shareholders
regarding the purchase by us of all of Tevels assets, including Tevels
holdings in Golden Channels. If we were to acquire Tevels assets, we would have over
560,000 cable subscribers, representing approximately 60% of the Israeli cable television
market, and we would hold 35% of Golden Channels, subject to certain terms. We have not
signed a binding agreement with Tevel, and cannot be certain that this transaction will be
completed, or if completed, on what timeframe or on what terms and conditions, including
price. If this transaction were to take place, we would likely incur or assume substantial
additional indebtedness. If we were to acquire all of Tevels assets as aforesaid,
there is no assurance that the proposed merger of the three Israeli cable television
operators will be completed in its current proposed form.

In
the event that the merger is not consummated, it will be more difficult for us to realize
our objectives and to compete effectively. In addition, should the merger not be
consummated, our overall expenses may increase, since we may no longer benefit from
reduced costs, which result from our joint activities with the other two Israeli cable
television operators.

If
the merger is consummated, there can be no assurance whether: (i) the conditions of the
merger will enable the merged entity to successfully compete; (ii) there will be a
successful integration between the merged entities; and (iii) the combined entity will be
able to compete effectively against current or future competitors and will realize the
anticipated benefits of the merger.

If
the merger is consummated, we face the following risks:

|q | As
a result of the merger, we may be characterized as a passive foreign investment  company,
 and as a          result our U.S.  shareholders  may suffer  adverse tax  consequences.
 Generally,  if for any          taxable  year 75% or more of our  gross  income  is
 passive  income,  or at least 50% of our          assets are held for the production of,
or produce,  passive income,  we may be  characterized          as a  passive  foreign
 investment  company  for  U.S.  federal  income  tax  purposes.  This
         characterization  could  result  in  adverse  U.S.  tax  consequences  to  our
 shareholders,          including  having gain realized on the sale of our shares be
treated as ordinary  income,  as          opposed to capital gain income,  and having
 potentially  punitive  interest charges apply to          such sales proceeds.  U.S.
 shareholders should consult with their own U.S. tax advisors with          respect to
the U.S. tax consequences of investing in our ordinary shares.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|q | As
a result of the merger, we may be deemed to be an investment company under
the Investment Companies Act of 1940. A significant part of our assets may constitute
investment securities as defined in the Investment Company Act. If we were
deemed to be an investment company, then we would be required to be
registered as such. In that case there would be a substantial risk that we would be in
violation of the Investment Company Act because of the practical inability of a non-U.S.
company to register under the Investment Company Act. If we were deemed to be an
unregistered investment company under the Investment Company Act, our
contracts may be voidable, we might not be allowed to offer securities in the United
States, and we may also be subject to other materially adverse consequences.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|q | The
sums that will be deemed to have been borrowed by the merged entity may exceed the
maximum borrowing limit of a single borrower under Israeli banking laws, which might
materially restrict the ability of the merged entity to receive loans from Israeli banks.
In addition, we, the merged entity and the other parties to the merger may be subject to
additional limitations in connection with the receipt of loans from Israeli banks due to
restrictions under Israeli Banking laws pertaining to the maximum borrowing by a group of
borrowers.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|q | The
goodwill contributed to the merged entity by the merging entities could result in
accounting expenses under Israeli GAAP in the years following the consummation of the
merger that would reduce our shareholders equity and would have an adverse effect
on the public market for our shares and ADSs, and may negatively affect our ability
to pay dividends to our shareholders. A material reduction in our shareholders equity
could cause our shares to be delisted from the Tel Aviv Stock Exchange and Nasdaq
National Market.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|q | For
the merger, including certain ancillary actions performed in the framework of the merger,
to qualify, pursuant to the approval of the Israeli Income Tax Commission, as a tax-free
transaction under Sections 103, 104 and 105 of the Israeli Income Tax Ordinance, the
merging entities and their respective shareholders (including us) are required to comply
with certain restrictions, including restrictions on certain issuances of shares of the
merged entity and restrictions on the number of shares that may be sold by the
shareholders of the merged entity. In addition, the merged entity may not sell a majority
of the assets (as defined in the Income Tax Ordinance) transferred to it by the merging
entities during this restricted period, and no actions, transfers, provision of
guarantees or any other activities may be performed between the merged entity and the
other entities that participated in the merger, including their respective shareholders.
In the event that any of these conditions or restrictions are not complied with, the tax
exemption may be retroactively cancelled and the merger may be subject to tax, plus a
consumer price index linkage adjustment and interest. These restrictions may deter an
acquisition of the merged entity, and prevent us from selling or disposing of our shares
in the merged entity. Additionally, subject to the final terms of the merger, further
approval of the Income Tax Commission to the merger may be required and additional
conditions or restrictions may be imposed on the merged entity, the merging entities and
their respective shareholders.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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|q | The
terms and conditions of the approvals that we have received to date to the merger affect
the ability of the merged entity to manage its business, and restrict the ability of the
merged entity to utilize some of the potential competitive advantage it may otherwise
have.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|q | In
the event that the Controller considers there to be a material decline in the
multi-channel television market as a result of the consummation of the merger, he has the
power to oblige the merged entity to allow other broadcast license holders (including
D.B.S. Satellite Services (1998) Ltd., commonly known as YES, the Israeli satellite
multi-channel television operator) usage of the network infrastructure to access all
potential subscribers, and not only to the subscribersof the merged entity.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|q | A
condition of the approval of the Controller to the merger is an obligation upon the
merged entity to begin to supply fixed line telephony services over cable infrastructure
to the Israeli public not later than November 20, 2004. As of the end of November 2004,
HOT Telecom has gradually commenced to provide commercial domestic fixed telephony
services. The merged infrastructure entity is obligated to invest in fixed line telephony
cable infrastructure an aggregate of not less than NIS 350 million, that shall be
invested as follows: not less than NIS 190 million until June 30, 2005, not less than NIS
160 million until June 30, 2006 and any other amount as shall be required for the
fulfillment of its business plan for the provision of telephony services which fully
compete with those of Bezeq. The Companys portion of the infrastructure investment
commitments (NIS 350 million), pro rata to its proportionate share in HOT Telecom is
estimated to be approximately NIS 93 million. In addition, according to the amendment to
the Controllers approval, the Controller increased the minimum number of
subscribers to whom the merged entity is obliged to provide telephony services by the end
of the consecutive years 2005, 2006 and 2007. The approval of the Controller to the
merger is conditional upon the provision of a bank guarantee in the amount of US$ 15
million to ensure compliance with the terms of the approval. In the event that the
Controller decides, in his discretion, that there has been a material breach of the terms
of the approval, he may fully or partially exercise the guarantee. We have provided our
pro rata portion of this amount, by giving a guarantee in the amount of US$ 3.75 million.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
joint activities with the other two Israeli cable television operators is subject to
regulation and antitrust review, which limits the joint activities, causes us significant
expenses and makes the future of these joint activities uncertain.

On
April 22, 2002, the Controller granted an approval to the merger the cable television
operators. The Controllers approval to the merger is subject to terms and
conditions. The Controllers approval to the merger was extended and amended from
time to time.

On
December 15, 2004, the Controller granted us and the other cable television operators an
additional extension of the merger approval from April 2002 until January 29, 2005, which
was further amended on January 30, 2005 until the earlier of January 29, 2006 or the
consummation of the merger. There can be no assurance that the Controller will agree to
further extend the approval. If the approval will not be further extended upon its
expiration, we may be required to cease our joint activities with the other two cable
television operators. The approval of the Council to the merger was granted on March 7,
2002 and amended on February 13, 2003. For more information on the terms and conditions of
the approvals of the Council and Controller, see Item 4B. Business Overview.

On
January 30, 2005, the Controller granted us and the other cable television operators an
exemption from the requirement to receive an approval of a restrictive arrangement in
relation to the ongoing cooperation between the cable television operators. The exemption
was granted for a period of one year, until January 30, 2006. Pursuant to the exemption,
the cable television operators may continue their cooperation in the multi-channel TV
broadcasting operations, including marketing, content acquisition and content production,
and in building infrastructure and providing fixed line telecommunication services,
including access to High Speed Internet and telephony. This exemption is conditional upon,
among other things, the cable television operators compliance with the terms of the
Controllers approval to the merger and all of the cable television operators
refraining from taking any irreversible actions which would prevent them from being able
to undertake separate and independent activities in the event that the merger will not be
completed. If the merger is not consummated, it will be necessary for us to receive an
extension of this exemption. There can be no assurance that the Controller will continue
to grant us this exemption. If this exemption will not be extended, we may be required to
cease our joint activities with the other two cable television operators.

The
terms and conditions of the approvals of the Council and the Controller to the proposed
merger also impose significant restrictions on the activity of the merged entity in
relation to all areas of our business, including programming, marketing and broadcasting.
We currently have the obligation to fulfill most of the conditions of the
Controllers approval of the proposed merger.

12

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The telecommunications industry in
Israel is highly regulated which limits our flexibility to manage our business.

Our
business is subject to regulation under the Israeli Telecommunications Law as amended, or
the Telecommunications Law, regarding, among other things:

| | q | licenses;
| | - | ---------

| | q | royalties
and other payments to be paid by licensees to the government;
| | - | -----------------------------------------------------------------------

| | q | content
and scope of programming;
| | - | ---------------------------------

| | q | the
subscriber charges set by cable television operators for their cable television services;
| | - | ---------------------------------------------------------------------------------------------

| | q | our
cable infrastructure that will become a public telecommunications network; and
| | - | ----------------------------------------------------------------------------------

| | q | the
nature of telecommunications services.
| | - | ------------------------------------------

Changes
in laws, regulations or government policy affecting our business activities could
adversely affect our business and operations. We cannot make any assurance that the
Minister will not intervene in relation to the amounts we charge our subscribers.

As a result of the changing
regulatory environment we have lost the competitive advantage we previously enjoyed as a
holder of exclusive franchises, and we face competition from a variety of sources. This
has lowered the entry barriers for potential new competitors and may affect our ability to
compete in the market.

The
Israeli telecommunications market has been transformed, moving to a more liberalized
environment in which various markets are being gradually opened to competition. Amendments
to the Telecommunications Law, which replaced the previous system of exclusive franchises
by general non-exclusive licenses, have significantly reduced the barriers to entry into
our market and imposed conditions upon us, thereby increasing competition.

In
January 1999, the Ministry of Communications granted a license for the provision of
television broadcasts to subscribers in Israel via satellite to YES. YES began to operate
and market its broadcasts in July 2000. Bezeq  Israel Telecommunications Corporation
Ltd., or Bezeq, is a principal shareholder of YES. Bezeq was declared as a monopoly by the
Controller over the provision of basic telephony services, telecommunications
infrastructure services, data transmission services and ancillary services and access to
High Speed Internet. Bezeq has great financial resources, which it may place at the
disposal of YES, thereby allowing YES to offer its services at low prices and use
aggressive marketing strategies, including providing set-top boxes free of charge. For
these reasons, we may not be able to successfully compete with YES. We also have an
obligation to lease our inside wiring to YES, and YES is under a reciprocal obligation to
us, pursuant to directives issued by the Minister of Communications. Such competition from
YES has affected our income, reduced the number of our subscribers and caused us increased
expenses, mainly in marketing and programming. In particular, the purchasing power of YES
has raised the cost of content purchasing from the major production companies.

The
Telecommunications Law, our licenses and the terms of the approvals we have received to
date from the regulatory authorities with regard to the proposed merger of the Israeli
cable television operators, also may impose upon us an unbundling obligation,
the purpose of which is to encourage competition in accordance with, and subject to the
conditions of our licenses and applicable law. The obligation allows other broadcasting
licensees access to our subscribers through our network infrastructure on terms that are
not inferior to the terms that will be provided by HOT Telecom under the HOT Telecom
Infrastructure Licensee, to our Cable Broadcast Licensees; and also allows other
telecommunications licensees (who may therefore be providers of, among other things, other
value added services) to have access to our infrastructure. Furthermore, pursuant to the
terms of the approvals we have received in relation to the proposed merger between the
Israeli cable television operators, in the event that the Controller considers there to be
a material decline in competition in the multi-channel television market we may be
instructed to allow YES, or other broadcast licensees, usage of our network infrastructure
to all potential subscribers, and not only to our subscribers, so long as our cable
network infrastructure reaches their premises. If YES ceases to operate due to insolvency,
this will be deemed to be a material decline in competition in the multi-channel
television market and we may be instructed to allow YES or its successor usage of our
network infrastructure as mentioned above.

Pursuant
to our licenses and the Telecommunications Law, we are obliged to reserve and allow one
sixth of our broadcasting network capacity for broadcasts of channels produced by special
cable broadcast licensees to our subscribers. According to the Telecommunications Law,
without derogating from the general unbundling obligation referred to above, and taking
into account the obligation to reserve one sixth of our network capacity, the Minister has
the authority to direct HOT Telecom to designate network capacity for the transmission of
broadcast and other telecommunications services of a third party.

We
cannot anticipate how and to what extent these obligations may affect our income and
expenses, or our subscriber base in the future.

13

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The provision of access to High
Speed Internet over cable services in Israel is characterized by significant competition.

In
April 2002, we commenced to provide access to High Speed Internet over cable services. In
November 2003, HOT Telecom was granted a license to supply these services instead of us
and the other cable television operators. As of June 2004, HOT Telecom provides such
services to the business sector, itself, and to the residential sector through the former
infrastructure licensees of the cable television operators. We have incurred considerable capital expenditure preparing for the provision of this
service and in various telecommunication services, and anticipate that we and HOT Telecom
shall continue to invest in the improvement and maintenance of these services in the
future. However, we and HOT Telecom face significant competition in the access to High
Speed Internet marketfrom Bezeq and may face competition in the future from other
well placed competitors. Furthermore, we face competition in the domestic
telecommunication transmission services market and may face additional competition in this
market from new competitors in the future. We can make no assurance that we will be able
to compete effectively with such competitors, or that we will be successful in realizing a
significant return on our investments with respect to such service.

The provision of domestic fixed communications services in Israel is characterized by
significant competition.

As
of the end of November 2004, HOT Telecom has gradually commenced to provide commercial
domestic fixed telephony services. Pursuant to the approval of the Controller to the
proposed merger of the cable operations, as amended, the merged infrastructure entity is
to invest in fixed line telephony cable infrastructure an aggregate of not less than NIS
350 million, that shall be invested as follows: not less than NIS 190 million until June
30, 2005, not less than NIS 160 million until June 30, 2006 and any other amount as shall
be required for the fulfillment of its business plan for the provision of telephony
services which fully compete with those of Bezeq. The Companys portion of the
infrastructure investment commitments (NIS 350 million), pro rata to its proportionate
share in HOT Telecom of 26.6% is estimated to be approximately NIS 93 million.

On
September 17, 2002, the Minister of Communications adopted, with certain changes, the
recommendations of a committee formed by the Ministry of Communications for the
establishment of policies and rules for the opening of competition in the field of
domestic fixed communications services, as the guiding principles in this field. In order
to implement the committees recommendations, the Israeli parliament approved an
amendment to the Telecommunications Law at the end of May 2003. Under this amendment, as
of September 1, 2004, the Minister may grant a special general license for domestic fixed
telecommunications services without imposing on the holders of such licenses the
obligation to provide their services to the entire public throughout the entire country or
in any specifically defined area in Israel. The Ministry of Communications published the
language of the special general license. In June 2004, the Ministry published new
regulations setting forth the conditions and procedures for obtaining a special general
license for domestic fixed telecommunications services. Under the said regulations, any
applicant may be granted with such a license, provided it is able to comply with several
basic conditions which are listed in the said regulations.

On
November 30, 2004, the Ministry of Communications issued policy principles to license the
provision of telephony services by broadband access, known as Voice-Over Broadband access,
or VoB. The VoB services that new competitors shall be entitled to provide may compete
with the telephony services already provided by HOT Telecom. HOT Telecom filed a detailed
status paper in which it demanded to revoke the policy principles. As a result of these
new competitors ,HOT Telecom may not be able to compete effectively, and it may
not recover its significant investments in telephony services.

Pursuant
to the abovementioned regulations and policy principles, the Ministry has granted several
special marketing licenses for experimental provision of fixed line telephony services by
broadband access (VoB), inter alia, to ISP, cellular and international communications
licensees.

In
addition, new technologies are being developed, such as VoIP, voice-on-data lines,
wireless technologies and broadband infrastructure, which will enable current
telecommunication providers and/or new competitors to implement rapid deployment of
relatively low-cost technologies. This could place HOT Telecom in an inferior status in
competing with them.

In
March 2004, the Minister announced its new policy with respect to Bezeqs general
license. Specifically, the policy provides that Bezeq may offer discounts for size at a
rate of up to 10% and may request to amend its license in a manner that it will be able to
market bundled services when its market share of the fixed domestic telephony industry
(residential or business customers) decreases below 85% or if the competitive status of
Bezeqs subsidiary, YES, has significantly deteriorated. With regard to YES, the
Minister determined that a significant deterioration in the competitive status shall be a
situation in which its market segment in the industry of multi channel-broadcast to
subscribers decreased below 25% of all subscribers in that market. On January 9, 2005, the
Minister resolved to raise the deterioration threshold in the competitive status of YES
from 25% to 29%. This policy enables Bezeq to provide services jointly with its
affiliates, which it was not allowed to do in the past, including among other things,
telephony services (local and international), multi-channel television services, cellular
services and access to High Speed Internet services. As a result of this policy,HOT Telecom may not be able to compete effectively with Bezeq and others, and it may
not recover its significant investments in telephony services. In addition, the offering
by Bezeq of bundled services, including multi-channel television services through YES, may
have a material effect on our ability to supply telephony services to our subscribers and
could cause us to lose multi-channel television subscribers. Accordingly, we may suffer
losses as the result of our holdings in HOT Telecom, which would affect our results of
operations.

14

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Due to the prospective investment
in Bezeq, Bezeq may no longer be regarded as a government company and therefore, shall
cease to be subject to the limitations imposed on a government company. As a result, our
ability to compete in the access to High Speed Internet, telephony services and
multi-channel services markets could suffer.

On
May 2005, the State of Israel selected the offer made by F.SB.R Holdings Ltd.
(FSBR) as the winning bid for the purchase of approximately 30% of the shares
of Bezeq, which are currently held by the State of Israel. In addition FSBR will have an
option to purchase an additional 10.66% of the shares of Bezeq. The consummation of
such transactions is subject to the receipt of certain approvals, including the approval
of the Prime Minister and the Minister of Communications and the consent of the
Controller. If these transactions are consummated, Bezeq will no longer be a government
company and will, therefore, no longer be subject to government involvement and certain
obligations as a government company. Bezeq will continue to be subject to other
limitations imposed on it, including, inter alia, obligations imposed on it according to
its license and its declaration as a monopoly. Further, Bezeq has great financial
resources, which it may place at the disposal of YES, without the restrictions that have
in the past been imposed on it as a government company, thereby allowing YES to offer its
services at lower prices and use more aggressive marketing strategies. If this occurs, our
ability to compete in the multi-channel services market could be harmed. The business
activities of the controlling shareholder of FSBR are focused on media and television
productions. This controlling shareholder also has significant holdings in broadcasting
and communication entities both within and outside of Israel. As a result, this could
provide Bezeq and YES with a great competitive advantage to our detriment. This could have
a negative effect on our ability to compete in the access to High Speed Internet,
telephony services and multi-channel television markets.

We have recently been the victim
of industrial espionage in Israel, which could have an adverse effect on our operations,
on our financial condition and on our ability to compete in the market.

We
were notified in May 2005 that the Israeli police were conducting an investigation of
industrial espionage against certain companies in Israel, including against our competitor
YES. On June 2, 2005, we along with other cable television operators filed a statement of
claim in the District Court of Tel Aviv asking for certain relief against YESs
alleged actions, inter alia, requesting to appoint a receiver in order to seize all
documents taken from us by YES. YES has responded to our claims stating that it did, in
fact, receive documents of the cable television operators through civil intelligence but
also indicated that these documents have since been confiscated by the police. We have
filed our response to YESs response. We are examining what additional procedures we
may pursue. As the entire scope of our confidential information that was improperly
disclosed to YES is still unknown, it is difficult for us to assess the risk involved and
the exact implications it will have on our business, including the scope of damages to our
business. The disclosure of our confidential information could have an adverse effect on
our operations, our financial condition and on our ability to compete in the multi-channel
television, access to High Speed Internet and telephony services markets.

We could lose our competitive
advantage of being the exclusive provider of Video on Demand services if YES were to
receive an approval from the Ministry of Communications to provide alternative services.

We,
along with the other cable television operators, gradually commenced in January 2005
providing Video on Demand, or VOD, services in our operating areas on a commercial basis.
We, along with the other cable television operators, are currently the only companies to
offer VOD services. VOD is a service that allows television viewers to instantaneously
select and view various contents (such as library movies, current movies, series, contents
for children, contents for adults, sports content, entertainment and leisure contents) at
any time they choose. VOD services also allow the viewer to stop, pause, fast-forward,
rewind and restart the viewing, in a similar manner to the operation of a video tape
recorder. We have incurred considerable capital expenditure preparing for the provision of
this service. According to publication, YES requested permission from the Ministry of
Communications to provide VOD services deployed over DSL. If YES were to receive such an
approval from the Ministry, we would lose our competitive advantage of being the exclusive
provider of such services in Israel. This could have a material adverse effect on our
financial condition.

We may face competition from other
existing technologies in broadcasting and infrastructure that may be implemented in
Israel, or new technologies that could reduce the appeal of our services.

While
we believe that our existing technologiesallow us to effectively compete with
other existing technologies implemented in Israel, we may face competition from new
technologies that may be implemented in Israel. We cannot anticipate whether, and to what
extent if at all, future changes in technology will materially affect the continued use of
fiber optic and coaxial cabling technologies that we employ. We may also face competition
from technologies in development or that may be implemented in the future, such as LMDS
and other wireless technologies in the fields of data over cable and telephony, video on
demand or VOD, services that may be deployed over DSL, and satellite platforms. We cannot
predict the effect of existing, emerging and future technological changes on the viability
or competitiveness of our system. Accordingly, we cannot make any assurance that the
technologies we currently employ, or shall employ in the future, will not become obsolete
or subject to competition from new technologies in the future.

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# One party controls a
large block of our shares.

As
of December 2004, Delek Investments and Properties Ltd., or Delek, holds approximately 40%
of our outstanding shares. Delek is a wholly-owned subsidiary of Delek Group Ltd., a
public company whose shares are listed on the Tel Aviv Stock Exchange. As of May 2005,
Delek Group Ltd. is controlled by Mr. Yitzchak Sharon (Tshuva). Mr. Tshuva
holds indirectly approximately 78.64% of the shares of Delek Group Ltd. Accordingly, Delek
Group Ltd. and Tshuva, as the single largest beneficial shareholder, may have the ability
to determine the election of a majority of our directors, and to direct our policies,
including the payment of dividends, and may control the outcome of substantially all
matters that may be brought before our shareholders.

We may not be able to obtain
additional capital in order to implement our business plans on favorable terms.

Although
our management currently believes that our existing capital resources, including our
credit lines, are adequate to satisfy our financial needs in order to implement our
business plans for the next 12 months, as of December 31, 2004, we may in fact require
additional capital. Our financial needs in that period will be subject to, among other
things: our ability to successfully provide our services; the need to upgrade our network
to provide added value services; the need to acquire additional equipment; the need to
implement the buildout of our infrastructure in peripheral areas; and the needs of
companies in which we have significant investments, such as Barak and, if the proposed
merger shall be consummated, the merged entity.

Any
future equity or debt financing, if available, may be on terms that are not favorable to
us, and in the event of equity financing, could result in dilution of our
shareholders interests. Our principal shareholders are not contractually obligated
to make loans or contribute equity to us.

We
commenced negotiations with the banks regarding an increase of our credit lines. These
negotiations were ceased due to the proceedings in connection with the proposed merger of
the Israeli cable television operators. In the event that we are granted increased credit
lines to meet our financial needs, there can be no assurance that we would be able to
obtain terms which are favorable to us, or which are not significantly expensive, in light
of current market conditions. Further, one of our main credit lines is based on an
unwritten agreement with the bank. Due to its oral nature, the terms and conditions of
this credit line are at risk and we could be required to accelerate payment of all amounts
owing to this bank. In addition, our agreement with another bank supplying one of our
credit lines contains a number of covenants relating to, among other things, our debt to
equity ratio and the maintenance of a minimum number of subscribers. In the event we
breach any of these covenants, we could be required to accelerate payment of all amounts
owing to this bank. For further details regarding this credit arrangement, please see
Item 5B. Operating and Financial Review and Prospects  Liquidity and Capital
Resources.

We have been notified by one of
our banks that we did not comply with two of our covenants under our credit agreement,
which if not remedied, could result in an event of default under the agreement, which may
have an effect on our liquidity in the future.

As
of December 31, 2004, we did not comply with two covenants to maintain the financial
ratios, as defined in the agreement, as follows: (i) the number of broadcast subscribers
and (ii) Operating surplus.

In
March 2005, we received a letter from our bank according to which the bank does not deem
the non-compliance, described above, to be a violation by the company to maintain such
financial ratios for a period of one year, commencing on March 24, 2005 (the Waiver
Period). We anticipate that additional negotiations will take place with the bank at
the end of the Waiver Period. If we fail to comply with the covenants at that time or fail
to reach an agreement with the bank, it could result in an event of default under the
credit agreement, in which case amounts under the agreement would become due. For further
details regarding this credit arrangement, please see Item 5B. Operating and
Financial Review and Prospects  Liquidity and Capital Resources.

Our substantial leverage could
adversely affect our financial health.

In
recent years, we incurred intensive capital expenditures related to the continued
construction of our cable television network and other technological projects, and
operating losses, which have increased our indebtedness, resulting in our becoming highly
leveraged.

Our
ability to meet our debt obligations will depend on whether we can successfully implement
our strategy, as well as on financial, competitive, regulatory and technical factors,
including some factors that are beyond our control. If we are unable to generate
sufficient cash flow from operations to meet principal and interest payments on our debt,
we may have to refinance all or part of our indebtedness.

We
cannot assure you that any such refinancing would be possible on terms that we could
accept or that we could obtain additional financing. If refinancing were not possible or
if additional financing were not available, we may have to sell our assets under
circumstances that might not yield the highest prices, or default on our debt obligations.

Due to the fact that we have a
significant amount of short-term loans bearing variable interest rates, we are vulnerable
to interest rate increases.

Because
we have a significant amount of short-term loans bearing variable interest rates, we are
vulnerable to interest rate increases. In the event that the interest rates applicable to
our short-term loans should increase significantly, this would increase our expenses. Any
significant increase in our expenses will harm our results of operations.

Our industry is subject to rapid
technological changes that will cause us to incur capital expenditures to remain
competitive.

In
order to provide advanced communication services, we have incurred significant capital
expenditures expanding our cable network bandwidth from 550 MHz to 860 MHz. We have a
technological advancement plan for deployment of additional two-way services, expansion of
fiber optic cable networks and a digital broadcasting system or advanced data over
cable/IP platform. We also aim to improve the network in terms of redundancy and
manageability, by closing fiber rings, enhancing the powering and telemetry measures, and
downsizing the fiber nodes. Such enhancements are necessary to allow us to provide
telecommunication services at a Telco-Grade quality of service, which is the
standard commonly used by telephone companies to grade availability and quality of
services. We may not have sufficient capital resources to finance the expenditures
required to remain competitive, which could adversely affect our results of operations.

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Our business may be impacted by
shekel exchange rate fluctuations and inflation.

Since
we may be unable, or not permitted to raise our rates and fees pursuant to our licenses in
a manner that would fully compensate for any increase in the Israeli consumer price index,
inflation in Israel, which may impact our borrowing costs with respect to shekel amounts
linked to the Israeli consumer price index and may cause an interest increase in Israel,
may have a material adverse effect on us.

Substantially
all of our revenues and a portion of our operating expenses are denominated in shekels,
and on the other hand, substantially all of our programming expenses and certain other
expenses are denominated or linked to foreign currency. Thus, any devaluation of the
shekel against the US dollar (or other foreign currencies), will also increase the shekel
cost of our non-shekel denominated or linked expenses. Such increase may have an adverse
impact upon our operating results, which may be material. Our borrowings are mostly in
Israeli shekels. We enter into option contracts to protect ourselves from the risk of the
possible fluctuations in exchange rates. There can be no assurance that we adequately
protect ourselves from exchange rate fluctuations.

The financial situation of the
other Israeli cable television operators has an impact upon our business.

Due
to the fact that we cooperate closely with the other two Israeli cable television
operators, Tevel and Golden Channels, and during 2004 have decided to merge our operations
with those of Tevel and Golden Channels, the financial situation of these companies has an
impact on our business.

Any
future deterioration of Tevel or Golden Channels, which result in a delay or omission of
such party to provide its relative portion of the joint activitys costs, could have
an impact upon our business and our day to day operations, including causing an increase
in our respective pro rata portion of joint costs, including, among others, content costs
which may have a material adverse affect upon our financial statements. Furthermore, it
may affect the possibility of the consummation of the proposed merger between the Israeli
cable television operators, and the conditions that the creditors of the companies that
are parties to the merger may impose.

We
have concluded preliminary discussions with Tevel and its shareholders for the purchase by
us of all of Tevels assetsPlease see the discussion of this proposed
transaction in Item 4B. Business Overview  Agreement for a Merger of the Cable
Television Operators.

Our previous franchises required
us to meet certain milestones with respect to cable access to potential customers in the
areas covered by our licenses, which if not met, could expose us to litigation or
administrative actions.

Our
previous exclusive franchises contained specific construction milestones with respect to
regions within a franchise area that must be passed by the cable television network by
specified dates. We substantially completed the installation of the regional cable
transmission network in all our operating areas, and believe that completing portions of
the buildout requirements in peripheral regions in the operating areas would be
substantially more expensive, on a per-subscriber basis than in the metropolitan areas.
Therefore we did not fully complete build-out requirements in certain peripheral regions.
Our current licenses require us to connect any applicant to purchase cable television
broadcasts within a specified period of time. The Ministry of Communications or the
exceptions committee thereof may allow an exception regarding the time schedule to connect
applicants, or the obligation to connect every applicant.

We
are subject to a lawsuit and have been subject to other lawsuits in the past, and may be
exposed to additional lawsuits in the future, by residents of communities that are not, or
were not, connected to our cable television network, seeking to force us to implement the
build-out of our network in their communities, or compensation for being prevented from
receiving cable television services. See Item 8A. Consolidated Statements and Other
Financial Information  Legal and Arbitration Proceedings.

We may be required to pay
royalties to, and could be subject to lawsuits by, owners of copyrights in connection with
particular programs.

We
re-transmit certain foreign channels which are broadcast by third parties. These foreign
channels may purchase rights from third parties to broadcast particular programs.
According to a recent final ruling of the Israeli Supreme Court in a further hearing, the
re-transmission by us of programs broadcast by the foreign channels may constitute an
infringement of the rights of the copyright owners of such programs if they did not
consent to the re-transmission of their programs into Israel. As a result of this ruling,
we may be required to reach royalty arrangements with the owners of the copyrights of such
programs prior to their re-transmission, in addition to the arrangements we reach with the
foreign channels. This could increase our programming costs. In addition, we could be
subject to lawsuits by the owners of copyrights in programs broadcast by the foreign
channels. If we are found to have violated the copyrights of third parties, we could also
be subject to regulatory sanctions. In the ruling, the Supreme Court called upon the
Israeli legislators to amend the Copyrights Law to address this issue. We have been
informed that the legislature has published a draft amendment to the Copyrights Law to
address certain aspects of the foregoing issues; however, we cannot predict if and when
the legislators will complete this process and what shall be the final version of such
amendment, nor can we currently predict the magnitude of our exposure to increased royalty
obligations and lawsuits relating to programs broadcast by the foreign channels we offer.

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The proposed reduction in
royalties by the Ministry of Communications and the Ministry of Finance could have an
adverse effect on our ability and HOT Telecoms ability to compete in the market.

According
to a letter dated April 20, 2005, which was sent by the Ministry of Finance and the
Ministry of Communications to the Manager of the Government Companies Authority in Israel,
the Ministries intend to reduce the percentage of royalties paid to the State of Israel by
the holders of the international communication licenses and the holders of domestic fixed
communication services licenses. The amount of the reduction is 0.5% per year commencing
on January 1, 2006 up to a percentage of royalties of 1% in the year 2010. The execution
of this reduction is conditioned on the amendment of the Communication Regulations
(Royalties), the approval of the Minister of Communications and the Minister of Finance,
and the approval of the Finance Committee of the Knesset. This intended reduction will
supplement an additional reduction already made with regard to holders of cellular
telecommunication licenses.

The
said position does not include the field of multi-channel broadcasting. Therefore, in the
event the reduction will be implemented as detailed above, we will not be able to benefit
from it. In addition, although HOT Telecom may benefit from the intended reduction in its
activity as a provider of infrastructure services, this reduction will not be significant
due to the fact that HOT Telecom is a new operator with relatively low revenues.
Furthermore, such a reduction in the percentage of royalties may be of more significance
to HOT Telecoms competitor.As such, the reduction in royalties, as proposed, could
have an adverse effect on our ability as well as HOT Telecoms ability to compete in
the market.

Pursuant to tax assessments made
by the Israeli Income Tax Authority, we may be required to pay significant additional
taxes in respect of past years.

We
received tax assessments from the Israeli Income Tax Authority. For details, please see
Item 8A. Financial Information  Consolidated Statements and Other Financial
Information  Legal and Arbitration Proceedings. If, as a result of any of
these tax assessments, we are required to pay significant additional amounts of taxes to
the Israeli Income Tax Authority, our results of operations would be materially affected.

We may be required to pay stamp
duty on agreements executed by us on or after June 1, 2003, which would increase our
taxes.

The
Israeli Stamp Duty on Documents Law, 1961 (the Stamp Duty Law), provides that
most documents signed by Israeli companies are subject to a stamp duty, generally at a
rate of between 0.4% and 1% of the value of the subject matter of such document. De facto,
it has been common practice in Israel not to pay such stamp duty unless a document is
filed with a governmental authority or with the courts. As a result of an amendment to the
Stamp Duty Law that came into effect on June 1, 2003, the Israeli tax authorities have
approached many companies in Israel and requested the disclosure of all agreements signed
by such companies after June 1, 2003 with the aim of collecting stamp duty on such
agreements. The legitimacy of the aforementioned amendment to the Stamp Duty Law and of
said actions by the Israeli tax authorities are currently under review by the Israeli High
Court of Justice. Based on advice from our Israeli counsel, we believe that we may only be
required to pay stamp duty on documents signed on or after August 2004. However, we cannot
assure you that the tax authorities or the courts will accept such view. Although at this
stage it is not yet possible to evaluate the effect, if any, on us of the amendment to the
Stamp Duty Law, the same could adversely affect our results of operations.

In
January 2005, an order was signed in accordance with which the said requirement to pay
stamp duty is cancelled with effect from January 1, 2008.

Risks relating to the
market for our shares

Our ordinary shares and ADSs are
listed for trading on different markets and this may result in price variations.

Our
ordinary shares are listed for trading on the Tel Aviv Stock Exchange, or TASE, and our
ADSs are listed for trading on the Nasdaq Stock Market, or Nasdaq. Each ADS represents two
ordinary shares. Trading in our ordinary shares and ADSs on these markets is made in
different currencies (NIS on TASE and US dollars on Nasdaq), and at different times
(resulting from different time zones, different trading days and different public holidays
in the United States and Israel). Actual trading volume on Nasdaq or the TASE could be
insignificant and as such could be subject to volatility. The trading prices of our
ordinary shares and ADSs on these two markets often differ, resulting from the factors
described above, as well as differences in exchange rates. Any decrease in the trading
price of our ordinary shares on the TASE could cause a decrease in the trading price of
our ADSs on Nasdaq, and any decrease in the trading price of our ADSs on Nasdaq could
cause a decrease in the trading price of our ordinary shares on the TASE.

If our ADSs are delisted from
Nasdaq, the liquidity and price of our securities and our ability to issue additional
securities may be significantly reduced.

We
intend to delist voluntarily from the Nasdaq National Market and to terminate our American
Depositary Receipt (ADR) program in the future. Our board of directors will examine the
timing of such termination in the next few months. We intend to file a Form 15 with the
SEC to terminate the registration of the ADRs and ordinary shares, thereby suspending our
obligation to file annual and other reports with the SEC. After the delisting, our shares
will continue to trade in the TASE and we will continue to make public reports in
accordance with the Israeli securities laws and regulations.Although we only have
a limited number of record holders of our ADSs, delisting could diminish investors
interest in our securities as well as significantly reduce the liquidity and price of our
securities. Delisting may also make it more difficult for us to issue additional
securities or secure additional financing.

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Risks relating to
operations in Israel

We are subject to the political,
economic and military conditions in Israel.

We
are incorporated and based in, and currently derive all our revenues in Israel. As a
result, the political, economic and military conditions in Israel directly influence us.
Hostilities involving Israel, the interruption or curtailment of trade between Israel and
its trading partners, political instability within Israel or its neighboring countries, a
significant downturn in the economic or financial condition of Israel and changes in
Israeli laws and regulations, including taxation, are likely to cause our revenues to fall
and harm our business.

A
state of hostility, varying from time to time in intensity and degree, has led to security
and economic problems for Israel. Since October 2000, there has been an increased level of
hostilities and violence between Israel and the Palestinians, which has adversely affected
the peace process and has negatively influenced our relationship with several Arab
countries. The future effect of this deterioration and violence on the Israeli economy and
our operations is unclear. From time to time Israeli companies or companies doing business
with Israeli companies have been subject to an economic boycott initiated by several Arab
countries. This boycott or similar restrictive laws or policies directed towards Israel or
Israeli business could adversely affect us.

Due
to a continuing budget deficit of the Israeli government and the slow down of the Israeli
economy in recent years, the Israeli parliament approved, on May 29, 2003, an economic
plan that entails, among other things, budget cuts in various sources of government
spending, the increase of various tax liabilities and cuts in various social
benefits.  It is not known at this stage what impact the implementation of the
approved economic plan would have on the Israeli economy. Since we are located in, and
currently derive all of our revenues in Israel, economic events in Israel, or
uncertainties associated with such events, could adversely affect our operations and
financial results.

Our
results of operations could be negatively affected by the obligations of our personnel to
perform military service.

Certain
of our male employees are obligated to perform annual military reserve duty in Israel. In
addition, in the event of a military conflict or other attack on Israel, including the
ongoing conflict with the Palestinians, these persons could be required to serve in the
military for extended periods of time. The absence of a number of our officers and
employees for significant periods could disrupt our operations and harm our business.

Provisions of our licenses and
Israeli law could delay, prevent or make difficult a merger or acquisition or a change of
control of us and therefore depress the market price of our shares.

Our
Cable Broadcast Licenses and HeadEnd License, and the HOT Telecom Infrastructure License,
include restrictions regarding changes of means of control of the licensees.

In
addition, provisions of Israeli corporate law may have the effect of delaying, preventing
or making more difficult a merger with, or acquisition of us. The Israeli Companies Law
generally requires that a merger be approved by a companys board of directors and by
a majority of the shares present and voting on the proposed merger at a meeting called on
at least 21 days notice. For purposes of the shareholder vote, unless a court rules
otherwise, the merger will not be deemed approved if a majority of the voting rights held
by parties other than the other party to the merger (or by any person who holds 25% or
more of the shares or the right to appoint 25% or more of the directors of the other party
or its general manager) have voted against the merger. Upon the request of any creditor of
a party to the proposed merger, a court may delay or prevent the merger if it concludes
that there is a reasonable concern that, as a result of the merger, the surviving company
will be unable to satisfy the obligations of the surviving company. In addition, a merger
may not be completed unless 30 days have passed from the time in which each of the merged
companies shareholders have resolved to merge, and at least 50 days have passed
since the filing of the merger proposal signed by both parties with the Israeli Registrar
of Companies.

The
Israeli Companies Law also provides that an acquisition of shares in a public company must
be made by means of a tender offer if, as a result of the acquisition, a person would
become a holder of 25% or more of the company. This rule does not apply if there is
already another 25% shareholder of the company. Similarly, the Israeli Companies Act
provides that an acquisition of shares in a public company must be made by means of a
tender offer if, as a result of the acquisition, the purchaser would become a holder of
45% or more of the company, unless there is already another 45% shareholder of the
company. This requirement does not apply if the acquisition is made in a private placement
provided that the companys shareholders approve such private placement as a private
placement which is intended to grant the placee a holding of either (a) 25% or more of the
company, if there is not already another 25% shareholder of the company, or (b) 45% or
more of the company, if there is not already another 45% shareholder of the company. In
addition, this requirement will not apply upon the purchase of shares from either (i) a
holder of 25% or more of the company which results in a person becoming a holder of 25% or
more of the company or (ii) a holder of 45% or more of the company which results in the
purchaser holding more than 45% of the company. The tender offer must be extended to all
shareholders, but the offeror is not required to purchase more than 5% of the
companys outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
companys outstanding shares will be acquired by the offeror and (ii) the number of
shares tendered in the offer exceeds the number of shares whose holders objected to the
offer. Shares that are acquired in violation of this requirement to make a tender offer
will be deemed treasury shares and will have no rights whatsoever for so long
as they are held by the acquirer. If, as a result of an acquisition of shares, the
acquirer will hold more than 90% of a companys outstanding shares, the Israeli
Companies Law requires that the acquisition be made by means of a tender offer for all of
the outstanding shares. If less than 5% of the outstanding shares are not tendered in the
tender offer, all the shares that the acquirer offered to purchase will be transferred to
it. The Israeli Companies Law provides for appraisal rights if any shareholder files a
request in court within three months following the consummation of a full tender offer. If
more than 5% of the outstanding shares are not tendered in the tender offer, then the
acquirer may not acquire the shares in the tender offer that will cause his shareholding
to exceed 90% of the outstanding shares.

Finally,
Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an
Israeli company and a foreign company less favorably than U.S. tax laws. For example,
Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his
ordinary shares for shares in another corporation to taxation prior to the sale of the
shares received in such stock-for-stock swap.

These
provisions of our licenses and of the Israeli corporate and tax law (and the uncertainties
surrounding such laws) may have the effect of delaying, preventing or making more
difficult a merger or acquisition or change of control of us, and depress the market price
of our ordinary shares which otherwise might rise as a result of such a change of control.

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It may be difficult to (i) enforce
a U.S. judgment against us, our officers and directors and our Israeli auditors, (ii)
assert U.S. securities laws claims in Israel, and (iii) serve process on substantially all
of our officers and directors and these accountants.

We
are incorporated in Israel. Substantially all of our executive officers and directors and
our Israeli auditors are nonresidents of the United States, and a substantial portion of
our assets and the assets of these persons are located outside the United States.
Therefore,service of process upon our directors and officers named herein may be
difficult to effect within the United States because some of these people reside outside
the United States. Any judgment obtained in the United States against us or these
individuals or entities may not be enforceable within the United States.

There
is doubt as to the enforceability of civil liabilities under the Securities Act and the
Securities Exchange Act in original actions instituted in Israel. However, subject to
specified time limitations, Israeli courts may enforce a U.S. final executory judgment in
a civil matter, provided, inter alia, that:

| |  | adequate
service of process has been effected and the defendant has had a reasonable
                opportunity to be heard;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment and its enforcement are not contrary to the law, public policy,
                security or sovereignty of the State of Israel;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment was obtained after due process before a court of competent jurisdiction
                according to the rules of private international law prevailing in Israel;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment was not obtained by fraudulent means and does not conflict with any
                other valid judgment in the same matter between the same parties;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
action between the same parties in the same matter is not pending in any Israeli
                court at the time the lawsuit is instituted in the U.S. court; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. court is not prohibited from enforcing the judgments of Israeli courts.
| | - | --------------------------------------------------------------------------------

If
a foreign judgment is enforced by an Israeli court, it generally will be payable in new
Israeli shekels, which can then be converted into non-Israeli currency and transferred out
of Israel. The usual practice in an action to recover an amount in non-Israeli currency is
for the Israeli court to render judgment for the equivalent amount in new Israeli shekels
at the rate of exchange on the date of payment, but the judgment debtor also may make
payment in non-Israeli currency. Pending collection, the amount of the judgment of an
Israeli court stated in new Israeli shekels ordinarily will be linked to the Israel
Consumer Price Index plus interest at the annual rate (set by Israeli law) prevailing at
that time. Judgment creditors bear the risk of unfavorable exchange rates.

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|        |                           
|------- | --------------------------
|ITEM 4. | INFORMATION ON THE COMPANY

4A.    HISTORY AND DEVELOPMENT OF THE COMPANY

We
were incorporated as Matav-Cable Systems Media Ltd. under the laws of the State
of Israel on June 28, 1987. Our
principal executive offices are located at 42 Pinkas Street, North Industrial Area, Netanya 42134,
Israel (telephone: +972-9-860-2160).
Our website address is www.hot.net.il. Our agent for service of process in the United States is Puglisi
& Associates, 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware
19715.

We
are one of three operators and providers of broadband cable television services
in Israel. The other two cable
television operators are Tevel Israel International Communications Ltd. Group,
or Tevel, and Golden Channels & Co. Group, or Golden Channels. We market
our cable television services and engage in content-related activities and
other telecommunication activities together with Tevel and Golden Channels
under the brand name HOT.

In
order to strengthen the cooperation of the three Israeli cable television
operators, we, Tevel and Golden Channels agreed to perform an operational
merger in June 2004. To this effect, a joint management was appointed to
oversee the joint operation of the marketing, sales, engineering, customer
service, operations and information systems activities of the three cable
television operators. The joint management conducts and manages the Companys
activities in the ordinary course of business in the areas of the joint activities. Material decisions applicable to the
operational merger require our approval as well as the approval of Tevel and
Golden Channels. Our approval is
subject to the decision of our board of directors and other corporate bodies,
as required by law. Since the
appointment of the joint management and the commencement of the operational
merger, we, Tevel and Golden Channels have operated jointly on a regular
basis. The three cable television
operators have agreed in principle that the allocation of the expenses deriving
from the joint activity among themselves shall be proportional to the number of
subscribers of each party. The
operational merger does not include transfer of assets from any of the three
cable television operators to a merged entity or from any of the three cable
television operators to another cable operator. Each of the three cable television operators remains the sole
owner of its assets and is entitled to the revenue generated from its own
subscribers. Furthermore, the joint
activity does not include transfer of liabilities owed to third parties,
including, inter alia, banks or other creditors.

Prior
to the grant of our licenses in 2002, we operated pursuant to five exclusive
franchises granted to us by the Israeli Ministry of Communications to provide
cable television services in franchise areas, which covered approximately 25%
of Israels households. As of December
31, 2004, we provided cable television services to approximately 26.7% of all
cable television subscribers in Israel. We own substantially all of our cable
television network infrastructure. Our
exclusive franchises covered four operating areas, three of which included the
major metropolitan areas of Bat-Yam  Holon, Haifa, and Netanya  Hadera, and
one of which served the less densely populated area of the Galilee. Our exclusive franchises were subsequently
cancelled and replaced by general non-exclusive long term broadcast licenses
covering the same geographical areas. Our subscriber penetration is highest in
the metropolitan operating areas.

We
operate both directly and through subsidiaries in various fields of
communications. We began serving cable
television subscribers in 1990. We have
adopted a growth strategy that combines core activities in the multi-channel
television market, based on state-of-the-art technology, with the use of cable
television infrastructure. The total
number of our cable television subscribers was approximately 257,344 as of
December 31, 2004, compared to approximately 266,700 as of December 31, 2003
and approximately 275,000 as of December 31, 2002. Cable television subscriber penetration has decreased by
approximately 4% during the same period. In April 2002, we started to offer a
commercial service of access to High Speed Internet over cable.

Our
aggregate revenues (including revenues from cable television and access to High
Speed Internet residential subscribers) have increased from approximately NIS
495.5 million as of December 31, 2002 to approximately NIS 545.5 million as of
December 31, 2003 and approximately NIS 584.6 million as of December 31,
2004. During the same period, our
operating loss and net income was approximately NIS 98.7 million and
approximately NIS 33.8 million, respectively, for the year ended December 31,
2002, and an operating loss and net loss of approximately NIS 7.8 million and
approximately NIS 5.5 million, respectively, for the year ended December 31,
2003, and an operating income and net loss of approximately NIS 3 million and approximately
NIS 83 million, respectively, for the year ended December 31, 2004. EBITDA has
increased from approximately NIS 56.7 million for the year ended December 31,
2002 to approximately NIS 147.0 million for the year ended December 31, 2003
and decreased to approximately NIS 139.6 million for the year ended December
31, 2004. (Since the results for the year 2003 do not include proportional
consolidation with HOT Vision, for comparison purposes, the EBITDA is presented
assuming no consolidation with HOT Vision.)

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Through
December 31, 2004, we have invested approximately NIS 2,119 million
(approximately US$ 491.9 million) in the build-out of our cable television
network within our license areas and in other fixed assets. In July 2002, we and the other two Israeli
cable television operators, Tevel and Golden Channels, submitted a request to
receive a license to provide domestic fixed communications services. In October 2003, we and the other two Israeli
cable television operators, acting through affiliates, entered into an
agreement, as amended in November 2003, for the establishment of AMAT Telecom
L.P., now known as HOT Telecom L.P., which would engage in the establishment
and operation of a public telecommunications network based on the cable network
of the cable television operators by which it will supply domestic-fixed
telecommunications services.

In
November 2003, the Ministry of Communications granted HOT Telecom the HOT
Telecom Infrastructure License covering
the same services covered by our Telecommunications Infrastructure License (to
be supplied within the time frames set forth in the Telecommunications
Infrastructure License), and also including the requirement to start to provide
other services over cable networks including basic telephony services to
subscribers by no later than November 25, 2004. The HOT Telecom Infrastructure License replaced and cancelled
our Telecommunications Infrastructure License. HOT Telecom provides the following services: access to High Speed
Internet over cable services, various data telecommunications services and
various data transmission services and Infrastructure services. As of the end of November 2004, HOT Telecom
has gradually commenced to provide commercial domestic fixed telephony
services.

In
November 2004, we concluded
preliminary discussions to acquire the cable and communications assets of
Tevel. If this transaction is
completed, we would have over 560,000 cable subscribers, representing
approximately 60% of the Israeli cable market, and we would hold 35% of Golden
Channels, subject to certain terms. We
have not signed a binding agreement with Tevel, and cannot be certain that this
transaction will be completed, or if completed, on what timeframe or on what terms
and conditions, including price. If
this transaction were to take place, we would likely incur or assume
substantial additional indebtedness.

We
have expanded our telecommunications activities by investing in Barak I.T.C.
(1995)  The International Telecommunications Services Corp. Ltd., or Barak, an
international telephony service provider in Israel, and in Partner
Communications Company Ltd., or Partner, one of four licensed providers of
mobile cellular telephone services in Israel, and one of the two providers
using the global system for mobile telecommunications, a comprehensive digital
standard for the operation of all elements of a cellular telephone system,
known as GSM. For more information on
Barak and the recent settlement with Baraks creditors, see Item 4B. Business
Overview  International Telecommunication Services.

As
of April 2002, we beneficially held, through Matav Investments Ltd.,
approximately 15.2% of Partners issued and outstanding shares. Following the sale of shares in Partner in
April 2002, November 2003 and April 2005, we beneficially own approximately
1.2% of Partners issued and outstanding shares.

We
intend to delist voluntarily from the Nasdaq National Market and to terminate
our American Depositary Receipt (ADR) program in the future. Our board of directors will examine the
timing of such termination in the next few months. We intend to file a Form 15 with the SEC to terminate the
registration of the ADRs and ordinary shares, thereby suspending our obligation
to file annual and other reports with the SEC.
After the delisting, our shares will continue to trade in the TASE and
we will continue to make public reports in accordance with the Israeli
securities laws and regulations.

Important
events in the development of the cable television and telecommunications
industry and our business

Overview

Television
broadcasting in Israel began in 1967 through one off-air government controlled
channel, known as Channel 1. In 1993,
private operators commenced regular commercial broadcasts of a second off-air
channel, known as Channel 2, and later, an additional channel, the Israeli
Knesset Channel. In April 2000, the Ministry of Communications approved the
establishment of a second commercial channel (Channel 10), which began
broadcasting at the beginning of 2002.

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In
1989, we, together with the other cable television operators, formed I.C.P.
Israel Cable Programming Company Ltd., or ICP, for the purpose of jointly purchasing
and producing our local cable channels, which then consisted of four channels:
family, now known as HOT 3, movies, now
known as HOT Movies, sport, and childrens.
The culture & science channel was later added. In January 2004, ICP changed its legal name
to HOT Vision Ltd. Today, HOT Vision
Ltd., or HOT Vision, creates, produces and acquires content for only two
channels (HOT 3 and HOT Movies), and independent producers produce the other
three channels. For a discussion regarding HOT Vision, please see Item 4B.
Business Overview  HOT Vision and Cooperation of Cable Television Operators in
Production of Broadcasting.

In
1990, the Ministry of Communications began issuing exclusive franchises to
operate cable television systems in various geographical areas in Israel.
Pursuant to amendments to the Telecommunications Law in 2001 the exclusive
franchises were replaced by a system of general non-exclusive long term
broadcast licenses, broadcasting HeadEnd licenses, and general non-exclusive telecommunications
infrastructure licenses, all of which we have been granted. In November 2003, our Telecommunications
Infrastructure License was replaced and cancelled by the HOT Telecom
Infrastructure License. Please see the
discussion regarding the HOT Telecom Infrastructure License in Item 4B.
Business Overview  Domestic Fixed Communications.

Direct
Broadcasting by Satellite and Developments regarding YES

On
January 5, 1998, the Israeli parliament approved an amendment to the Telecommunications
Law, which allows the Ministry of Communications to grant licenses for
distribution of direct broadcast by satellite (DBS) services to subscribers.
The Ministry of Communications granted D.B.S. Satellite Services (1998) Ltd.,
or YES, a license for the provision of television broadcasts to subscribers via
satellite, and YES commenced DBS broadcasting in July 2000. The development of competition to cable
television services by the commencement of DBS broadcasting has adversely
affected our business. Following a
dispute arising out of the grant of the license to YES, and in consideration
for the recognition by the government of our ownership of the cable television
network infrastructure, in July 2001, the cable television operators entered
into an agreement with the State of Israel pursuant to which the cable
television operators, including us, undertook not to bring any claim in the
future regarding the grant of a license to YES, and to make certain payments to
the government over a 12 year period, commencing January 1, 2003.

On
September 13, 2000, we, together with the other Israeli cable television
operators, entered into an agreement with YES, under which we and the other
cable television operators granted YES a non-exclusive permit to use our Inside
Wiring for the transfer of satellite broadcasts (multi-channel television and
interactive channels only); and YES granted the cable television operators a
non-exclusive permit to use its Inside Wiring for the transfer of cable
television broadcasts (including any other service provided by the cable
television operators). This agreement
has since been terminated by YES, and in place of that agreement, in September
2001 the Minister of Communications issued administration directives, which were
amended effective as of February 3, 2002, governing the reciprocal use of
Inside Wiring between the cable television operators and YES. The directives establish instructions
regarding the procedures of transition for cable television subscribers to become
subscribers to YES and vice versa.
These directives also provide that YES shall pay fees to the relevant
cable television operators for the use of their Inside Wiring, and that the
cable television operators shall pay fees to YES for the use of its Inside
Wiring. The directives stipulate what
such amounts should be. In addition,
the Minister of Communications has the authority to issue directives regarding
the common use of the Inside Wiring by both YES and by the cable television
operators, with regard to the provision of different services by each
party. The Ministry of Communications
conducted a hearing regarding the common use of Inside Wiring. To date, the
Ministry has not issued directives regarding this matter. In January 2004, we
and the other cable television operators reached an agreement with YES
according to which YES will pay the aggregate amount of NIS 7.3 million (not
including VAT) in consideration for the use of Inside Wiring for the period
from January 2002 through December 2004.
We are entitled to 26.6% of that amount. We, the other cable television operators and YES attempted to
reach an understanding regarding the terms for YESs use of our Inside Wiring
during 2005 and thereafter; however, this attempt was unsuccessful. On May 30, 2005, the cable television
operators sent a letter to YES requesting that YES pay for the months of
January to May 2005 in an amount equal to NIS 1.5 million, including interest
and linkage differentials. On June 7,
2005, YES responded to the request, refusing to pay such amount and instead,
suggesting to continue in negotiations in order to resolve the dispute. We are examining what additional procedures
we may pursue.

In
addition, the Telecommunications Law permits a person in residential premises
to purchase from the service provider the Inside Wiring installed in the
persons premises.

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Digital
Broadcasting

We
commenced digital broadcasting in July 2001, pursuant to approvals from the
Council for Cable and Satellite Broadcasting, or the Council, and the Ministry
of Communications. These approvals
allow us to broadcast in a digital format our analog basic package channels and
Pay-Per-View services, as well as other channels that have been subsequently
approved for digital broadcast. These
approvals include authorization to provide electronic program guide services,
commonly referred to as EPG services.

We
informed the Ministry of Communications that we would provide digital set-top
boxes to our subscribers principal connection according to actual demand as
follows: up to 100,000 set-top boxes will be provided in 2001; 70,000 in 2002,
and 60,000 in 2003. The remainder is to be provided during the year 2004. As of May 31, 2005, we have provided
approximately 258,000 set-top boxes to our subscribers. We have already purchased approximately
280,000set-top boxes. We have
entered into various agreements to purchase additional set-top boxes.

Additional
Packages and Services

As
of March 1, 2005, we market to our digital subscribers, a new marketing method
based on various combinations we offer our customers. According to the new
marketing method, our digital
subscribers, in addition to the basic package offered to them, may receive, at
their choice, for additional consideration, content-products that include a
variety of additional channels, channel
packages and additional content products and services. In addition, as of March 1, 2005, we offer
all of our subscribers a bundled package of our cable television offerings,
access to High Speed Internet and telephony services (available only to
subscribers in the areas where HOT Telecom has commenced providing telephony
services) into a Triple Play offer.
For more information about these services, see Item 4B Business
Overview  Additional Packages and Services.

Pay-Per-View,
Video On Demand and Personal Video Recorder

We
began offering Pay-Per-View services in October 2000. Pay-Per-View services are governed by our Cable Broadcast
Licenses. As of January 2005, we have
gradually provided Video on Demand, or VOD, services on a commercial basis. We
intend to commence providing Personal Video Recorder, or PVR, services in July
2005. For more information about these
services, see Item 4B Business Overview  Products and Services.

High
Definition Services

We
recently commenced offering our subscribers an additional unique channel based
upon high definition technology. For
more information about these services, see Item 4B Business Overview 
Products and Services.

Internet
Services

We
received a license to provide ordinary dial-up Internet services in February
2000, and we commenced such services in April 2000. In parallel, we began to
offer our subscribers access to High Speed Internet over cable on a trial
basis, pursuant to a trial license.

According
to the HOT Telecom Infrastructure License granted in November 2003 and amended
on March 16, 2005, access to High Speed Internet services shall be provided
through HOT Telecom. Specifically, pursuant to the March 2005 amendment, from
the date of the grant of the HOT Telecom Infrastructure License and until the
consummation of the merger amongst the cable television operators, HOT Telecom
shall be entitled to contact with subscribers, including subscribers of the
former infrastructure licensees of the cable television operators for the
provision of access to High Speed Internet services through the former
infrastructure licenses of the cable television operators, including our
subsidiary Matav Infrastructure 2001 L.P., and the provision of the said
service shall be deemed as a service rendered by HOT Telecom and the HOT
Telecom Infrastructure License provisions shall apply. Please see the discussion regarding the HOT
Telecom Infrastructure License in Item 4B. Business Overview  Domestic Fixed
Communications Services. As of
December 31, 2004, we provide access to High Speed Internet over cable services
to 88,324 residential subscribers.

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Ownership
of Cable Infrastructure and Payments to the State of Israel

In
light of the contention of the Ministry of Finance according to which,
following the expiration of the cable television operators franchises, the
cable television operators should pay the State of Israel appropriate
consideration for the grant of a right to continue to provide multi-channel
television services to subscribers, as well as other telecommunications
services over the cable network, the cable television operators, including
ourselves, came to an agreement with the State of Israel dated July 2001, in
which we undertook, among other things, to make certain payments to the
government over a 12-year period, and in consideration, each cable television
operator received recognition by the government of its ownership of its
respective cable television network infrastructure. Subsequent amendments to the Telecommunications Law adopted that
agreement. The material terms of the
agreement provide that:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | Each cable television operator shall make payments
  to the government over a period of 12 years commencing on January 1, 2003,
  equal to its pro rata portion of a sum determined by multiplying certain
  accumulated income of all the cable television operators, including certain
  income derived from the use of cable infrastructure, by a percentage which is
  between 0% and 4%, increasing gradually according to the amount of such
  income. In the July 2001 agreement,
  it was agreed that our pro rata portion would be 24.1%, until agreed
  differently by all of the cable television operators.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | Each cable television operator shall pay the State
  of Israel in the 12-year period up to 12% of its income from the sale of any
  activity related to the cable infrastructure or a right related to such
  activity, and the sale of certain assets as set forth in the agreement.                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | The Israeli government (subject to payment of
  payments by the cable television operators) undertook to waive any of its
  rights or claims regarding the ownership of the cable infrastructure.                                                                                                                                                                                                                                                                                                                                                                                                                      

As
a result, each cable television operator is deemed to own all the rights to the
cable network infrastructure in its license areas, and the right to operate it
is subject to applicable law, following the expiration of the previous
franchises.

In
March 2003, the cable television operators approached the Israeli Ministry of
Finance with a request to defer for one year the commencement of payments due
under the July 2001 agreement. In April
2004, this request was rejected by the Accountant General of the State of
Israel, and the Accountant General of the Ministry of Communications demanded
that we pay all amounts outstanding in respect of 2003 and the first quarter of
2004 by May 31, 2004. On June 6,
2004, we reached an agreement with the
Accountant General of the State of Israel regarding the terms of payment of our
obligations in respect of 2003. We
agreed to pay the amount owed in seven equal quarterly installments, beginning
on July 21, 2004, and ending on January 21, 2006. The amounts outstanding with respect to 2003 are linked to the
Israeli Consumer Price Index, and will bear annual interest at the rate of
5.9%. As of the date of this annual
report, we have already paid 4 installments.

The
July 2001 agreement, and its codification into law by way of amendments made to
the Telecommunications Law, will continue to be in effect if the cable
television operators consummate their proposed merger. Please see the discussion of the proposed
merger below.

Proposed
Merger of the Israeli Cable Television Operators

As
of 2001, the cable television operators are acting in order to merge their
activities. The purpose of the merger, among other things, is to enable us to
provide additional telecommunications services, to increase our ability to
compete successfully with Bezeq in the field of domestic fixed line services,
including telephony, and, to cooperate in various areas, including purchase of
content, marketing, sales and unified networks and effect substantial cost
savings. The consummation of the merger
is subject to reaching an agreement with the major Israeli banks and the other
creditors of the merging entities addressing among other things, the assignment
of certain of the current debts and securities to the merged entity, and its
future financing, and receipt of approvals required under applicable law,
including the approvals of the Income Tax Commission, the Council, the
Controller of Restrictive Business Practices, or the Controller, and the
Israeli court. To date, we have
received approvals, subject to certain terms and conditions, from the Council,
the Controller and the Income Tax Commission.
Subject to the final terms of the merger, further approval of the Income
Tax Commission to the merger may be required.
See Item 4B. Business Overview  Arrangement for a Merger of the Cable
Television Operators.

In
February 2003, we and the other Israeli cable television operators agreed on a
final version of an agreement outlining the structure and conditions of a
merger between us, including, inter alia, the terms of the agreement between
the shareholders. The merger agreement,
if, and when, it will be signed, will add to and broaden the terms of the
previous arrangement between the parties executed on December 31, 2001, which
cancelled and replaced previous arrangements between the parties. The parties have agreed that if the final
version of the merger agreement has not been signed by July 31, 2003, or a later
date agreed upon by the parties, the provisions of the agreement will not
apply, the parties shall not have any claim or suit towards another party with
respect to the proposed merger agreement and/or the shareholders agreement, and
shall be free to act independently or together with others, without any
limitation. To date, the agreement has
not been signed.

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According
to the position of the Supervisor of Banks, the merger of the cable television
operators and the formation of a merged cable entity would constitute a deviation
from the directives of the Bank of Israel and of Proper Bank Management
Directives of the Supervisor of Banks regarding, among other things,
restriction on debt amounts to a Group of Borrowers as such term is defined
in the Proper Bank Management Directives.
The relevant directives deal with certain limits applicable to loan
amounts given by banking corporations to Sole Borrower and/or Group of
Borrowers and as a result, attribution of the merged companys debts, among
other things, to an indirect controlling shareholder of us and the other cable
television operators.

Since
the date of the approval of the Controller to the merger on April 22, 2002, we,
Tevel and Golden Channels cooperate in most of our areas of activities,
including but not limited to marketing and content related activities, and
since the end of 2003 we carry out these activities under the brand name HOT.

In
order to strengthen the cooperation of the three Israeli cable television
operators, we, Tevel and Golden Channels agreed to perform an operational
merger in June 2004. To this effect, a joint management was appointed to
oversee the joint operation of the marketing, sales, engineering, customer
service, operations and information systems activities of the three cable
television operators. The joint management conducts and manages the Companys
activities in the ordinary course of business in the areas of the joint
activities. Material decisions
applicable to the operational merger require our approval as well as the
approval of Tevel and Golden Channels.
Our approval is subject to the decision of our board of directors and
other corporate bodies, as required by law.
Since the appointment of the joint management and the commencement of
the operational merger, we, Tevel and Golden Channels have operated jointly on
a regular basis. The three cable
television operators have agreed in principle that the allocation of the
expenses deriving from the joint activity among themselves shall be
proportional to the number of subscribers of each party. The operational merger does not include
transfer of assets from any of the three cable television operators to a merged
entity or from any of the three cable television operators to another cable
operator. Each of the three cable
television operators remains the sole owner of its assets and is entitled to
the revenue generated from its own subscribers. Furthermore, the joint activity does not include transfer of
liabilities owed to third parties, including, inter alia, banks or other
creditors.

Domestic
Fixed Communications Services

We
beneficially own approximately 26.6% of the rights in HOT Telecom. We and the
other two cable television operators committed to provide access to our cable
networks to HOT Telecom on terms and conditions to be determined. Furthermore, we agreed that if, during the
36 months following the date of signature of the partnership agreement our
cable broadcasting and communications operations would be merged, the holdings
of the parties in HOT Telecom, including the operations of HOT Telecom would be
transferred to the merged entity for no consideration. HOT Telecom is obligated to invest in fixed
line telephony cable infrastructure an aggregate of not less than NIS 350
million, that shall be invested as follows: not less than NIS 190 million until
June 30, 2005, not less than NIS 160 million until June 30, 2006 and any other
amount as shall be required for the fulfillment of its business plan for the
provision of telephony services which fully compete with those of Bezeq. The Companys portion of the said investment
(NIS 350 million), pro rata to its proportionate share in HOT Telecom, is
estimated to be approximately NIS 93 million.

In
October 2003, the limited partners of HOT Telecom also entered into an
agreement to establish AMAT Telecom Ltd. to serve as general partner of HOT
Telecom (with a 1% interest). On April 14, 2004, AMAT Telecom Ltd.s name was
changed to HOT Telecom Ltd. We
beneficially own approximately 26.6% of HOT Telecom Ltd., and have the right to
appoint two out of six directors to HOT Telecom Ltd.s board of directors. This
agreement includes provisions relating to the taking of decisions, distribution
of profits and income, limitations on the transfer of rights in HOT Telecom
Ltd. and the obligations of the three cable television operators to afford
access to their cable networks to HOT Telecom and HOT Telecom Ltd.

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The
abovementioned two agreements were made conditional upon the Israeli court
overseeing Tevels insolvency proceedings approving the entrance into such
agreements by Tevel. On November 24, 2003, Tevels trustee notified the court
of, among other things, these agreements. To date, no decision, response or
instruction has been received from the Court with respect to the approval of
Tevels entrance into these agreements. As of January 8, 2004, all of the
approvals that were required in order for the arrangement of creditors of Tevel
to become effective had been obtained, and accordingly the arrangement of
creditors entered into effect. According to this arrangement, Tevel has reached
agreement with its unsecured creditors, which has resulted in the settlement of
all of the debts. According to the
agreement reached with the secured creditors, Tevels shares and remaining
assets are subject to the right of Tevels secured creditors which are banks to
realize these shares and assets to cover Tevels debts to these secured
creditors.

On
September 17, 2002, the Minister of Communications adopted, with certain
changes, the recommendations of a committee formed by the Ministry of
Communications for the establishment of policies and rules for the opening of
competition in the field of domestic fixed communications services, as the
guiding principles in this field. In
order to implement the committees recommendations, the Israeli parliament
approved an amendment to the Telecommunications Law at the end of May
2003. Under this amendment, as of
September 1, 2004, the Minister may grant a special general license for
domestic fixed telecommunications services without imposing on the holders of
such licenses the obligation to provide their services to the entire public
throughout the entire country or in any specifically defined area in
Israel. The Ministry of Communications
published the language of the special general license. In June 2004, the Ministry published new
regulations setting forth the conditions and procedures for obtaining a special
general license for domestic fixed telecommunications services. Under the said
regulations, any applicant may be granted with such a license, provided it is
able to comply with several basic conditions which are listed in the said
regulations.

On
November 30, 2004, the Ministry of Communications issued policy principles to
license the provision of telephony services by Voice-Over Broadband access
(VoB) (the policy principles). Pursuant to the policy principles, the
provision of fixed-domestic VoB services shall be organized in the context of a
unique domestic operator license, according to which the provision of telephony
services is to be performed by VoP technology while using the broadband access
of a domestic operator (currently Bezeq or HOT Telecom). According to the
policy principles, licenses to provide VoB services shall be granted in 2005 in
a manner that the commencement of operations by virtue of the licenses shall be
feasible on May 1, 2005. It was further determined that for the time being, an
owner of VoB license shall not be charged to pay the domestic operator for
using the domestic operators network. The Ministry, in its policy principles,
noted that it intends to complete soon the policy on the provision of VoB
services by broadband access network of cellular operators. In addition, the
policy principles indicated that Bezeq shall be entitled to provide VoB
services at the earlier of May 1, 2007 or after its customer segment in the
area of the fixed-domestic telephony (business or private segments) shall
decrease below 85%, and a subsidiary of Bezeq shall be able to provide VoB
services subject to restrictions stipulated in the unique domestic operators
regulations.

Following
the policy principles and as a result of applications by Bezeq and HOT Telecom,
the Ministry of Communications, on December 29, 2004, sent a letter to various
parties including Bezeq and HOT Telecom thereby enabling them to present their
position with respect to the ramifications of the policy principles on them and
with respect to the manner and the timing of Bezeqs participation in the
provision of VoB services, directly or through a subsidiary. In a reply to the
Ministry of Communications, HOT Telecom filed a detailed status paper in which
it demanded to revoke the policy principles alleging that they constitute a
deviation from the policy to organize the communications market in Israel on a
facilities based competition and that the resolution of the Ministry of
Communications to enable the provision of VoB services while using the domestic
operator infrastructures constitutes an illegal impairment of the proprietary
right of the infrastructures owner. In addition, it was alleged that the
resolution pursuant to which the VoB operator shall not be charged with a
payment for using the domestic operators infrastructure lacks authority and is
devoid of reasonableness and results in economic distortions and the ministry
is required to enable the payment of access fees to the domestic operator for
using its infrastructures for providing the VoB service. Alternatively, HOT
Telecom requested to adjourn the date for granting the VoB licenses until after
HOT Telecom shall reach a market segment of 5% of the fixed-domestic telephony
industry. In addition, HOT Telecom claims that the resolution of the Ministry
of Communications to enable the use in the domestic operators infrastructures
to provide cellular VoB service without, at the same time, enabling HOT Telecom
to provide VoB service over the cellular infrastructures, is unreasonable and
discriminatory amongst the operators.

Following
a hearing held by the Ministry of Communications regarding its policy
principles, on April 20, 2005, the Ministry of Communications notified HOT
Telecom, in writing, that it is considering to amend its policy principles,
thus, enabling Bezeq or a subsidiary on its behalf to provide VoB services in
the event that Bezeqs share of the fixed domestic telephony market, in the
business or private segments, shall decrease below 85%. In addition, the
Ministry of Communications notified HOT Telecom of its intention to establish
two testing points, the first to be established in November 2006 and the second
to be established in November 2007, in which, the possibility to allow Bezeq or
a subsidiary on its behalf to provide VOB services shall be examined, even if
Bezeqs share market has not decreased below 85%. In its response to the
letter, HOT Telecom, has repeated its previous position, according to which,
Bezeq or a subsidiary on its behalf should not be allowed to provide VOB
services, as long as Bezeq constitutes a monopoly in the fixed domestic
telephony market, that is, so long as Bezeq holds 50% of the fixed domestic
telephony market. In addition, HOT Telecom expressed its rejection to the
establishment of the testing stations.

27

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Pursuant
to the abovementioned regulations
and policy principles, the Ministry has granted several special marketing
licenses for experimental provision of fixed line telephony services by broadband access (VoB), inter alia,
to ISP, cellular and international communications licensees.

In
March 2004, the Minister announced its new policy with respect to Bezeqs
general license. Specifically, the policy provides that Bezeq may offer
discounts for size at a rate of up to 10% and may request to amend its license
in a manner that it will be able to market bundled services when its market
share of the fixed domestic telephony industry (residential or business
customers) decreases below 85% or if the competitive status of Bezeqs
subsidiary, YES, has significantly deteriorated. With regard to YES, the Minister determined that a significant
deterioration in the competitive status shall be a situation in which its
market segment in the industry of multi channel-broadcast to subscribers
decreased below 25% of all subscribers in that market. On January 9, 2005, the Minister resolved to
raise the deterioration threshold in the competitive status of YES from 25% to
29%. This policy enables Bezeq to
provide services jointly with its affiliates, which it was not allowed to do in
the past, including among other things, telephony services (local and
international), multi-channel television services, cellular services and access
to High Speed Internet services. As a result of this policy,HOT Telecom may not be able to compete
effectively with Bezeq and others, and it may not recover its significant
investments in telephony services. In
addition, the offering by Bezeq of bundled services, including multi-channel
television services through YES, may have a material effect on our ability to
supply telephony services to our subscribers and could cause us to lose
multi-channel television subscribers. Accordingly, we may suffer losses as the
result of our holdings in HOT Telecom, which would affect our results of
operations.

According
to a recent amendment to the Communications Regulations (Bezeq and
Broadcasting) (Payments for Interconnection), which, inter alia, set the Bill
and Keep arrangement, which applies between Bezeq and HOT Telecom, as
follows: Bezeq and the domestic
operator (except for a unique domestic operator and Bezeq) will not make
payments to each other for interconnection as stated in the aforesaid
regulation, and each of them will bear their costs in this respect, subject to
the fulfillment of the following cumulative conditions: (i) two years have not
yet elapsed form the date on which the domestic operator commenced providing
telephony services on a commercial basis, as the Minister of Communications
informed the concerned license holders (according to the Minister of
Communications the date applicable with respect to HOT Telecom is November 25, 2004);
and (ii) the difference between the total minutes of traffic originating in the
domestic operators aforesaid network and their destination being the domestic
operator network of Bezeq and the total minutes of traffic originating in the
domestic operators network of Bezeq and their destination being domestic
operators aforesaid network does not exceed 1,050,000,000 minutes of traffic.

Bezeq
has withdrawn a petition it submitted to the Supreme Court with respect to the
recent amendment at the recommendation of the court.

28

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4B.    BUSINESS OVERVIEW

We
operate digital and analog cable television systems and provide a variety of
channels and programs as one of three cable television operators in Israel. We
believe that Israel is and will continue to be an attractive environment in
which to provide cable television services for the following reasons:

Multi-Channel Cable
Television Market. As of December 31, 2004, there were
approximately 1.84 million homes covered by cable networks in Israel, with a
penetration rate of approximately 52.5%. The high penetration rate for
multi-channel cable television services in Israel is attributable to the high
penetration of televisions, multiple televisions in homes, and the fact that we
provide various programs and services.

Subscriber
Base. Between 2001
and 2004, the population of Israel grew at an average rate of approximately
1.8% per year. In 2004, our number of
cable television subscribers decreased. Of our cable television subscribers,
our number of digital subscribers increased, and our number of subscribers for
other services provided over cable increased.
During the same period, our number of access to High Speed Internet
subscribers increased.

Diverse
Population. The cultural and linguistic diversity of
Israels population has created a large pool of potential cable television
subscribers with different viewing needs. From 1991 through the end of 2004,
approximately 938,000 new immigrants arrived in Israel, representing
approximately 52% of the increase in Isreals population during that
period. In addition, a substantial
portion of Israels population consists of first or second-generation immigrants,
many of which we believe continue to speak the language of their country of
origin and maintain strong cultural ties to that country.

Digital
Broadcasting Services. In July 2001, we began to provide digital broadcasting services,
in addition to the analog broadcasting services which we provided all
along. We offer our digital subscribers
the digital Basic Package. In addition,
digital subscribers may receive, at their choice, for additional consideration,
content-products that include a variety of additional channels, channel
packages and additional content products and services. For additional information on the Basic
Package, please see Item 4B. Products and Services.

Growth
in the Number of Channels and Diversity of Content. We provide our subscribers with the most widely
viewed cable television broadcasts in Israel.
We continually aim to increase the number of channels we provide and
improve the diversity of content, including channels in various languages for a
large spectrum of viewers, in accordance with the perceived requirements of our
subscriber base. The following are the
new channels that we provide since January 1, 2001, most of which are subtitled
or dubbed in Hebrew or Russian, which we believe promote viewer interest in
cable television in Israel. The list is
up to date as of May 31, 2005 .

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | Added during 2001: the childrens channel (Fox
  Kids); the Indian entertainment channel (Zee TV); the Romanian
  entertainment channel (Pro TV); the youth channel (BIP); the 40 audio
  music channels; the European culture channel, (ARTE); the action channel
  (Reality); the Arabic family, sport, children movie and music channels
  (ART 1, 2, 3, 4 and 5); the entertainment channel (E!); the History
  Channel; the movie channels (HOT Drama, HOT Action, and HOT Fun); the
  movie channel (MGM); the Adventure channel (Adventure 1); the lifestyle
  channel, (The Good Life); the telenovella channel (Viva Platina); the
  sports channels (Sport 5+); and (NBA).
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | Added during 2002: the life style channel (The Mens
  Channel); the movie channel (HOT Prime), and four music channels (MTV
  Base, MTV 2, MTV Hits, and VH1 Classic); the Russian movie channel
  (MF); the news channel (Fox News); the sports channel (Eurosport); the
  economics channel (CNBC); the sports channel (Fox Sport); and 4 regional
  radio channels.                                                                                                                                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | Added during 2003: the Russian channel (NTV Mir);
  the sports channel (the Teams channel); the Russian History channel
  (History Russian); the Judaism channel (Techelet); the Playboy channel
  (reinstated); the childrens knowledge channel (Logi); and the Russian
  Telenovela channel (Romantica).                                                                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | Added during 2004 : the Academic channel; the
  General Russian channel (Moscow Open World); the Extreme sports channel;
  Home+ channel; Karma channel; the Parents channel; the Campus channel;;
  Nickelodeon channel; the TVR channel; Inter Plus channel; the Baby channel
  (Luli); and the Private Blue channel.                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | Added through May 2005: the premium series channel (X-tra
  HOT) and the High Definition channel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

29

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For
more information on the channels, see Item 4B. Business Overview 
Programming.

High
Definition. We have
recently commenced offering our subscribers a channel transmitted in High
Definition technology. For more
information about this channel, see Item 4B. Business OverviewProducts and
Services.

Additional Services. We began offering
Pay-Per-View services in
October 2000, which are commenced by digital and analog HeadEnd equipment and
received at the subscribers premises by analog and digital set-top boxes. As of January 2005, we have gradually
provided Video on Demand services on a commercial basis to our subscribers. We also intend to commence providing Personal
Video Recorder services to our subscribers in July 2005. For more information
about these services, see Item 4B. Business OverviewProducts and Services.

Interactive
Services. Since
the end of 2001, we have provided interactive services to our digital
subscribers. For more information about these services, see Item 4B. Business
OverviewProducts and Services.

Access
to High Speed Internet Over Cable Services. On April 8, 2002,
as part of our competitive activity in the telecommunications market, we began
to provide access to High Speed Internet over cable services through our
infrastructure.

Services
to the Business Sector. HOT Telecom has commenced the
marketing of additional communication services designed for businesses, such as
Internet for businesses, various data transmission services and network
services at different bit rates, including Internet Protocol Virtual Private
Network, or IP VPN, Synchronous Digital Hierarchy, or SDH, services, and IP
services . Please see the tables relating to our services to the business
sector under Item 4B. Business Overview  Services for the Business Sector.

Domestic
Fixed Line Telephony Services. As
of the end of November 2004, HOT Telecom has gradually commenced to provide
commercial domestic fixed telephony services.
For more information on HOT Telecoms domestic fixed line telephony
services, see Item 4B. Business Overview  Domestic Fixed Line Telephony
Services.

Technologically
Advanced Infrastructure. Due to the relatively recent
buildout of the cable television industry in Israel, operators utilize advanced
technologies, such as broadband, hybrid fiber optic/coaxial, or HFC, cable
networks and digital video broadcasting, or DVB, platforms. The main benefits
of using such technologies are the potential for greater capacity, increased
functionality, improved broadcasting quality, and development of two-way
communication based services. We
installed and utilize a DVB platform, and previously upgraded our HFC network
into a full two-way expanded bandwidth plant.
We successfully employ access to High Speed Internet over our cable
platform. We have upgraded our
infrastructure to allow us to provide data over cable services. The technology upgrade is compliant with the
technologies of the other parties to the proposed merger of the Israeli cable
television operators. Based on our
infrastructure, we plan to gradually implement more service layers, such as
enhanced television interactive applications and other services, which
utilize the cable television platform advantages over other alternative
platforms.

Integrated
Fiber-Optic Network. The broadband networks of the three
cable television operators in Israel are connected through nationwide fiber
optic cable links. This interconnection is currently being used for sharing
resources, for mutual back up measures and in order to create a uniform
platform for new access to High Speed Internet services provided by us, Tevel
and Golden Channels. That network also
creates an opportunity, subject to regulatory approvals, to develop and provide
subscribers throughout Israel with services such as telecommunications using
the already installed cable television infrastructure networks.

Strategy

Our
mission is to leverage our cable television infrastructure and market share to
be a leader in the Israeli telecommunications and entertainment industry. In order to achieve our mission, we are
implementing strategies designed to:

|  |                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | increase our range of video on demand and
  interactive value-added services offerings to our subscribers;                                                         
|  |                                                                                                                                                                    
|q | enhance our broadband internet services, complete
  the rollout of our new domestic fixed line telephony services and gain
  significant market share in this area;

30

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|  |                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | combine our cable television offerings, access to
  High Speed Internet and telephony into a triple play offer, with a view to
  increase revenues, reduce costs by lowering churn while increasing customer
  loyalty, and increase profitability of our operations; and
|  |                                                                                                                                                                                                                                                                            
|q | focus on our customer relations, inter alia, by
  improving the efficiency and responsiveness of our customer service.                                                                                                                                                     

Competitive
Strengths

We
believe that the following competitive strengths differentiate us from our competitors
and will assist us in achieving our mission and implementing our strategies:

|  |                                                                                                                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | state-of-the-art technology and an advanced network
  and infrastructure which we own entirely, including two-way broadband
  transmission, HFC cables, a fully developed IP network for the supply of
  broadband internet access and near completion of a brand new state-of-the-art
  telephony over cable IP network, and a fully digitalized broadcasting system;
|  |                                                                                                                                                                                                                                                                                                                                                                       
|q | a diversified and rich selection of programming
  content, including the supply of unique VOD services;                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                       
|q | high quality of broadcasting service and support for
  subscribers;                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                       
|q | bundle packages of our cable television offerings,
  access to High Speed Internet and telephony into a triple play offer;                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                       
|q | as of December 31, 2004, a large subscriber base
  which contains approximately 257,344 subscribers, constituting a penetration
  rate of approximately 52% in our license areas ;                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                       
|q | a highly experienced and dedicated management team
  and staff;                                                                                                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                       
|q | technological unique advantages comprised of wide
  bandwidth, 2-way communication, one pipe for various multiple services
  (triple play i.e., voice, data, TV,
  VOD, PVR, access to High Speed Internet, etc.), and segmented network (which
  allows reuse of bandwidth and implementation of narrowcast and Unicast
  service).;                               
|  |                                                                                                                                                                                                                                                                                                                                                                       
|q | reasonable fees for our cable television broadcast
  offerings and access to High Speed Internet over cable services, telephony
  services, and for other services; and                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                       
|q | offering various value-added services to our
  subscribers, including services targeted to the business sector.                                                                                                                                                                                                                                                       

Availability
and Sources of Programming

The
increasing availability of cable television in Israel has provided an
attractive alternative to the limited off-air television programming and the
use of video cassette recorders and DVDs. We offer cable television analog and
digital subscribers a single tier of basic service within the framework of the
analog and digital Basic Packages. We
offer our digital subscribers the possibility for additional channels and
packages within the framework of our Premium Broadcastings and services and
various marketing combinations that include the Basic Package and additional
products, according to the subscribers choosing. Two of the most popular
channels available to cable television operators in Israel are provided by HOT
Vision. The three cable television
operators in Israel currently provide the same program scheduling on all of the
channels in each of their license areas, enabling subscribers throughout Israel
to watch the same program at the same time under the brand name HOT. For information regarding the channels and
packages included in the Basic Packages and the Premium Broadcastings, see
Item 4B. Products and Services - Basic Packages and Item 4B: Products and
Services Additional Packages and Services.

We
aim to diversify and improve the content quality we provide to our
subscribers. We do so by adding new
broadcasting channels and enriching the existing ones, including the VOD
services, which offer a wide range of programming, and new interactive channels and applications.
See the discussion in Item 4B. Business Overview  Growth in the Number of
Channels and Diversity of Content.

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Products
and Services

Overview of our Cable Television Services

We
offer cable television analog and digital Basic Packages, and we offer our
digital subscribers Premium Broadcastings and a variety of channel packages and
combinations.

Subscribers
are offered access to a variety of Hebrew language programming (including
original, subtitled and dubbed), a home shopping channel, off-air channels
originating in Israel and other selected countries, and satellite television
channels. We charge subscribers an
initial installation fee of NIS 99 including VAT, and a monthly subscription
fee for the analog and the digital Basic Packages of approximately NIS
170.9-176.5 including VAT and 186.5 including VAT, respectively. We also
require a deposit of approximately NIS 99 including VAT, for the regular analog
set-top box (for those subscribers without cable-ready televisions), or NIS 198
including VAT, for the addressable analog set-top box, and a deposit of
approximately NIS 399 including VAT, for the digital settop box. We partially
refund the deposit when the set-top box is returned. The refund amount (which is linked to the Israeli consumer price
index) is reduced by 10% of the value of the set-top box for depreciation each
year or each partial year commencing from the date of installation of the
set-top box and until the date we cease to provide services to such
subscriber. Alternatively, our
subscribers may elect to lease the set-top box for a monthly fee that ranges
between NIS 9 and NIS 11 including VAT.
 We are allowed to sell the set-top
box to a subscriber, at the subscribers option, in consideration for an amount
not exceeding the value of the set-top box.
In certain marketing campaigns, we fully refund the first set-top box
given to our new customers in return for certain obligations to the
company. We also charge subscribers
fees for reconnection, installation of additional outlets in subscribers
households, and provision of cable television services on the additional
outlets. The fees set forth above
include value added tax at a rate of 17%.

Programming

We
currently transmit programming on varying numbers of channels in our operating
areas, which consists of off-air channels, local channels, satellite channels,
dedicated channels, and other channels. The tables set forth below present our
analog and digital Basic Packages and those additional channels and packages
that are included within the Premium Broadcastings, which we provide to digital
subscribersin the tiering system. For a
discussion of the risks related to programming, see Item 3. Risk Factors, and
for a discussion of certain of our costs associated with programming, see Item
5. Operating Results  Results of Operations  Operating Expenses.

We
and the other cable television operators have agreed, to pay royalties to
certain organizations representing Israeli performing artists with respect to
copyrighted materials broadcasted by the cable television operators. For the
years ended December 31, 2002, 2003 and 2004, we recorded royalties expenses
with respect to such organizations of approximately NIS 2.9 million, NIS 2.8
million and NIS 3.6 million, respectively.

Off-Air
Channels. The off-air channels we transmit to our subscribers
are the Israel Broadcast Authority channels (Channel 1, Channel 33) and Channel
2. Although subscribers can receive
transmission of these off-air channels through a household antenna or a
satellite dish, the antennae located on our HeadEnds enable subscribers to
obtain superior picture and sound quality.

Satellite
Channels. We transmit to our subscribers broadcasts of
foreign and Israeli television channels which we receive at our HeadEnds via
satellite. We pay fees for the right to transmit certain of these broadcasts.
We have not received permission to transmit the respective broadcasts from all
foreign satellite television operators whose broadcasts we transmit. However, pursuant to our Licenses, and
subject to the permission of the Council, our freedom to remove channels from
the Basic Packages is limited. The
telecommunications rules prohibit the broadcasting of channels or programs
without the consent of the original broadcaster. Furthermore, there can be no assurance that the satellite
television operators to whom we do not currently make payments will not request
payments from us in the future. In addition, a lawsuit was filed against us in
connection with these matters. See
Item 8A. Consolidated Statements and
Other Financial Information - Legal and Arbitration Proceedings.

32

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Special
Cable Television Licenses. Under the Telecommunications Law,
we are required to provide up to one-sixth of our network capacity for
broadcasting to holders of special cable television licenses for specific channels. In addition, we have allocated programming
time to broadcasting by local community organizations and the public
educational channel, which we are obliged to broadcast according to the
Telecommunications Law. With the
exception of the broadcasts by local community organizations and the public
educational channel, all such special cable television licensees are required
to pay for the use of our network capacity.
We are under an obligation to allow other broadcast license holders to
have access to our network infrastructure, within three months from the date
requested by the other licensee or producer.
According to the approval of the Controller to the proposed merger, if
we are unable to reach a commercial agreement with such broadcast licensee or
producer within 60 days, the matter must be referred to arbitration and the
arbitrator must act in accordance with the instructions of the Controller.

Shopping
Channel. In late
1995, we began transmitting a home-shopping channel, which offers products
directly to cable television subscribers, known as the Shopping Channel. The Shopping Channel is broadcast pursuant
to a special broadcast license and is provided to our subscribers as part of
the digital and analog Basic Packages.

Commercial
Advertising and Dedicated Channels. According to the Telecommunications Law, the Council may grant
special licenses to independent producers of specific dedicated cable
television channels, and such channels may be entitled to offer commercial advertising. The Economic Committee of the Israeli
Parliament, or Knesset, decided on January 27, 1998, that such dedicated
channels will be: an Arabic channel, a Jewish traditional channel, two news
channels, an Israeli music channel and one channel or more in foreign languages
for new immigrants arriving to Israel.
In 2001 and 2002, the Council selected winning bids for the tender for a
News Channel, a general Russian Channel and an Israeli music channel, all of which
are permitted to broadcast commercials.
The general Russian Channel commenced broadcasts as of November
2002. The Israeli music channel
commenced broadcasts as of June 2003.
The Council decided to cancel the license granted by it to the News
Channel as a result of the News Channels failure to timely commence
broadcasting. To date, the Arabic
channel has not commenced broadcasts.  A bid for the Jewish traditional
channel was published by the Council.
As of the date of this annual report, a bidder has not been selected.

Currently
Channel 2, Channel 10, the general Russian Channel and the Israeli music
channel are the only locally produced channels (which have commenced
broadcasting) that have permits to air commercials. Some foreign satellite channels also air commercials. In addition to
the prohibition on
broadcasting commercials on our local channels, the Telecommunications Law, as
amended, prohibits the broadcasting of commercials on channels that the Council
has decided are targeted mainly to the Israeli public, without the prior
approval of the Council. The Council
has set certain criteria regarding these stipulations.

The
approval of the Controller to the merger of the Israeli cable television
operators provides, among other things, that if the merged broadcasting entity
receives approval to air advertisements on its channels, then the Controller
shall have the power to impose additional restrictions upon the entity. We have no assurance that the merged entity
shall receive any such approval to air commercials.

Locally
Produced Programming. In
1989, together with the other Israeli cable television operators, we
established a company named ICP  Israel Cable Television Programming Company
Ltd., which is now known as HOT Vision Ltd., for the purpose of jointly
purchasing and producing content for our local channels. Today, HOT Vision creates, produces and
acquires content for two channels (HOT 3 and HOT Movies). We own approximately 26% of HOT Vision and
make payments to it based on the number of our subscribers. For the years ended December 31, 2002, 2003
and 2004, we paid HOT Vision approximately NIS 62.0 million, NIS 54.0 million
and NIS 50 million, respectively.

Local
News Broadcasts. Our
licenses also require that we provide periodic local news broadcasts in our
license area. The content of our local
news and local community programs varies in our operating areas. In accordance with the Councils decisions
of December 2002, February 2003 and June 2005, a Cable Broadcasting Licensees
are required to produce local news broadcast for five license areas through an
external producer, subject to the Councils approval. We and the other two Israeli cable television operators entered
into an agreement dated January 5, 2003, as amended on March 5, 2003, with
Todays Cable News  the Local News Company Ltd., commonly referred to as JCS,
whereby JCS shall produce local news for the cable television operators for
their respective areas.

Basic Packages

In
accordance with Israeli law and our Broadcasting License, we must provide each
of our subscribers (analog and digital) basic broadcasts that include:

|  |                                                           
|- | ----------------------------------------------------------
|q | Channels 1 and 33 of the Israeli Broadcasting
  Authority;
|  |                                                           
|q | the commercial channels (Channels 2 and 10);              
|  |                                                           
|q | the Knesset channel;                                      
|  |                                                           
|q | the Israeli educational channel;                          

33

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|  |                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | channels of special cable licensees according to the
  Councils instructions, on the digital service only - we currently broadcast
  Tourism, Health and Leisure from the Teva Hadvarim Group;
|  |                                                                                                                                                                                                
|q | dedicated channels pursuant to the
  Telecommunications Law (which currently only include the Shopping Channel,
  Russian Channel and Music Channel,);                                         
|  |                                                                                                                                                                                                
|q | regional news and community broadcastings; and                                                                                                                                                 
|  |                                                                                                                                                                                                
|q | the EPG service, on the digital service only.                                                                                                                                                  

Our
Cable Broadcast Licenses stipulate that, in the event that we wish to reduce
the scope of the basic broadcasts, we must request the Councils approval. In the event that the scope of the analog
basic broadcasts has been reduced, the Council may instruct us (subject to the
approval of the Minister) to reduce the price for such reduced package to an
amount determined by the Council. In
such case, we would be entitled to present our position to the Council prior to
it rendering its decision.

Our
Cable Broadcast Licenses stipulate that we may not charge our analog
subscribers for the basic broadcasts more than approximately NIS 148 plus VAT
in the Holon/Bat Yam and Haifa/Hadera regions, approximately NIS 140 plus VAT,
in the Sea of Galilee/Netanya region, and approximately NIS 141 plus VAT, in
the Golan/Safed and Kiryat Shemoneh region.
Additionally, we may not charge our analog subscribers for a movie
provided on Pay-Per-View basis more than approximately NIS 15 plus VAT, per
broadcast. We may link our fees to the
Israeli consumer price index from February 2002 (subject to regulations and the
provisions of our licenses). Our Cable
Broadcast Licenses do not stipulate fees for digital subscribers. Under regulations promulgated pursuant to the
Telecommunications Law, we may determine our subscriber fees for digital
subscribers (including the basic broadcasts package). The fees that we set for our digital subscribers must be
reasonable, and the Minister may direct us to adjust such fees if he finds,
among other things, that they are harmful to competition, discriminatory or
misleading. The Councils approval to the proposed merger of the
Israeli cable television operators (as amended) stipulates, as a condition to
the merger, that we, or the merged entity, will be subject to a maximum
subscriber fee for both the digital and analog basic broadcasts packages of NIS
156 including VAT once the merger will be consummated. The subscriber fee will be linked to an
index which includes the Israeli consumer price index of December 2001
(published January 15, 2002) and the US dollar exchange rate as published by
the Bank of Israel, or any other index as shall be determined in
regulations. The effectiveness of the
Councils condition regarding the linkage to the combined index is subject to
the amendment of the applicable regulations promulgated under the
Telecommunications Law. To date, the
Ministry has not adopted such an amendment. For more information on fees we
charge our subscribers, see Item 4B Business Overview  Overview of our Cable
Television Services.

The
Council has determined that all channels in the Basic Package on our digital
platform must be included in the Basic Package on our analog platform, unless
otherwise authorized by the Council.

Digital
Basic Package

The
following table lists information regarding the Basic Package that we offer to
our digital subscribers as of April 30, 2005.



| |               |                                                      |                      
| | ------------- | ---------------------------------------------------- | ---------------------
| | Channel       | Description                                          | Language (1)         
| |               |                                                      |                      
| | HOT 3         | Entertainment                                        | Hebrew               
| | HOT Movies    | Cinema Movies                                        | Hebrew               
| | Sport         | Local and intentional games & Competition            | Hebrew               
| | Children      | Cartoons, movies & other children entertainment      | Hebrew               
| | MTV           | Europe video music                                   | English              
| | Channel 8     | Culture, Science & Education                         | Hebrew and Russian   
| | Local Channel | Local news & others-general                          | Hebrew               
| | Channel 9     | Russian channel                                      | Russian              
| | Channel 10    | Third national channel                               | Hebrew               
| | Israel 1      | First national channel                               | Hebrew               
| | Israel 33     | General Channel of the Israel Broadcasting Authority | Arabic/Hebrew/English

34

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| |                       |                                                 |                        
| | --------------------- | ----------------------------------------------- | -----------------------
| | Channel               | Description                                     | Language (1)           
| | CNN                   | World news                                      | English                
| | Sky news              | World news                                      | English                
| | BBC World             | Collection of BBC best programs                 | English                
| | Fox News              | World News                                      | English                
| | Channel One-Russia    | Russian channel                                 | Russian                
| | RTR Planeta           | Russian channel                                 | Russian                
| | NASHA KINO            | Russian Channel                                 | Russian                
| | RTV Int               | Russian Channel                                 | Russian                
| | NTV MIR               | Russian Channel                                 | Russian                
| | Moscow Open World     | Russian Channel                                 | Russian                
| | National Geographic   | Localized channel of NGC                        | Hebrew                 
| | Academic Channel      | Academic Lectures                               | Hebrew                 
| | Star World            | Entertainment                                   | English                
| | Shopping              | Israeli shopping channel                        | Hebrew                 
| | Israel 2              | Second national channel                         | Hebrew                 
| | Education             | Israeli educational channel                     | Hebrew                 
| | Music 24              | Israeli Music                                   | Hebrew                 
| | Knesset               | Israeli parliament channel                      | Hebrew                 
| | Nickelodeon           | Childrens channel                              | Hebrew/English         
| | SAT 3                 | German channel                                  | German                 
| | RTL                   | German channel                                  | German                 
| | TV5                   | French channel                                  | French                 
| | France 2              | French channel                                  | French                 
| | Arte                  | Culture                                         | French                 
| | Euro sport            | European sport broadcasting                     | English                
| | VH-1                  | Video Music                                     | English                
| | TVE                   | Spanish channel                                 | Spanish                
| | RETE 4                | Italian channel                                 | Italian                
| | TRT 1                 | Turkey 1                                        | Turkish                
| | TRT 2                 | Turkey 2                                        | Turkish                
| | INTERSTAR             | Turkish channel                                 | Turkish                
| | DUNA TV               | Hungarian channel                               | Hungarian              
| | Emergency (2)         | Emergency communications                        | Hebrew                 
| | SAT 1                 | German channel                                  | German                 
| | LBC                   | Arabic channel                                  | Arabic                 
| | Viva                  | Teledrama Channel                               | Hebrew                 
| | Fashion TV            | Fashion TV                                      | French                 
| | MEZZO                 | Classic Music Channel                           | French                 
| | Hop                   | Children Channel                                | Hebrew                 
| | Hallmark              | Series and Movies                               | Hebrew/Russian         
| | HOT Time              | Pay-Per-View Portal                             | English/Hebrew         
| | BBC Prime             | English channel                                 | English/ Hebrew        
| | AXN                   | Action                                          | Hebrew                 
| | TCM                   | Movies                                          | English/Hebrew         
| | ESPN                  | Sport                                           | English                
| | CARTOON               | Cartoons, movies & other Children entertainment | English                
| | TV 7-TUNIS            | Tunisian channel                                | Arabic                 
| | Jordan                | Jordanian channel                               | Arabic                 
| | Jordan                | Jordanian channel                               | English                
| | Morocco               | Moroccan national channel                       | Arabic                 
| | Egypt                 | Egyptian national channel                       | Arabic                 
| | METV                  | Free Lebanon television                         | Arabic/English         
| | MBC                   | Arabic channel                                  | Arabic                 
| | Almustakbal           | Entertainment                                   | Arabic                 
| | Saudia                | National                                        | Arabic                 
| | Syria                 | National                                        | Arabic                 
| | Aljazeera             | News                                            | Arabic                 
| | Dubai                 | National                                        | Arabic                 
| | EPG                   | User Guide                                      | Hebrew/English /Russian
| | User Guidance Channel | User Guidance Channel                           | Hebrew /Russian        
| | Radio Channels        | Music, News General                             | Hebrew /Russian        

|    |                                               
|--- | ----------------------------------------------
|(1) | Originated, subtitled or dubbed, as indicated.
|(2) | Operates only during emergencies.             

35

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Analog
Basic Package

The
following table lists information regarding the Basic Package that we offer to
our analog subscribers as of April 30, 2005.

|                    |                                                       |                |               |       |                |       |                  |        
|------------------- | ----------------------------------------------------- | -------------- | ------------- | ----- | -------------- | ----- | ---------------- | -------
|Channel             | Description                                           | Language (1)   | Bat-Yam/Holon | Haifa | Netanya/Hadera | Golan | Arab 
   section | Galilee
|                    |                                                       |                |               |       |                |       |                  |        
|HOT 3               | Entertainment                                         | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|HOT Movies          | Cinema Movies                                         | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|Sport               | Local and intentional games & Competition             | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|Children            | Cartoons, movies & other      
Children entertainment | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|MTV                 | Europe video music                                    | English        | ü             | ü     | ü              | ü     | ü                | ü      
|Channel 8           | Culture, Science & Education                          | Hebrew/Russian | ü             | ü     | ü              | ü     | ü                | ü      
|Channel 9           | Russian channel                                       | Russian        | ü             | ü     | ü              | ü     | ü                | ü      
|Local channel       | Local news & others                                   | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|TVE                 | Spanish channel                                       | Spanish        | ü             | ü     | ü              | ü     |                  | ü      
|Channel 10          | Third national channel                                | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|Israel 1            | First national channel                                | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|CNN                 | World news                                            | English        | ü             | ü     | ü              | ü     | ü                | ü      
|Sky news            | World news                                            | English        | ü             | ü     | ü              | ü     | ü                | ü      
|ORT Russia          | Russian channel                                       | Russian        | ü             | ü     | ü              | ü     | ü                | ü      
|RTR Planeta         | Russian channel                                       | Russian        | ü             | ü     | ü              | ü     |                  | ü      
|National Geographic | Localized channel of NGC                              | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|Star World          | Entertainment                                         | English        | ü             | ü     | ü              | ü     |                  | ü      
|RETE 4              | Italian channel                                       | Italian        | ü             | ü     | ü              | ü     | ü                | ü      
|Shopping            | Israeli shopping channel                              | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|Israel 2            | Second national channel                               | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|Education           | Israeli educational channel                           | Hebrew         | ü             | ü     | ü              | ü     | ü                | ü      
|SAT 3               | German channel                                        | German         |               | ü     |                | ü     | ü                | ü      
|RTL                 | German channel                                        | German         | ü             | ü     | ü              |       |                  | ü      
|Jordan              | Jordanian
  channel                                   | Arabic         |               |       |                | ü     | ü                |        
|TV Guide            | TV broadcastingprograms                               | Hebrew         | ü             | ü     | ü              | ü     |                  | ü      
|Morocco             | Moroccan national channel                             | Arabic         | ü             | ü     | ü              | ü     |                  | ü      

36

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---



|                |                                                         |                    |               |       |                    |       |                  |        
|--------------- | ------------------------------------------------------- | ------------------ | ------------- | ----- | ------------------ | ----- | ---------------- | -------
|Channel         | Description                                             | Language (1)       | Bat-Yam/Holon | Haifa | Netanya/
   Hadera | Golan | Arab 
   section | Galilee
|                |                                                         |                    |               |       |                    |       |                  |        
|Egypt           | Egyptian national channel                               | Arabic             | ü             | ü     | ü                  | ü     | ü                | ü      
|METV            | Free Lebanon television                                 | Arabic/English     | ü             | ü     | ü                  | ü     | ü                | ü      
|MBC             | Arabic channel                                          | Arabic             | ü             | ü     | ü                  | ü     | ü                | ü      
|Israel 33       | General channel of the Israeli Broadcasting
  Authority | Hebrew             | ü             | ü     | ü                  | ü     | ü                | ü      
|Knesset         | Israeli Parliament channel                              | Hebrew             | ü             | ü     | ü                  | ü     | ü                | ü      
|TV5             | French channel                                          | French             | ü             | ü     | ü                  |       |                  | ü      
|France 2        | French channel                                          | French             | ü             | ü     | ü                  | ü     |                  | ü      
|Euro sport      | European sport broadcasting                             | English            | ü             | ü     | ü                  |       | ü                | ü      
|VH-1            | Video Music                                             | English            | ü             | ü     | ü                  | ü     | ü                | ü      
|TRT1            | Turkey 1                                                | Turkish            | ü             |       | ü                  |       |                  |        
|TRT2            | Turkey 2                                                | Turkish            | ü             |       |                    |       |                  |        
|DUNA TV         | Hungarian channel                                       | Hungarian          | ü             | ü     | ü                  | ü     |                  | ü      
|                |                                                         |                    |               |       |                    |       |                  |        
|Emergency (2)   | Emergency communications                                | Hebrew             |               |       |                    | ü     |                  | ü      
|TV 7 -TUNIS     | Tunisian channel                                        | Arabic             |               |       | ü                  | ü     |                  | ü      
|LBC             | Arabic channel                                          | Arabic             |               | ü     |                    | ü     | ü                |        
|Viva            | Teledrama Channel                                       | English /
  Hebrew | ü             | ü     | ü                  | ü     | ü                | ü      
|Fashion TV      | Fashion TV                                              | French             | ü             | ü     | ü                  | ü     |                  | ü      
|MEZZO           | Classic Music Channel                                   | French             | ü             | ü     | ü                  | ü     | ü                | ü      
|Hop             | Children Channel                                        | Hebrew             | ü             | ü     | ü                  | ü     | ü                | ü      
|RTV Int.        | Russian Channel                                         | Russian            | ü             | ü     | ü                  | ü     |                  | ü      
|Hallmark        | Series and Movies                                       | English/
  Hebrew  | ü             | ü     | ü                  | ü     | ü                | ü      
|BBC Prime       | English channel                                         | English/ 
  Hebrew | ü             | ü     | ü                  | ü     | ü                | ü      
|AXN             | Action                                                  | English/ 
  Hebrew | ü             | ü     | ü                  | ü     | ü                | ü      
|TCM             | Movies                                                  | English/
  Hebrew  | ü             | ü     | ü                  | ü     | ü                | ü      
|ESPN            | Action                                                  | English            | ü             | ü     | ü                  | ü     | ü                | ü      
|CARTOON         | Cartoons, movies & other      
 Children entertainment  | English            | ü             | ü     | ü                  | ü     | ü                | ü      
|NASHA KINO      | Russian Channel                                         | Russian            | ü             | ü     | ü                  | ü     | ü                | ü      
|Almustakbal     | Entertainment                                           | Arabic             |               |       |                    |       | ü                |        
|Saudia          | National                                                | Arabic             |               |       |                    |       | ü                |        
|ART 1           | Family                                                  | Arabic             |               |       |                    |       | ü                |        
|ART 2           | Sport                                                   | Arabic             |               |       |                    |       | ü                |        
|ART 3           | Children                                                | Arabic             |               |       |                    |       | ü                |        
|ART 4           | Movies                                                  | Arabic             |               |       |                    |       | ü                |        
|ART 5           | Music                                                   | Arabic             |               |       |                    |       | ü                |        
|Syria           | National                                                | Arabic             |               |       |                    |       | ü                |        
|Aljazeera       | News                                                    | Arabic             |               |       |                    |       | ü                |        
|Dubai           | National                                                | Arabic             |               |       |                    |       | ü                |        
|Music
  Channel | Israeli
  Music                                         | Hebrew             | ü             | ü     | ü                  | ü     | ü                | ü      
|                |                                                         |                    |               |       |                    |       |                  |        



|    |                                              
|--- | ---------------------------------------------
|(1) | Originated, subtitled or dubbed as indicated.
|(2) | Operates only during emergencies.            

37

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---



Additional
Packages and Services

As
of March 1, 2005, we market to our digital subscribers, a new marketing method
based on various combinations we offer our customers. According to the new
method, our digital subscribers, in addition to the basic package offered to
them, may receive, at their choice, for additional consideration, products that
include a variety of Premium channels, channel packages, and a la carte
channels.

In
addition, as of March 1, 2005, we offer all of our subscribers a bundled
package of our cable television offerings, access to High Speed Internet and
telephony services (available only to subscribers in the areas where HOT
Telecom has commenced providing telephony services) into a Triple Play offer.
Under the Triple Play offer, analog subscribers may receive, in addition to the
basic analog cable television package, access to High Speed Internet and
telephony services. Digital subscribers may receive under the Triple Play
offering, the digital basic package, additional channel packages and a la carte
channels, plus access to High Speed Internet and telephony services. The fees
associated with the content are fixed. Further, the subscriber is permitted to
change channel packages once a month without incurring an additional fee.

Product Choices

One
Package Choice.

Below
please find the list of packages available to our digital subscribers.

|Name of Package           |  | Channels Included                                                                                                       
|------------------------- |  | ------------------------------------------------------------------------------------------------------------------------
|                          |  |                                                                                                                         
|Movies                    |  | HOT Drama                                                                                                               
|                          |  | HOT Fun                                                                                                                 
|                          |  | HOT Action                                                                                                              
|                          |  | HOT PrimeGames and Content about MoviesMGM                                                                              
|                          |  |                                                                                                                         
|Children                  |  | HOT Fun                                                                                                                 
|                          |  | Parents Channel                                                                                                         
|                          |  | Logi                                                                                                                    
|                          |  | Jetix                                                                                                                   
|                          |  | Games Channel                                                                                                           
|                          |  |                                                                                                                         
|Parents and Babies        |  | Parents Channel                                                                                                         
|                          |  | HOT Luli                                                                                                                
|                          |  |                                                                                                                         
|Enrichment for Children   |  | HOP LomdimGordy's Friends                                                                                               
|                          |  |                                                                                                                         
|Music                     |  | VH-1 Classic                                                                                                            
|                          |  | MTV Hits                                                                                                                
|                          |  | MTV 2                                                                                                                   
|                          |  | MTV Base                                                                                                                
|                          |  |                                                                                                                         
|24 Music Choice           |  | Variety of Music Channels                                                                                               
|                          |  |                                                                                                                         
|Entertainment and Leisure |  | Bip- the laughter channelXtra Hot - the series channelThe Good LifeE!Leisure and EntertainmentHistory channelAdventure 1
|                          |  |                                                                                                                         
|Men and Sport             |  | Reality TV                                                                                                              
|                          |  |                                                                                                                         
|                          |  | Ego                                                                                                                     
|                          |  | Sport 5+                                                                                                                
|                          |  | Eurosport NewsFox SportsExtreme SportsCNBC                                                                              
|Russian                   |  | Reality TV                                                                                                              
|                          |  | HOT DJ                                                                                                                  
|                          |  | History Channel                                                                                                         
|                          |  | Romantica                                                                                                               
|                          |  | E!                                                                                                                      
|Karma and Home+           |  | Home+                                                                                                                   
|                          |  | Karma                                                                                                                   

38

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A Product of Two Channels.

Below
please find the list of channels available to our subscribers under our Product
of Two Channels.

|                             
|-----------------------------
|                             
|Channels
  Included          
|                             
|Bip- the laughter channel    
|Xtra Hot - the series channel
|The Good Life                
|E!                           
|Home+                        
|Reality TV                   
|Ego                          
|Karaoke                      
|Parents Channel              
|History Channel              
|Adventure 1                  
|Eurosport News               
|Fox Sports                   
|Extreme Sports               
|CNBC                         
|HOT Luli                     
|Logi                         
|Jetix                        
|VH-1 Classic                 
|MTV Hits                     
|MTV 2                        
|MTV Base                     
|Mega Film                    
|Romantica                    
|Ukranian Channel Inter+      
|MGM                          
|                             

39

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A La
Carte Channels.

Below
please find a list of our channels that are offered a la carte.

|                                                         
|---------------------------------------------------------
|Channels Included                                        
|                                                         
|Viva Platina                                             
|The Nature and Things                                    
|Tchelet Channel                                          
|Pro-TV                                                   
|Romanian Channel TVR                                     
|HOT Time                                                 
|Playboy Channel                                          
|Private Blue                                             
|Campus                                                   
|Viva Espanola                                            
|Entertainment and Leisure                                
|Vegas (Games for adults)                                 
|Double Click                                             
|Gogo Club                                                
|The Green Point (in the Childrens Channel)              
|Jetix Channel                                            
|Karaoke Channel                                          
|Gogo                                                     
|Klick                                                    
|The Hot Game                                             
|Weather- Daily and Weekly forecast in Israel and
  Abroad
|Horoscope, Forecast and Matches                          
|Personal Horoscope                                       
|HOT Talk                                                 

We intend to provide an additional package in the
future called VOD For Choice.

40

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Pay-Per-View

Pay-Per-View
services are covered by our Cable Broadcast Licenses. We are subject to maximum
price restrictions for analog Pay-Per-View services, of approximately NIS 15
plus VAT, per broadcast. We are also subject to restrictions regarding payment
for specific broadcasts, the time duration of a single broadcast and certain
restrictions regarding the cancellation of a Pay-Per-View order by a
subscriber. We are authorized to offer live broadcasting by Pay-Per-View. We
began providing Pay-Per-View services to our subscribers in October 2000. We currently broadcast 10 Pay-Per-View
channels on the digital platform. Pursuant to our request, on June 24, 2004,
the Council resolved to allow us to cease to provide Pay-Per-View services on
our analog platform, subject to our commitment, with respect to subscribers
that received such service commencing from January 1, 2003, to provide to such
subscribers who approach us, the option to use such service upon their request,
on terms determined in the Councils decision. Beginning in March 2005 and
ending in April 2005, we gradually ceased to provide Pay-Per-View services on
our analog platform in all of our operating areas.

Video On Demand

In
January 2005, we gradually commenced providing Video on Demand services on a
commercial basis. Currently, VoD services are provided in the majority of our
operating areas. Video on Demand, or VOD, is a service that allows television
viewers to instantaneously select and view various contents (such as library
movies, current movies, series, contents for children, contents for adults,
sports content, entertainment and leisure contents) at any time they choose.
VOD services also allow the viewer to stop, pause, fast-forward, rewind and
restart the viewing, in a similar manner to the operation of a video tape
recorder, thereby allowing the viewer to determine and control exclusively the
timing and the speed in which he would like to watch the selected content. The
VOD service gives the subscriber direct and instant access to a variety of
content-libraries via a friendly access portal for the user. We provide VOD
services to our digital subscribers in accordance with the approval rendered to
us by the Council. We
currently charge a fixed subscription fee for our VOD services. In addition, while
various contents are not subject to additional payment, certain contents are
subject to additional fees on a pay-per-use basis or a subscription VOD basis.
On June 9, 2005, the Council published a hearing regarding the limitation on
ownership with respect to the provision of VOD services.

Personal Video Recorder

We
intend to begin providing Personal Video Recorder, or PVR, services in July
2005 under the brand name HOT Magic. PVR is a device, based on large storage
(hard-drive) and an easy-to-use user interface. PVR services allow the viewer to decide what content to record
along with providing them with the convenience of being able to watch them
whenever they want. PVR services also allow the viewer to stop, pause,
fast-forward, rewind and restart the viewing, in a similar manner to the
operation of a video tape recorder.

High Definition

In
May 2005, we gradually commenced providing a high definition channel. As of
June 2005, this channel is available to all of our subscribers. The high definition channel broadcasts
contents using a high definition system. The high definition technology enables
the subscriber to enjoy a sharp quality picture and peripheral sound in the
dolby digital system. The high definition channels contents are diversified,
and include sports, music, lifestyle and travel.

InteractiveServices.

Since
the end of 2001, we have provided interactive services such as Horoscopes and
Weather to our digital subscribers. In June 2002, we added to our interactive
services to include Games Channels. Since February 2002, we provide an
entertainment programming guide service. Various interactive applications have
been integrated into different channels since July 2002. Since August 2002 we provide an interactive
invoice service. In December 2002, we began to implement an interactive voting
application, which allows our subscribers to participate in television votes
conducted on certain programs through the use of the subscriber set-top box. In
January 2003, we began to implement an interactive commercial application. Since the end of the fiscal year 2003 and
through to June 2005, we have commenced providing the following interactive
services to our digital subscribers: two childrens channels (HOP Lomdim and
Gordys friends); Vegas Channel; Karoake Channel (in Hebrew and Russian); Net
Action; and TV Mall Channel. We currently offer our digital subscribers Games
Channels also on a pay-per-play basis (pay per game) or pay-per-use basis (pay
per defined duration of time played), the use of which may be limited by the
subscriber (for the purpose of parental control), on the basis of a
predetermined maximum monthly fee. Subject to the receipt of the relevant
regulatory approvals, we intend to provide additional interactive services in
the future, including interactive channels, games channels and integration of
interactive applications into additional channels.

41

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Internet Services

On
April 8, 2002, we launched a service of access to High Speed Internet over
cable. Initially we offered promotional packages to the subscribers to the
trial services and other initial subscribers to the service. We currently offer
access to High Speed Internet over cable services in all of our license areas,
and at December 31 2004, we had 88,324 access to High Speed Internet over cable
subscribers. As of May 31, 2005, we had approximately 96,000 access to High
Speed Internet subscribers. The table below sets forth the products we offer to
our residential subscribers of access to High Speed Internet over cable
services.

| |              |               
| | ------------ | --------------
| | Upload Speed | Download Speed
| |              |               
| | 64Kbps       | 0.256Mbps     
| | 96Kbps       | 0.75Mbps      
| | 128Kbps      | 1.5Mbps       
| | 150 Kbps     | 3.0Mbps       

In
addition, we offer our Internet subscribers the option to upgrade the Upload
Speed of our access to High Speed Internet over cable products, by 64Kbps
(Extra) and 128Kbps (Extra Plus).

HOT Telecoms access to High Speed Internet over cable
service, which is provided to the residential subscribers in the former
Infrastructure License areas by us, allows the user to directly access the
Internet over cable broadband infrastructure, through the use of a cable modem
and personal computer, and there is no need for dial-up activity

Services for the Business Sector

In
March 2004, HOT Telecom commenced the marketing of additional communication
services designed for businesses, including access to High Speed Internet for
businesses, Internet Protocol Virtual Private Network, or IP VPN, and data
transmission services and network services at different bit rates.

HOT
Telecom markets packages with the following various broadband widths:

Broadband
Cable Internet for Businesses

|                  |              |               
|----------------- | ------------ | --------------
|Name of Package   | Upload Speed | Download speed
|                  |              |               
|HOT Business 750K | 150 Kbps     | 750 Kbps      
|HOT Business 1.5M | 150 Kbps     | 1.5 Mbps      
|HOT Business 3M   | 150 Kbps     | 3 Mbps        

In
addition, HOT Telecom offers its subscribers the option to upgrade the upload
speed of these products by 64Kbps and 128 Kbps.

Access
to High Speed Cable Internet for Businesses

|                     |              |               
|-------------------- | ------------ | --------------
|Name of Package      | Upload Speed | Download speed
|                     |              |               
|HOT Business 2M/512K | 512 Kbps     | 2 Mbps        
|HOT Business 3M/512K | 512 Kbps     | 3 Mbps        
|HOT Business 3M/1M   | 1 Mbps       | 3 Mbps        
|HOT Business 4M/1M   | 1 Mbps       | 4 Mbps        

42

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---



Data
Transmission Services and Network Services at Different Bit Rates

HOT
Telecom provides broadband connections which allows for the transmission of
data at different speeds over a fiber optic and coax cable in a variety of
technologies.

SDH
Services

The
following diverse services are provided on the (SDH) transmission backbone:

|              | Transmission
  rate
|------------- | -------------------
|E1            | 2Mbps              
|E3            | 34Mbps             
|DS3           | 45Mbps             
|STM-1         | 155Mbps            
|STM-4         | 622Mbps            
|STM-16        | 2.5Gbps            
|F.CEsconFecon | 1.06Gbps           
|200Mbps      
|1.06Gbps     
|G.E           | 1Gbps              

IP
Services

The following diverse services are provided on the IP
backbone:

|Type
  of infrastructure | Interface
|------------------------ | ---------
|Optic/copper             | 10BaseT  
|100BaseT                
|1000BaseT               
|1000BaseFX              
|Coax                     | 10BaseT  

43

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Domestic
Fixed Line Telephony Services.

In
November 2004, HOT Telecom commenced providing domestic fixed line telephony
services to residential and business subscribers. A subscriber may subscribe
only to the telephony services without having to subscribe to our broadcasting
or access to High Speed Internet services. HOT Telecom also provides ancillary
services, such as: voicemail services, caller ID, last-call service, and call
blocking options. As of June 2005, HOT Telecom provides such services gradually
throughout its license areas, including provision of the ancillary services in
stages. By using HOT Telecoms telephony services, a subscriber can call and
receive phone calls from the Bezeq network, from all of the cellular networks,
and from abroad through the Israeli international telephony operators. The
payment for HOT Telecoms telephony services is based on a fixed monthly fee
for the basic package, which includes up to 2,000 minutes per month (to the
Bezeq network and to the HOT Telecom network) plus caller ID, last-call
service, and call blocking services, without additional fees. HOT Telecom offers
its subscribers 24-hour customer service and maintenance. HOT Telecom commenced
supplying telephony services to small offices and big businesses via PRI
channels. HOT Telecom has an interconnection agreement with all of the cellular
suppliers and with the major international telecommunication companies,
including Barak, Golden Lines and Bezeq International.

On
July 9, 2004, Hot Telecom, signed an agreement with an Israeli entity in the
global Lucent Int. Group for the establishment of a telephony network based on
the cable infrastructure. The agreement is a framework agreement for 100,000
subscribers and, in the first stage, orders have been issued for the
establishment of a network for approximately 60,000 telephony subscribers in consideration
for an estimated amount of US$ 19 million. As of May 31, 2005, to secure the
payments to Lucent, we provided a bank guarantee in the amount of approximately
NIS 7.7 million. In addition, Tevel and we, guarantee, jointly and severally,
in a total aggregate amount of US$ 4.5 million to secure the payments of HOT
Telecom to Cisco. The cable television operators signed an indemnification
agreement with respect to this guarantee.

Sales,
Marketing and Customer Service

Sales
and Marketing. Our marketing strategy is to increase the subscriber penetration
within our license areas and maintain subscriber satisfaction in order to
preserve low subscriber churn rate and to increase the average revenues per
user, or ARPU. We market and sell our services through the combined efforts of
integrated sales, marketing, technical and customer service groups. We train
our personnel to provide information concerning technological advances and to
address the specific requirements of existing and potential subscribers. We
monitor the performance of these personnel through a variety of supervising
methods. In addition, HOT Vision participates in rating surveys conducted by
independent organizations, and we also use training programs and surveys
prepared by independent professional marketing consultants to help increase the
effectiveness and efficiency of its sales and marketing groups.

During
the initial phase of the buildout of our network, we sought to create awareness
of our cable television services and stimulate subscriber demand. In an effort
to increase subscriber penetration, we initially relied on door-to-door visits
by sales personnel who introduced our products and services by offering
on-location demonstrations. We also utilized billboards, direct mail and mass
marketing programs, including radio advertising, print media and shopping mall
demonstrations to further marketing efforts. As the buildout of our cable
television network continued and subscriber penetration rates increased in the
license areas, we placed greater emphasis on telemarketing and direct mail
efforts to target those groups that had not subscribed for our services,
tailoring the campaign to the specific requirements of such potential
subscribers. This targeted marketing had the effect of reducing the marketing
costs incurred in attracting new subscribers. We have further refined our focus
to preserve our existing subscriber base and, in this context, we have
established marketing locations in centrally located consumer malls within our
license areas.

As
part of our effort to attract and maintain subscribers, we market our services,
inter alia, by advertising on television and through print media, direct mail,
and telemarketing. In addition, as part of our effort to maintain subscribers,
we broadcast channels and programs that we broadcast for promotion and cross
promotions. We also invest in promotions specifically aimed at the Russian
sector in Israel due to the potential of this market.

We
also contact subscribers who request to be disconnected and attempt to rectify
any perceived or actual problem promptly. Under the Telecommunications Law and
the subscriber agreement, we are required to disconnect an analog subscriber
within 14 days of receipt of a written disconnection request, or such later
date as the subscriber may request. According to our Cable Broadcast Licenses,
we are required to disconnect a digital services subscriber within 2 business
days of receipt of a written disconnection request or such later date as the
subscriber may request, and we must not charge the subscriber any fees from the
date of the disconnection. According to
the HOT Telecom Infrastructure License, HOT Telecom is required to disconnect
services provided under our Cable Broadcast Licenses and the HOT Telecom
Infrastructure License (including access to High Speed Internet over cable
services) within 2 business days of receipt of a written disconnection request or such later date as the subscriber may
request. During those periods, the
marketing and sales groups contact the subscriber in an effort to retain the
subscriber.

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Although
we seek to limit disconnections initiated by subscribers, a certain amount of
such disconnections is inevitable, either because a subscriber has moved
outside of our license areas or has decided that it no longer wishes to receive
our services. We make marketing efforts towards such homes that have
disconnected cable services in order to get cable television subscriptions
reinstalled by new subscribers who have moved into such locations or by
subscribers who made a decision to no longer receive cable television services.
We believe that satisfaction with our services is essential to reaching and
maintaining high levels of penetration. We have combined our cable television
offerings, internet access and telephony into a Triple Play offer, with a
view to increase revenues, reduce costs by lowering churn while increasing
customer loyalty, and increase profitability of our operations. An integral
part of our efforts has been to create for ourselves a positive image among our
potential and existing subscriber base. To foster such image, we have been
involved, and intend to continue to be involved, with various communities
within our license areas by participating in public campaigns with local
authorities.

Customer
Service.We believe that highly efficient, responsive and prompt customer
service is a significant factor in our marketing efforts to build and retain
subscriber satisfaction. Since 1999, we operated a service number for the
convenience of our subscribers. We currently operate a toll free number for our
cable television subscribers. As of December 31, 2004, we had a staff of 246
customer service personnel on a full-time or full-time equivalent basis. Our
subscriber service personnel provide information regarding, among other things,
subscriber bills, special offers, channels, packages and available services.
Our customer service personnel also provide technical support via telephone so
that, to the extent possible, subscribers will not have to wait for on-site
service. However, if a problem cannot be resolved over the telephone, a service
technician is dispatched to the location, usually at no cost to the subscriber,
depending on the circumstances and pursuant to the terms of the license. The
customer support staff routinely provides feedback to the marketing and
research and development groups. Our customer service personnel also engage in
sales activities.

Operating
Areas.

During
2003, we unified the 4 operational areas into 2 operational areas- Netanya and
Haifa. Since the last quarter of 2004, the activity of the cable television
operators, within the framework of the operational merger, is conducted in four
operating areas, which include the Northern area (includes Haifa and Galilee);
the Sharon area (includes Netanya and Hadera), the Shfela area (includes
Bat-Yam and Hulon) and the Southern part of Israel. We do not operate in the
Southern part of Israel.

A Description of the Geographical Areas according to
our Broadcast Licenses Areas.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | In the fiscal year 2004, we conducted our operations
  in the following geographical areas.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Haifa: The Haifa operating area includes the city of
  Haifa and the surrounding communities. We substantially completed the
  installation of a regional cable transmission network in this operating area
  in 1995. As of December 31, 2004, the area included approximately 138,650
  households, and our network in the Haifa area passed 136,238 homes and had approximately
  74,609 cable television subscribers.                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Galilee: The Galilee operating area includes the
  city of Tiberias, along the Sea of Galilee, Safed and Kiryat Shemona, in
  Israels north, as well as the surrounding small towns and agricultural
  communities, and the Golan Heights. As of December 31, 2004, the area
  included approximately 58,002 households, and our network in the Galilee
  operating area passed 54,986 homes and had approximately 26,878 cable
  television subscribers. We have not completed the buildout of the cable
  network in this operating area.                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Bat-Yam/Holon:  The Bat-Yam/Holon operating area
  includes the cities of Bat-Yam and Holon (which border Tel Aviv to the south)
  and neighboring areas. We completed installation of most of the cable transmission
  network in this operating area by the end of 1991. As of December 31, 2004,
  the area included approximately 118,806 households, and our network in the
  Bat-Yam/Holon area passed 118,806 homes and had approximately 68,742 cable
  television subscribers.                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Netanya/Hadera: The Netanya/Hadera operating area
  includes the coastal cities of Netanya, approximately 30 kilometers north of
  Tel Aviv, and Hadera, located between Haifa and Tel Aviv, and adjacent
  communities to these cities. We substantially completed the installation of a
  regional cable transmission network in this operating area in 1995. As of
  December 31, 2004, the area included approximately 210,036 households, and
  our network in the Netanya/Hadera area passed 188,722 homes and had approximately
  87,115 cable television subscribers.

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Description of our Subscriber Penetration on a
Geographical Basis According to our Broadcast Licenses

The
table below contains information on subscriber penetration on a geographical
basis as of December 31, 2004 according to our broadcast licenses.

|                 |  |                                                  |                |                             |  |                      |         |                  |  |                                    |  |                                           |  |                                          |  |                         |  |  |  |         |  |  |  |  |     
|---------------- |  | ------------------------------------------------ | -------------- | --------------------------- |  | -------------------- | ------- | ---------------- |  | ---------------------------------- |  | ----------------------------------------- |  | ---------------------------------------- |  | ----------------------- |  |  |  | ------- |  |  |  |  | ----
|Area             |  | Date Commenced 
  Cable Television 
  Operations |                | Approx No. of 
  Households |  | Plant Length 
  (km) |         | Homes 
  Covered |  | Cable 
  Television 
  Subscribers |  | Penetration Rate 
  of Homes 
  Passed(1) |  | Penetration 
  Rate of 
  Households (2) |  | Internet 
  Subscribers | 
|                 |  |                                                  |                |                             |  |                      |         |                  |  |                                    |  |                                           |  |                                          |  |                         | 
|Bat-Yam  Holon  |  |                                                  | March 1990     |                             |  |                      | 118,806 |                  |  |                                    |  | 596                                       |  |                                          |  | 118,806                 |  |  |  | 68,742  |  |  |  |  | 57.9
|Haifa            |  |                                                  | September 1991 |                             |  |                      | 138,650 |                  |  |                                    |  | 1,160                                     |  |                                          |  | 136,238                 |  |  |  | 74,609  |  |  |  |  | 54.8
|Netanya  Hadera |  |                                                  | January 1993   |                             |  |                      | 210,036 |                  |  |                                    |  | 3,344                                     |  |                                          |  | 188,722                 |  |  |  | 87,115  |  |  |  |  | 46.2
|Galilee          |  |                                                  | December 1990  |                             |  |                      | 58,002  |                  |  |                                    |  | 1,225                                     |  |                                          |  | 54,986                  |  |  |  | 26,878  |  |  |  |  | 48.9
|Total            |  |                                                  |                |                             |  |                      | 525,494 |                  |  |                                    |  | 6,325                                     |  |                                          |  | 498,752                 |  |  |  | 257,344 |  |  |  |  | 51.6

| |     |                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Cable television penetration of homes covered is
  calculated by dividing the total number of cable television subscribers at
  applicable date by the total number of homes covered.
| | (2) | Cable television penetration of households is
  calculated by dividing the total number of cable television subscribers at
  the applicable date by the total number of households.  

For
information on our HeadEnd Agreements, see Item 4B. Business Overview 
Technological Preparations for Competition in the Telecommunications Market.

Technological
Preparations for Competition in the Telecommunications Market

As
part of our preparation for competition in the telecommunications market, we
have defined, performed and completed a network upgrade project, for
segmentation and bandwidth expansion.

In
order to enable fast two-way communication via cable modems, a split of the HFC
network into smaller sub-networks, known as Segmentation, is necessary. The
Segmentation project involves significant installation of new fibers and
optical equipment. We completed the Segmentation process by the end of 2000 to
the extent actually required to reflect our subscriber demand.

Our
original network bandwidth was 50-550MHz, and fully occupied 45-48 analog
television channels. Full utilization of our network capacity is not possible
due to regulatory restrictions. We have upgraded our network in order to expand
the network capacity to 860MHz. The upgrade project included bandwidth
expansion of both the downstream and the upstream paths. The networks old
equipment has been replaced, in all of our operational areas, by a new uniform
type of equipment. The bandwidth expansion increased the network capacity by
approximately 25 analog channels, which is equivalent to more than 400 digital
channels, and enabled bandwidth allocation for new added value services.

The
network Segmentation and bandwidth expansion projects are part of our
technological enhancement plan, which enables us to offer subscribers a new
variety of interactive services, access to High Speed Internet over cable
using, alternatively, the television screen or a personal computer, Pay-Per-View
services, VOD, and may enable us in the future to offer other bandwidth
consumer services.

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We
have completed a substantial portion of the construction of our cable
television broadcast and transmission system, including technologically
advanced HeadEnds and a broadband, hybrid optical fiber/coaxial cable
television network. Our cable network consists almost entirely of underground
plants. Our cable transmission network is capable of supporting both broadcast
transmission and two-way data transmissions for various telecommunications
applications.

As
part of our technological preparations toward becoming a multi-service operator
for multi-channel television broadcasting and interactive television, access to
High Speed Internet over cable, telephony and data over cable services, we have
completed the installation of an addressable analog broadcast system; a digital
broadcast system and a data-over-cable platform. During the first quarter of
2005, we phased out the addressable analog system and introduced a new state of
the art VOD (Video On Demand) Platform, as well as a VoIP landline telephony
service. The VOD platform will enhance our ability to launch new services,
which are not possible, as of today, by YES, our main competitor in the
television services.

The
digital system enables us to provide our subscribers with dozens of
broadcasting channels, channel packages according to choice, Telephony, access
to High Speed Internet and data services, interactive services, and added value
services, including Pay-Per-View, Video on Demand and High Definition. During
the last year we also introduced an array of Interactive applications and
services including e-commerce, chat and messaging services, multi-user games
etc. Overall, we provide more then 100 Interactive applications to our
subscribers.

We
are currently in the final stages of introducing our PVR platform (an XTV
Set-Top-Box), which will complement our VOD Platform and will enable us to
offer our subscribers the most comprehensive user experience available today.

HeadEnds

A
cable television system begins with a HeadEnd, which transmits signals obtained
from the following three main sources: satellite broadcasts received by dish
antennae; local broadcasts received off-air or via optical transmission; and
programs played back from videocassette recorders and/or video servers. A fiber
optic cable network transmits signals carrying all the systems channels from
the main HeadEnd to secondary HeadEnds and distribution hubs, which cover the
different areas of the licenses and service zones. From the secondary
HeadEnds/hubs, the services are distributed to subscriber homes via an HFC
network. The drop cable terminates at a wall outlet installed in the subscriber
household; a cable from the wall outlet passes through a channel converter or a
Digital Set-Top-Box to the subscribers television set. A wireless remote unit
enables the viewer to select a channel from among the broadcasted channels.
Subscribers who own cable-ready television sets and prefer the analog services
only, may connect their sets directly to the wall outlet and select the viewing
channel via the television sets control panel/remote control.

In
November 1989, pursuant to a special permit issued by the Ministry of
Communications prior to our receiving a franchise, we became the first cable
television operator in Israel to supply cable television services when we
commenced operation of our HeadEnd in Bat-Yam. This HeadEnd is operated as a
secondary Headend serving the Bat-Yam/Holon operating area. Currently, this
HeadEnd is in the process of shut down and unification with Tevels Rishon
Lezion HeadEnd.

The
subscribers in the Galilee license area are served by a HeadEnd located at
Ramot Naftali (completed in December 1990), which includes, among other things,
a back-up play-back system and satellite dish antennas, cable-television
programming is transmitted by microwave from the HeadEnd to two unattended
sites, located in the Galilee license area, which in turn is transmitted by
underground cable to subscribers. As of the second quarter of 2005, those
microwave links have been replaced by modern two-way fiber optics links to
enable the full range of digital services to all the subscriber population.

In
September 1991, we completed construction of a HeadEnd located in Haifa. This
HeadEnd operates as a master HeadEnd and includes, among other things, a
playback system, satellite dish antennas and a production studio that generates
original programming. A fiber-optic network carries the services from the Haifa
HeadEnd to the Netanya operating area and the secondary Headends at Bat-Yam and
Ramot Naftali.

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We
acquired the HeadEnd equipment primarily from suppliers in the United States.
Construction of the HeadEnds was for the most part carried out by
sub-contractors supervised by a technical team we provided. The HeadEnds are
located on land that we either purchased or lease under a long-term lease.

The cable installation includes several stages, such as: preparation of an
engineering plan and receipt of permits from local authorities, excavation,
laying the cable and network installation (including connecting cables that
have been laid and installation of network components); and repaving the area
where the work was conducted.

The
network installation for a given geographic area is deemed to have been
completed when the infrastructure necessary to connect a building to the
network has been installed adjacent to each of the buildings in the area. After
completion of the network installation, network equipment is installed in the
buildings in the relevant area and subscribers are connected to the system. As
of March 31, 2005, we completed the installation of approximately 3,931 miles
of underground Coax and Fiber Optic cables.

We
supervise the various stages of network installation, which are performed by
design, infrastructure and network contractors. We are not dependent on the
services of any one of those contractors. In addition, we purchase equipment,
including cable, from a number of foreign suppliers and are not dependent on
any particular supplier. In building the network, we have left additional
conduit space for future uses.

In April 2005, we and the other two Israeli cable
television operators entered into an agreement (the HeadEnd Agreement) in
order to cooperate for the purpose of improving the efficiency of the
transmissions of the multi-channel television broadcasts for subscribers, by
way of a joint use of the cable television operators HeadEnds including the
unification of the operational systems which are connected to the HeadEnds,
according to the following terms: (1) the distribution of the multi-channel television
broadcasts for subscribers of the cable television operators shall be carried
out jointly by the HeadEnds of the cable television operators as one system;
(2) the cable television operators shall bear the cost of the HeadEnds system,
including depreciation, according to the proportional number of subscribers of
each cable operator as shall be updated each quarter; (3) each cable operator,
if required, shall enable the use of its HeadEnd system for the purpose of the
exercise of the joint cooperation under the HeadEnd Agreement. The HeadEnd
Agreement pertains only to the right of use of the HeadEnds, and does not
address any transfer of assets. In addition, the cable television operators
shall consider the need to unify HeadEnds or the need to partially shut down
part of the HeadEnds or the need for a cessation of certain HeadEnds
activities. As of the date of the signing of the agreement, the cable
television operators resolved to take the following actions effective on April
1, 2005: (i) the shut down of part of Tevels broadcasting HeadEnd activities
in Tel Aviv, which will be performed instead at our broadcasting HeadEnd in
Haifa, and as a result, Tevels broadcasting HeadEnd in Tel Aviv will become an
unmanned broadcasting HeadEnd; and (ii) the shut down of part of our
broadcasting HeadEnd activities in Bat-Yam, which shall be unified with Tevels
broadcasting HeadEnd in Rishon-lezion. The finance of the HeadEnds activities,
including future investments, shall be performed pursuant to a budget as shall
be agreed upon and approved by the cable television operators, according to the
proportional number of subscribers of each cable television operator.

Cellular
Telecommunication Services

We
became a shareholder in Partner Communications Company Ltd., or Partner, one of
four providers of mobile cellular telephone services in Israel, and one of the
two operators which use the GSM technology on a fully commercial basis in
Israel.

In
April 1998, Partner received its license to establish and operate a mobile
telephone network in Israel. In October 1999, Partner completed an offering of
its shares to the public, raising a gross sum of US$ 525 million. Partners
shares are traded on the Tel Aviv Stock Exchange, and its American Depositary
Shares, or ADSs, each representing one of Partners ordinary shares, are quoted
on the Nasdaq National Market and are traded on the London Stock Exchange. As a
result of Partners initial public offering we recorded capital gains in the
amount of approximately NIS 447 million. In addition, Partner repaid its
shareholder loans which it owed to us. In April 2002, we sold approximately 50%
of our holdings in Partner to a subsidiary of Hutchison Whampoa Ltd., in
consideration for approximately NIS 305 million. In November 2003, we sold
shares of Partner representing approximately 2.1% of Partners issued and
outstanding share capital in market transactions. In April 2005, we sold to
Partner 7,783,444 ordinary shares, or approximately 4%, of its issued and outstanding
shares, for total consideration of approximately NIS 250 million. Currently, through Matav Investments Ltd., we
beneficially own approximately 1.2% of Partners issued and outstanding share
capital.

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International
Telecommunication Services

Barak
I.T.C. (1995)  The International Telecommunications Services Corp. Ltd.
(Barak), an Israeli company, provides international telecommunications
services, which include voice, data, Internet to the business and residential
markets in Israel. Barak was one of the three companies originally licensed by
the Ministry of Communications of the State of Israel to provide international
telecommunications services. Barak commenced providing international voice
services on July 4, 1997.

We
indirectly hold a 10% share ownership interest in Barak. The other major
beneficial shareholders in Barak are Clalcom Ltd. (Clalcom), and indirectly,
Sprint International, Inc., Deutsche Telekom AG and France Cables et Radio SA.
We have the right to appoint one director to the board of directors of Barak
(which is comprised of 10 directors), pursuant to a shareholders agreement.

Since
we have a 10% interest in Barak, our holdings in Barak are reflected in our
financial statements on a cost basis. Baraks financial results do not affect
our financial statements.

In
December 2001, the Minister of Communications published its policy to work
towards opening the international telecommunications market in Israel to
additional competition. In April 2004, the Minister published regulations in
order to achieve this. The regulations provide that companies that meet the
required preconditions to serve as an international telecommunications operator
may receive licenses, except for domestic operators, cellular operators or
material operators in the field of international transmission services.
Accordingly, during the second half of 2004, the Ministry of Communications has
granted three additional licenses for the establishment and operation of international
telecommunications systems in Israel, of which two were given to large
providers of access to High Speed Internet.

On
November 28, 1997, Barak issued notes in an aggregate principal amount of US$
183 million, due 2007. The notes were issued at a discount on their aggregate
principal amount at maturity and generated gross proceeds of US$ 100.2 million.

As
at December 31, 2004 the principal amount of the notes outstanding totaled US$
122.4 million. The notes bear interest payable semi-annually, commencing May
15, 2003. Until the payment was due on November 15, 2004, Barak had met its interest payment
obligations. However, Barak has decided to defer payments of interest to the
noteholders in the amount of US$ 7.6 million each, which were due in installments on
November 15, 2004 and May 15, 2005.

Since
Barak did not pay the interest payment within the 30-day period, the
noteholders may have the right to request for the immediate acceleration of the
bonds, subject to certain limitations. Barak does not currently have the
financial ability to repay these notes in full. As of December 31, 2004, Barak
had a capital deficiency in the amount of NIS 527 million and a working capital
deficit in the amount of NIS 704 million. During 2002, we wrote-off approximately
NIS 8.8 million of our investment in Barak. During 2004, we wrote off the
remaining portion of our investment in Barak in the amount of approximately NIS
16 million. These decisions were based on a company valuation of Barak, the
deterioration in Baraks financial position, the opening of the international
communications segment to new competitors and the granting of licenses to three
additional operators, as described above.

During
2004, Barak increased the total volume of voice traffic by approximately 14%.
Barak reported revenues of NIS 704.4 million in 2004 as compared to NIS 711.4
million and NIS 694.7 million in 2003 and 2002, respectively, and net loss of
NIS 53.4 million in 2004 as compared to net income of NIS 55.9 million in 2003 and
NIS 62.6 million in 2002.

On
June 15, 2005, Barak, Clalcom and Clal Industries and Investments Ltd.
(together: Clal), Dial-the Israeli Company for International Communications
Ltd. and we, entered into a Non-Binding Term Sheet in order to set out the
terms for a proposed reconstruction (the Reconstruction) of Baraks capital
and debt (the Term-Sheet), subject, inter alia, to the entry by Barak,
certain holders of Senior Subordinated Discount Notes due 2007 of Barak (the
Existing Notes) (the Note Holders or the Ad Hoc Committee), Clalcom and Clal Industries and the
current (pre-restructuring) shareholders of Barak, into a definitive Restructuring Agreement. The Restructuring Agreement shall be
effected through,
amongst other things, a plan under Section 350 of the Companies Law (the
Plan).

49

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Pursuant
to the terms agreed in the Term Sheet, upon the Plan becoming effective in
accordance with Israeli law and, unless otherwise agreed between Barak, the Ad
Hoc Committee and Clal, in the U.S. (the Closing), Barak shall pay the Note
Holders, a cash sum (the Cash Payment) of US$ 32.35 million in exchange for
the full and final compromise of: (a) US$ 57.4 million of the principal face
value of the Existing Notes; (b) default interest on the interest coupon due on
the outstanding Existing Notes on November 15, 2004 (the November Coupon),
but excluding the November Coupon itself, the amount of which is US$7.65
million; and (c) all interest accrued on the outstanding Existing Notes,
including the interest coupon due on the outstanding Existing Notes on May 15,
2005 and all default interest thereon, but excluding (i) the November Coupon,
and (ii) the interest due on the Residual Notes, as defined below, accruing from March 1, 2005
(The Debt Compromise).

The
Term Sheet provides that the Cash Payment shall be funded by Clal in exchange
for ordinary shares that will be issued to Clal by Barak, on terms to be agreed
between Clal, Barak and the other current shareholders of Barak, subject to the
prior approval by the Ad Hoc Committee with regard to the pro forma
post-Restructuring balance sheet. Following Closing, Clal will own at least 95%
of the share capital of the Barak, subject to any participation by the current
shareholders of Barak in the funding of the Cash Payment.

On
June 28, 2005, our board of directors resolved to participate in the funding of
the Cash Payment in the amount of approximately US$ 6 million, in accordance
with our proportional holdings in Barak.
As required by a letter agreement that we entered into with Clal, we
notified Clal on June 29, 2005 of such decision by our board of directors. As a
result of such participation, our holdings in Barak will be increased upon the
Cash Payment to approximately 18.5% (on a non-diluted basis). As long as we
hold at least 12.5% of Barak, we will be entitled to appoint one director to
the board of directors of Barak (which then, will be comprised of five
directors).

Following
the Debt Compromise, the principal amount of the Existing Notes shall be
reduced to US$ 65 million (the Residual
Notes). The Residual Notes shall bear interest at the rate of 10%
per annum (compared to 12.5% according to the current terms of the notes),
accruing from March 1, 2005. Payments of interest on the Residual Notes shall
be made on May 15 and November 15 each year. The maturity date of the Residual
Notes will be extended to November 15, 2010 (compared to 2007 according to the
current terms of the notes) at which time the entire principal amount of the
Residual Notes shall be repaid in one payment. The first interest payment on
the Residual Notes will be paid when due on November 15, 2005.

In
addition, within 3 business days of the date of the Restructuring Agreement,
Barak shall pay to the Note holders, US$ 7.65 million (being the November
Coupon) out of its cash funds. The payment of the November Coupon shall be in
addition to the payment of the Cash Payment.

Referring
to our participation right, as described above, we reached a written
understanding with Clal according to which we, together with Clal, will be
granted, among others, preemptive rights, a put option to sell all of our
shares in Barak to Clal, subject to certain conditions, and a call option for Clal
to purchase all of our shares in Barak, all subject to certain conditions.

Investments
in Technological Companies

In
May 2000, we and some of our shareholders at that time decided to invest in
start-up companies which engage in fields of Internet, cable television, data
telecommunications, applications, content, infrastructure and Internet Protocol
telephony. To this end, Nonstop Ventures Ltd. was formed by several of our
former shareholders, in which we hold, since November 2002, 50% of the issued
share capital. As of December 31, 2004, we and the other shareholders have
invested through Nonstop Ventures Ltd. in seven start-up companies an aggregate
amount of approximately US$ 5.8 million. Of the aggregate investment, we
invested approximately US$ 2.9 million. Due to, among other things, market
factors, the financial situation of these companies and our accounting
policies, these investment amounts were reduced in our financial records, and
were recorded in our financial statements for the year ended December 31, 2004
at a value of approximately US$ 0.3 million.

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Government
Regulation

General

The
operation of cable television systems and other telecommunication services
relating to our business is regulated in Israel by the Telecommunications Law,
the Ministry of Communications, and the Council for Cable and Satellite
Broadcasting.

The
Council is established pursuant to the Telecommunications Law and is comprised
of 13 members (including 6 representatives of the government and 7
representatives of the public) appointed by the Israeli Government upon the
recommendation of the Ministry of Communications. The Council is authorized,
among other things, to:

|  |                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------
|q | grant cable broadcast licenses;                                                                               
|  |                                                                                                               
|q | establish policies and adopt rules concerning the
  type, subject and content of cable television programming;
|  |                                                                                                               
|q | supervise the provision of broadcasting services by
  cable television and satellite operators; and           
|  |                                                                                                               
|q | advise the Ministry of Communications.                                                                        

The Telecommunications Law and Our Licenses

Until
we received our licenses, we operated under five exclusive franchises in
central and northern Israel. In July 2001, the Israeli parliament approved
amendments to the Telecommunications Law, under which terms were set for the
granting of licenses for the provision of telecommunication services via cable
television networks, in place of the exclusive franchises. The amendments also
set new regulatory standards with respect to television broadcasting services
provided to subscribers in a highly competitive environment.

We now operate under non-exclusive long-term licenses pursuant to the provisions
of the amended law. On March 27, 2002, we were granted a Telecommunications
Infrastructure License by the Minister of Communications for the provision of
infrastructure services for the distribution of cable broadcasts and access to
High Speed Internet providers. On April 30, 2002, we were granted two Cable
Broadcast Licenses by the Council. On May 2, 2002, we were granted a special
license to hold a Broadcasting HeadEnd by the Minister of Communications. These
licenses cover the same geographical areas as our previous five exclusive
franchises. In November 2002, our
Telecommunications Infrastructure License was amended by the Minster of
Communications, pursuant to which we were allowed to provide additional
infrastructure services of data communications, digital transmission and optic
transmission services. In November 2003, the Ministry of Communications granted
to HOT Telecom, a limited partnership owned by the three Israeli cable
television operators (of which we beneficially own approximately 26.6%), a
license covering the same services covered by our Telecommunications
Infrastructure License (to be supplied within the time frames set forth in the
Telecommunications Infrastructure License), and also including the requirement
to start to provide other services over cable networks including basic
telephony services to subscribers by no later than November 25, 2004. As of the
end of November 2004, HOT Telecom has gradually commenced to provide commercial
domestic fixed telephony services. HOT Telecom Infrastructure License replaced
and cancelled the Telecommunications Infrastructure License granted to us in
2002. According to a recent amendment to the HOT Telecom Infrastructure
License, dated March 16, 2005, from the date of the grant of the HOT Telecom
Infrastructure License and until the consummation of the merger amongst the
cable television operators, HOT Telecom shall be entitled to contact with
subscribers, including subscribers of the former infrastructure licensees of
the cable television operators for the provision of access to High Speed
Internet services through the former infrastructure licenses of the cable
television operators, including our subsidiary Matav Infrastructure 2001 L.P.,
and the provision of the said service shall be deemed as a service rendered by
HOT Telecom and the HOT Telecom Infrastructure License provisions shall apply.
The terms and conditions of the various regulatory approvals we have received
to the proposed merger between the Israeli cable television operators also
affect the regulation of our current business in certain respects. See Item
4B. Business Overview  Arrangement for a Merger of the Cable Television
Operators.

Pursuant to the terms of the Telecommunications Law,
as amended, and the terms of our licenses and HOT Telecoms license, we are now
subject, among other things, to the terms, conditions and restrictions set
forth below.

51

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Our
Licenses

|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
| | Corporate Separation of Cable Broadcast and
  Telecommunications Infrastructure Licensees and Ownership of Network

We
must operate through separate entities, namely the broadcast entities, on the
one hand, and an infrastructure entity, on the other hand, which must each hold
a Cable Broadcast License or Telecommunications Infrastructure License, as
appropriate. Pursuant to the Telecommunications Law, the licensee under the
Telecommunications Infrastructure License, or the Telecommunications
Infrastructure Licensee, must own the cable network infrastructure as a
condition to the receipt of the license. However, according to an agreement
with the Ministry of Communications incorporated in our Telecommunications
Infrastructure License, and subsequently, in the HOT Telecom Infrastructure
License, our Cable Broadcast Licensees are allowed to continue to own the cable
network infrastructure and to provide infrastructure services for an additional
interim period of the earlier of two years following the date of the grant of
the HOT Telecom Infrastructure License, which was November 25, 2003, or the
date of the consummation of the merger of the Israeli cable television
operators.

During
such interim period, the necessary arrangements must be made regarding the
transfer of the ownership of the cable network infrastructure to the
Telecommunications Infrastructure Licensee. Accordingly, and as a condition for
the receipt of our original Telecommunications Infrastructure License, our
Cable Broadcast Licensees and the Telecommunications Infrastructure Licensee
entered into an agreement dated March 5, 2002, whereby our Cable Broadcast
Licensees granted an exclusive lease to the Telecommunications Infrastructure
Licensee to operate the cable network infrastructure. In October 2002, our
Cable Broadcast Licensees and the Telecommunications Infrastructure Licensee
entered into an agreement, whereby the Telecommunications Infrastructure
Licensee shall provide the Cable Broadcast Licensees infrastructure services
for the broadcast of cable broadcasts in the areas covered by their respective
license, including installment, maintenance and disconnection of terminal
equipment. Since November 2003, HOT Telecom is our Telecommunications Infrastructure
Licensee and the prior agreements are no longer in effect. Agreements in this
regard will be signed between HOT Telecom and us in the future. The Cable Broadcast Licenses, the original
Telecommunications Infrastructure License and the HOT Telecom Infrastructure
License all contain restrictions limiting the number and identity of directors
that are permitted to serve in both the infrastructure entity (and its general
partner), and the Cable Broadcast companies.

According
to our Broadcasting Licenses, as amended January 6, 2005, in the earlier event
of the following, that either another entity is granted a general license to
broadcast through the cable network, or in the event that HOT Telecom reaches a
number of subscribers to access to High Speed Internet over cable services
equal to 450,000, or the number of the telephony lines operated by HOT Telecom
pursuant to the HOT Telecom Infrastructure License reaches 250,000 or on
January 5, 2006, the separation rules set forth below shall apply.

According
to the HOT Telecom Infrastructure license, in the event that either another
entity is granted a general license to broadcast through the cable network, or
in the event that HOT Telecom reaches a number of subscribers to access to High
Speed Internet over cable services equal to 450,000, or if the number of the
telephony lines operated by HOT Telecom pursuant to the HOT Telecom
Infrastructure License reaches 250,000, the separation rules set forth below
shall apply.

Subject
to the aforesaid, the Council with respect to us, and the Minister with respect
to HOT Telecom, also have the authority to impose conditions in addition to
those set forth below, regarding the relationship between the Cable Broadcast
Licensees or the Telecommunications Infrastructure Licensee and their connected
companies, including the identity of the officers of each company, the transfer
of information, the separation of entities between broadcast and
infrastructure, the accounting systems, and technological, geographical or
commercial restrictions regarding the laying down of infrastructure or
regarding the provision of services or broadcasts.

Separation
rules:

| |     |                                                                                                                                                                                                                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i.  | A separation must be effected between the management
  of the Cable Broadcast Licensees, on the one hand, and the management of the
  Telecommunications Infrastructure Licensee and its general partner (but not
  including the board of directors), on the other hand, including in relation
  to the business, financial and marketing systems;
| |     |                                                                                                                                                                                                                                                                                                                                                    
| | ii. | subject to the interim period mentioned above, a
  division of the assets of both Cable Broadcast Licensees and the
  Telecommunications Infrastructure Licensee must be effected;                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                    

52

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| |      |                                                                                                                                                                                                                                                                                                                                             
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | iii. | the Telecommunications Infrastructure Licensee and
  its general partner shall not be permitted to employ the employees of the
  Cable Broadcast Licensees and vice versa; and                                                                                                                                                              
| |      |                                                                                                                                                                                                                                                                                                                                             
| | iv.  | no employee of both the Telecommunications
  Infrastructure Licensee and its general partner can also be a director of
  either Cable Broadcast Licensee, if pursuant to such employees duties he has
  access to commercial information regarding any other general broadcast
  licensee that competes with our Cable Broadcast Licensees.

In
the event that a company connected to the Telecommunications Infrastructure
Licensee is an Internet service provider, then there will be an immediate
obligation of structural separation between the Telecommunications
Infrastructure Licensee and the Internet service provider, in accordance with
the above restrictions. If the Minister finds that special circumstances exist,
after he is convinced that competition in the field of telecommunications
broadcasting will not be harmed, he is entitled, upon a written request by a
license holder, to amend the license to include exceptions to the separation
obligation subject to conditions that the Minister may set.

q
Term
of our Licenses

Our
Cable Broadcast Licenses are each valid for initial periods of 15 years. The
HOT Telecom Infrastructure License is valid for a period of 20 years. The Cable
Broadcast Licenses and the HOT Telecom Infrastructure License may be extended
for additional 10-year periods, by the Council and the Minister respectively,
upon the request of the licensees. Our Broadcasting HeadEnd License is valid
for as long as our Cable Broadcast Licenses are valid, but not later than May
30, 2017. It may be extended upon request to the Ministry of
Communications.

In
order to have our licenses extended, we are obliged to, among other things,
prove, during the terms of the licenses, that we have met with their terms and
conditions. To this end, we are required to deliver detailed reports to the
Council as to our compliance with our Cable Broadcast Licenses and applicable law,
and evidence of acts that we have taken to improve the quality and technology
of the broadcasts. We are similarly required to deliver detailed reports to the
Minister in respect of telecommunications services that we provide.

q

Guarantees

In
order to ensure compliance with our obligations pursuant to the licenses,
applicable law and regulatory bodies, and to ensure payment of fines that may
be imposed by the Council and the Ministry of Communications, the following
guarantees have been provided:

|  |                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | bank
guarantees by the three cable television operators in the aggregate amount of
US$ 14 million to the Ministry of Communications pursuant to the HOT Telecom
Infrastructure License, of which we provided a bank guarantee in the amount of
US$ 3.72 million; and

q

a
guarantee of NIS 9.3 million to the Council pursuant to the Cable Broadcast
Licenses provided by us.

Each
of the Minister and the Council has the authority to exercise the applicable
guarantees in the event that we or HOT Telecom, as the case may be, do not
fulfill our or its obligations, and to cover any damage, loss or cost that the
Council, the Minister, or the government may incur as a result of any breach of
our obligations under the licenses, and to ensure all payments by the licensee,
including royalty payments and payments of fines imposed by the Council or the
Minister. The exercise of the guarantee does not derogate from the authority of
the Council or the Minister to cancel the licenses, to amend the terms and
conditions of the licenses or to impose other sanctions including fines for
certain stipulated breaches or actions.

        Subscriber Services

Infrastructure
services must be provided to all applicants in our service areas, upon
non-discriminatory terms. A licensee is obliged to connect anyone wishing to be
a subscriber of cable broadcast services or infrastructure services according
to the terms of the relevant license, within stipulated time periods.

53

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Our
standard cable broadcasting subscriber agreements are subject to the approvals
of the Council and the Court for Standard Contracts. We may be directed to
amend the terms of our standard cable broadcasting subscriber contracts. The
standard subscriber agreement with respect to the services granted pursuant to
the HOT Telecom Infrastructure License must be submitted to the General Manager
of the Ministry of Communications for approval if so requested.

HOT
Telecom is obliged to offer its services to all applicants, regardless of
whether or not they may be a subscriber of another licensee (including a
broadcast licensee). HOT Telecom is prohibited from discriminating, and will
refrain from giving a preference to a licensee that is related to it, in the provision
of services, including with respect to payment for services, conditions of the
services, availability of the services, providing information regarding the
services, or in any other manner. HOT Telecom is prohibited from making the
provision of the infrastructure services dependant upon the purchase of its own
or another partys services, or dependant upon refraining from receiving
services from another party, unless authorized by the Minister.

We
are prohibited from making the supply of broadcasts dependant upon
unreasonable, discriminatory or unfair terms, such as: minimum periods; the
receipt of other services; or the obligation to obtain equipment from another
party or us. We are prohibited from discriminating between subscribers. We are
also subject to rules concerning the time limits allowed for connection and
disconnection of subscribers, after such subscriber has given us notice.

We
or HOT Telecom, as the case may be, must continue to operate a customer service
call center and office, for technical and general customer support, and appoint
a complaints officer. Minimum standards are set in our licenses as to the
operation of such services and the management of customer complaints.

Under
our Cable Broadcast Licenses and under the HOT Telecom Infrastructure License,
we or HOT Telecom, as the case may be, do not have the right to disconnect or
discontinue the broadcast and infrastructure services except: upon the
subscribers request, for a material breach of the subscriber agreement, for the
purpose of maintenance, or due to risk, or as further set forth in our Cable
Broadcast Licenses and the HOT Telecom Infrastructure License.

        Restrictions
upon Transfer of Assets

According
to the Telecommunications Law, the licenses themselves and the rights granted
thereunder may not be charged, transferred, or made subject to a lien, with the
exception of transfers within the framework of structural reorganizations. Both
our Cable Broadcast Licenses and the HOT Telecom Infrastructure License also
stipulate that the assets of the licensees pertaining to the licenses
(including terminal equipment of the Cable Broadcast Licensees) may not be
transferred, assigned, charged or otherwise pledged in any way, other than in
accordance with the provisions of the Telecommunications Law (in respect of the
Cable Broadcast Licenses), and only upon the advanced written consent of the
Minister (in respect of the HOT Telecom Infrastructure License). However,
according to the Telecommunications Law, it is possible to create a charge upon
the assets of a cable broadcast licensee in favor of a bank legally operating
in Israel.

In
addition, under the HOT Telecom Infrastructure License, HOT Telecom is allowed
to create a charge in favor of a bank legally operating in Israel in order to
receive financial credit, provided that prior notice is given to the Minister
of Communications, and so long as the charge agreement includes a provision
according to which the exercise of rights pursuant to the charge shall not be
harmful to the provision of services by HOT Telecom.

        Restrictions
upon Ownership and a Change of Means of Control.

According
to the Telecommunications Law, a cable television operator must be a citizen
and a resident of Israel, or an entity incorporated in Israel, and at least 26%
of any means of control of such entity must be held by Israeli citizens and
residents.

According
to our Cable Broadcast Licenses, the Councils authorization is necessary for
any of the following changes of means of control in a Cable Broadcast Licensee,
and any such change effected without the Councils authorization shall be void:

| |       |                                                                                                                                                                                                                                                                                                     
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | a change of identity of the controlling entity of
  the Cable Broadcast Licensees;                                                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                                                                                     
| | (ii)  | an increase in shareholding by over 10% in the Cable
  Broadcast Licensees; or                                                                                                                                                                                                                      
| |       |                                                                                                                                                                                                                                                                                                     
| | (iii) | a change in the holdings in the Cable Broadcast
  Licensees following which any party becomes an interested party (a holding of
  5% or greater), or has a material influence (a holding of 25% or more); or if
  such party has ceased to be an interested party or holder of material
  influence.

54

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A change in the
  holdings in Cable Broadcast Licensees of up to 15% of the means of control
  (but which does not result in a change of control in the Cable Broadcast
  Licensee) which result from transactions performed on a stock exchange
  require notification to the Council, rather than authorization, as well as to
  the Senior Vice President of Engineering and Licensing of the Ministry of
  Communications.

In
addition, any agreement pledging the controlling shareholding must be made
conditional upon the Councils approval if the exercise of such pledge would
cause a change in the means of control of the Cable Broadcast Licensees.

The
restrictions outlined above must also be included in the articles of
association of the Cable Broadcast Licensees. These provisions appear in our
amended articles of association.

According
to the HOT Telecom Infrastructure License, the authorization of the Minister is
necessary for any of the following changes of means of control in HOT Telecom:

| |       |                                                                                                                                                         
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | if any party becomes an interested party (a holding
  of 5% or greater of any means of control);                                                        
| |       |                                                                                                                                                         
| | (ii)  | if any party gains a material influence (inter alia,
  a holding of 25% or more of any means of control);                                               
| |       |                                                                                                                                                         
| | (iii) | if any party becomes a controlling shareholder
  (inter alia, a holding of 50% or more of any means of control); or                                     
| |       |                                                                                                                                                         
| | (iv)  | transfer of means of control which would result in
  any party becoming an interested party, holder of material influence, or
  controlling shareholder.

Furthermore,
in the event that a charge is placed over the means of control of HOT Telecom
or over the means of control of an interested party of HOT Telecom, which, if
exercised will make the grantee a holder of means of control in HOT Telecom
which vest the grantee with material influence over HOT Telecom, or as a result
of which the grantee shall become a controlling shareholder of HOT Telecom,
then such charge must include a provision stating that the exercise of the
charge is conditional upon receipt of advanced written consent from the
Minister of Communications. Due to restrictions regarding cross ownership
interests, certain entities or individuals are prohibited from becoming an
interested party in HOT Telecom. According to our HeadEnd License, the prior
written approval of the General Manager of the Ministry of Communications is
necessary for the transfer of the license, directly or indirectly, to another
party. For this purpose, transfer includes a change in the holdings of the
means of control of the licensee, even if this does not include a change of
identity of the controlling entity of the licensee.

Specific
Terms and Conditions of our Cable Broadcast Licenses

In
addition to those mentioned above, our Cable Broadcast Licenses also include,
among others, the following specific terms and conditions.

qSubscription
fees

The
subscription fees that we charge our analog subscribers for cable television
services are regulated under the terms of our Cable Broadcast Licenses and by
regulations promulgated under the Telecommunications Law. Pursuant to such
regulations, the fees are linked to the Israeli consumer price index. If the
consumer price index increases between 4% and 10% after the date of a previous
increase of the fees and rates we charge, then we can increase fees and rates
once every 3 months. However, if the consumer price index increases in excess
of 10% after the previous increase of our fees and rate charges, then we may
increase fees and rates regardless of whether three months have passed since
the previous increase of such fees and rates. We are authorized to charge
subscribers a monthly subscription fee, fees for the Premium Broadcastings,fees for Pay-Per-View services, an
installation fee, lease payments or a deposit for the set-top boxes, an
additional outlet fee and fees for certain ancillary services.

We have the
right to offer discounts and make special offers for limited periods, subject
to giving prior notice to the Chairman of the Council and a Senior Manager of
the Ministry of Communications. They have the combined authority to disallow
and to direct us to take actions with regard to any offers that we wish to
make, upon specific considerations set forth in our Cable Broadcast Licenses.
In the event that such offers last for longer than the limited period allowed,
the Chairman of the Council and a Senior Manager of the Ministry of
Communications have the authority to deem the sale prices to be a request to
amend our price list accordingly.

55

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|  |                           
|- | --------------------------
| | Broadcasts and Programming

Pursuant
to the terms of our Cable Broadcast Licenses, the Cable Broadcast Licensees
shall air only the broadcasts that have been authorized by the Council,
according to the terms of such approval.
Such broadcasts shall be both digital and analog, or any other system
authorized in advance by the Council.
We may request permission to reduce the scope of the analog broadcasts,
and in such event, we may be instructed to charge lower subscription fees.  We are prohibited from ceasing the supply of
approved programs or packages without the Councils prior approval.  The Council has the authority to change the
terms of its approval of broadcasts, and has the authority to cancel the
approval for the broadcast of any channel following breach of the terms of the
approval, or in the case of a material change in the content of the
channel.

We
are required to provide a stipulated amount of independent and local original
programming, including information and broadcasts/programs exclusively
regarding events in local areas, as well as a variety of films, and
entertainment, music, arts, education, science, culture and sport programming
material, all in accordance with quantity and content criteria established by
the Telecommunications Law, Council Regulations and our Cable Broadcast
Licenses.  We are also required to
provide real-time, unedited transmission of radio and television programming
broadcasts to the public in Israel, receivable from the open airwaves, including
those of foreign television stations and educational television broadcasts. We
must provide an electronic programming guide.
On July 31, 2003, the Council amended the telecommunications rules and
our Cable Broadcast Licenses, according to which, obligations of the Cable
Broadcast Licensees in respect of the content and scope of broadcasts that the
licensees are required to provide were reduced.

On
December 31, 2003, the Council resolved that prior to determining the final
version of new broadcast rules, it will conduct a procedure according to which
individuals and companies which have interests in the subject matter will be
able to present their positions to the Council regarding the proposed version
of the new rules. On April 25, 2004, the cable television operators presented
their position regarding the proposed new rules.  To date, such rules have not yet been adopted.  Nevertheless, the Council
amends the regulations
relating to specific issues from time to time.

On
October 14, 2004, the Council resolved to allow the cable television operators,
including us, to broadcast, under certain conditions, local original
programming, that we purchased exclusively, for infants or for children and
youth.

Our
Cable Broadcast Licenses prohibit us from conditioning (directly or indirectly)
the provision of any broadcasts to a subscriber upon the purchase of other
broadcasts, including by means of pricing that is unreasonable in the opinion
of the Council and which was not approved in advance by the Council.  However, this does not affect our ability to
condition the receipt of additional digital broadcasts upon the purchase of the
digital basic broadcasts package. The Council may, for special reasons, direct
us to alter the composition of the tiering packages, or to separate a channel
from the basic packages.  We are obliged
to allow subscribers the right to purchase individual channels separately,
although if the Council is convinced that we are offering our subscribers a
broad choice at reasonable prices, it has the authority to exempt us from this
latter requirement.

We
are prohibited from advertising new broadcasts, channels, or packages before we
have served the Council with a request to broadcast such broadcasts, channels
or packages.  The Council has the
authority to prohibit such advertisements until such request is granted.  Furthermore, any offering of free broadcasts
to subscribers must include an express clarification, to be approved by the
Council in advance, as to our plans to charge subscribers for such broadcasts
in the future.

We
are entitled to broadcast notices regarding sponsorships during certain sports
and culture broadcasts, subject to certain conditions, in accordance with and
as set forth in the Councils decisions of September 3, 2002 and November 23,
2004.  Under the Telecommunications Law
and in accordance with the resolution of the Council of June 2002 as amended in
September 2002 and in May 2003, each Cable Broadcast Licensee is required to
allocate to local production or purchase of locally produced programs in
initially broadcasting in Israel, a percentage of its annual income derived
from subscriber fees for the year preceding the year of the investment, as
follows: (i) commencing April 30, 2002 (the date of grant of the Cable
Broadcast License) and until the end of 2005, at least 8% of such income; and
commencing 2006 and thereafter, as to be determined by the Council prior to the
end of June 2005; and (ii) in the event a Cable Broadcast License is granted to
the merged entity of the Israeli cable television operators, the Council shall
determine, prior to the end of June 2005, the rate of the amounts that shall be
allocated to local productions by the Cable Broadcast Licensees as of 2006 and
thereafter.  For this latter purpose,
the Council shall consider, among other things, the financial condition of the
licensees in connection with their broadcast activities and the contribution of
the proposed merger of the cable television operators to the improvement of the
financial condition of the licensees.
According to the valuation of our management, the investment amount made
by us for local production in initial broadcasting in 2002, 2003 and 2004 is
higher than 8% of our annual revenues from the subscription fees for the same
years.

56

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|  |                                                                                 
|- | --------------------------------------------------------------------------------
| | Obligation to Broadcast Specific Channels of Special Broadcast
  License Holders

Our
Cable Broadcast Licenses stipulate that we must allow any holder of a special
broadcast license to broadcast a specific channel to have access to our
subscribers.  Restrictions apply to the
terms of any agreement with the holder of the special broadcast license, to the
effect that such terms cannot be inferior to the terms on which we broadcast
our own channels.  The obligation to
allow such access does not apply to analogical broadcasts, with the exception
of dedicated channels or channels
that were broadcast on the analogical system before the granting of the general
non-exclusive license (such as the Shopping Channel).  We are required to commence the broadcasts of such special
broadcast license holder at any time, or upon such date that the Council shall
direct, even if no agreement has been reached with such  special broadcast license holder, and even
if we have been unable to reach agreement as to the price, provided that such
special broadcast license holder will provide guarantees.

In
any advertisement of the broadcast schedule of the independent channels, a
special broadcast license holder may not be discriminated against by the Cable
Broadcast Licensee.  The fee that we are
permitted to charge for such broadcasts may include costs in addition to
reasonable profit for such inclusion of information in such advertisement.  We must include broadcasts of a special
broadcast license holder on the electronic programming guide, and we must air
trailers for such broadcasts for a period of six months following the date the
channel started its broadcasts.  We shall
also be responsible for taking any specific actions necessary to enable
broadcasts of the special broadcast license holder, including the provision of
technical services upon terms equal to those provided to independent
channels.  The price for such services
must be included in the general fee for the broadcast.  We are obliged to connect subscriber(s) to
channels of a special broadcast license holder within 3 working days of
notification by the special broadcast license holder and the special broadcast
license holder is entitled to elect whether to offer its broadcasts to
subscribers as part of a package of channels of such special broadcast license
holder or of other special broadcast license holders, in addition to the offer
of its broadcasts to subscribers as a single channel. We are prohibited from
preventing such choice from being effected.

|  |                                                     
|- | ----------------------------------------------------
| | Outstanding Obligations from the Previous Franchises

Our
Cable Broadcast Licenses, as amended by the Councils decisions dated April 10,
2003, list all of the following unfulfilled obligations on behalf of all of the
previous franchise holders in Israel, which are still outstanding under the
terms of the previous exclusive franchises. Based upon the number of
subscribers, our pro rata portion of the cost of such common obligations would
be approximately 25%.  During a period
of 8 years commencing two years from the date of our Cable Broadcast Licenses,
we and the other cable television operators are obliged to fulfill these
obligations.  According to the Councils
decision, the total outstanding obligations include:

| |      |                                                                                                                                                       
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | i.   | 398 total
  hours of original locally produced broadcasts;                                                                                            
| |      |                                                                                                                                                       
| | ii.  | US$ 6,466,178
  worth of total investments in original locally produced broadcasts;                                                                   
| |      |                                                                                                                                                       
| | iii. | 3,890 total
  hours in total of original programming on HOT 3, the Childrens channel and  Channel 8;                                                 
| |      |                                                                                                                                                       
| | iv.  | 342 total
  movies on HOT Movies;                                                                                                                     
| |      |                                                                                                                                                       
| | v.   | 5,483 total
  regional news broadcasts of at least 15 minutes each; and                                                                               
| |      |                                                                                                                                                       
| | vi.  | 1,350 total
  hours of translated programs with subtitles and 118 total new broadcasts with
  translation into sign language for the hearing impaired.

The cable
  television operators have addressed the Council asking for relief with
  respect to their outstanding obligations and the Council has responded by
  granting the cable television operators extensions with regard to certain of
  the individual obligations  mentioned
  above, although not extending further the original 8-year period.  The parties are still in correspondence
  with regard to this matter.

|  |                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------
| | The status of
  our Cable Broadcast Licenses in the event that the merger between the Israeli
  cable television operators is consummated

57

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The
terms of the approval of the Council to the merger (dated March 7, 2002, as
amended on February 13, 2003) shall be incorporated into any new broadcast
license that will be granted to the merged entity and that will replace our
current Cable Broadcast License.
Pursuant to the Councils amended approval, an application for a general
broadcast license was filed with the Council on behalf of the merged entity on
March 5, 2003.

Specific terms and conditions of the HOT
Telecom Infrastructure License

In
addition to the above, the HOT Telecom Infrastructure License also includes,
among other things, the following terms and conditions.

|  |         
|- | --------
|q | Services

HOT
Telecom has the right to grant general cable broadcast license holders
services, and to provide services of access to High Speed Internet over cable,
messaging services, data communications services, and other ancillary telephony
services.

The
provision of our service to a broadcast licensee shall be effected in such a
manner that the broadcast licensee shall be able to provide its services to the
subscribers in accordance with the terms and conditions of its license.  HOT Telecom is prohibited from
discriminating, and will refrain from giving a preference to a licensee that is
related to it, in the provision of services, including with respect to payment
for services, conditions of the services, availability of the services,
providing information regarding the services, or in any other manner.

|  |     
|- | ----
|q | Fees

The
fees that are permitted to be charged to subscribers by HOT Telecom and by us
(with respect to the services provided by us), include, among other things:
payment of installation fee for connection; payment for terminal equipment and
installation thereof; payment for installation of extensions; relocation fees;
payment for the sale, loan or lease of terminal equipment; regular periodic
payments; varying payments for use of the service according to time or traffic
volume; and payment for conversion of services and any other payment approved
by the Minister or the General Manager of the Ministry of Communications.  In addition, with respect to cable modems,
we may not charge subscribers for a deposit in excess of the cost of the cable
modem, for cable modem leased to the subscriber, and we may reduce the amount
by 10% of the value of the cable modems each year or partial year.

We
have the right to determine service packages of telecommunications services
that we provide, at an overall price per package of services, or at a price for
each service.  We are obliged to offer,
without discrimination, every service and every service package on equal terms
and at a uniform fee, according to the type of subscribers all over the service
area.  We must make information with
respect to fees fully available to every applicant, including on the Internet.

We
are obliged to notify the Ministry in advance of any intended changes in
fees.  The Minister has the right to
alter the fee if he finds that it contravenes the provisions of the license or
might compromise competition or the rights of subscribers.

When
collecting payment from a subscriber for another service provider, no
additional amount may be charged to the other entitys fee.

|  |            
|- | -----------
|q | Frequencies

Certain
frequency bands are forbidden, including between 806MHz and 862 MHz.  We are prohibited from causing interference
to other systems and shall cooperate in preventing interference.

|  |            
|- | -----------
|q | Termination

Upon
termination of the HOT Telecom Infrastructure License, in the event that HOT
Telecom is unable to reach an agreement with a potential purchaser of its
infrastructure within 6 months, then an arbitrator shall be appointed who shall
impose a valuation calculated according to the value of the infrastructure, on
a going concern basis and according to its economic value.

58

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Our Broadcasting HeadEnd License

This
license allows us to among other things; construct, maintain and operate
broadcasting HeadEnds, for the purpose of maintaining the cable services
provided by the Cable Broadcast Licensees; to connect our telecommunication
system to the public telecommunications network operated by HOT Telecom or
another entity licensed for transmission; to connect our telecommunications
system to the system of another special licensee for operating a HeadEnd, to
enable broadcasting reception via our telecommunications system and to
construct and operate monitoring mechanisms needed to ensure the orderly
operation of our telecommunications system.
In October 2002, two of our Cable Broadcast Licensees entered into an
agreement, pursuant to which one Licensee will provide the other HeadEnd
services for the purpose of transmission of cable broadcasts.  The General Manager of the Ministry of
Communications has the authority to conduct inspections to ensure that the
terms of our Broadcast HeadEnd License have been complied with.

In
April 2005, we and the other two Israeli cable television operators entered
into the HeadEnd Agreement in order to cooperate for the purpose of improving
the efficiency of the transmissions of the multi-channel television broadcasts
for subscribers, by way of a joint use of the cable television operators
HeadEnds including the unification of the operational systems which are
connected to the HeadEnds. For additional information on the HeadEnd Agreement,
see Item 4B.  Business
Overview--Technological Preparations for Competition in the Telecommunications
Market.

Special Licenses

In
July 2002, the Ministry of Communications granted us special licenses to
provide messaging services, which were subsequently extended to July 2008.  Under these special licenses, as
subsequently amended in October 2002, March 2004 and May 2004 , we may provide
the following services:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SMS services (between our subscribers and
  subscribers of mobile cellular telephone service providers);                                                                                                                                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | T-Mail services (from television to
  television, between our subscribers and between our subscribers and
  subscribers of Internet service providers);                                                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | chat services (between our subscribers of
  this service, and between our subscribers and subscribers of chat services of
  other cable television operators);                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | instant messaging  (between our subscribers of this service,
and between our
  subscribers and subscribers of instant messaging services of other cable
  television operators); and                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | interactive games (between our subscribers
  of this service or between our subscribers of other cable television
  operators), including multi-player messaging between these subscribers, and
  personal data information services (allows a subscriber to connect to
  databases through the cable network, which includes information on the
  subscriber, and for the purpose of receiving and inputting personal
  information and data, and connection of the licensees network to databases).

Agreements with
Subscribers.

When
we started to provide our subscribers with digital broadcasting services we
began signing new subscribers and those subscribers electing to purchase such
digital services, on a new subscriber agreement.  This agreement was approved by the Council in January 2001,
together with the Councils approval of our digital broadcasting services.  This agreement was submitted to the Standard
Contract Court in Israel for its approval, which has not yet been
received.

When
we started to provide our subscribers with access to High Speed Internet over
cable services we began signing such subscribers on an access to High Speed
Internet over cable agreement.  This
agreement was submitted to the General Manager of the Ministry of
Communications for its approval.  This
agreement was submitted to the Standard Contract Court for its approval as
required by our Telecommunications Infrastructure License in effect at such
time. The review of our application was later joined with similar applications
submitted by the other cable television operators. To date, comments or
amendments to this agreement by the General Manager have not been
received.  We are currently working
towards receiving the Courts approval.

HOT
Telecom has entered into an agreement with its subscribers for the provision of
telephony services.  According to the
HOT Telecom License, HOT Telecom is not required to receive the approval of the
Standard Contract Court with regard to this agreement.

59

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Royalties
and Payments to the State of Israel

Under
our Cable Broadcast Licenses, we are required to pay the Ministry of
Communications an annual license fee and variable royalties.  The variable royalties are payable annually
in an amount equal to a certain percentage of our annual gross revenues (not
including VAT) from the provision of certain broadcast services, which include,
among other things, certain installation and subscribers fees.  For purposes of payment of these royalties,
revenues derived from subscriber fees for tiering and pay-per-view broadcasts
are to be calculated net of payments that the licensee is contractually
obligated to pay to the holder of the rights to such broadcasts.  Under amendments to regulations promulgated
under the Telecommunications Law proposed by the Minister of Communications and
approved by the Economic Committee of the Israeli parliament on June 16, 2003,
royalties payable by Cable Broadcast Licensees have been reduced, effective
retroactively, from 5% of annual gross revenues (not including VAT), to 4% of
such revenues in 2002 and 2003, and 3.5% of such revenues in 2004 and
2005.  Payments are made on a quarterly
basis.

In
addition, regulations promulgated under the Telecommunications Law provide for
royalties payable by general telecommunications licensees (which includes HOT
Telecom) for the right to provide local fixed line communication services
(including access to High Speed Internet and others), as follows: until
December 31, 2003, 4% of certain income, and from January 1, 2004, 3.5% of
certain income. Certain income for these purposes includes all income of the
general telecommunications licensee that is derived from the provision of
telecommunications services pursuant to its license, excluding:

| |      |                                                                                                                                                                                                                                                                                                                                                                    
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i.   | income
  collected by the licensee on behalf of another licensee (general or special)
  and transferred to the other licensee; or payments made to a different
  general license holder for the completion of calls, or the transfer of such
  calls in the telecommunications network of such other license holder,
  including payments made for interconnection;
| |      |                                                                                                                                                                                                                                                                                                                                                                    
| | ii.  | income of
  the licensee from the provision of transmission services to other license
  holders;                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                    
| | iii. | income of
  the licensee from segments of transmission services by way of satellite;                                                                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                    
| | iv.  | income of
  the licensee from selling terminal equipment; and                                                                                                                                                                                                                                                                                                      
| |      |                                                                                                                                                                                                                                                                                                                                                                    
| | v.   | bad debts
  that are related to income from the provision of services in relation to
  which the licensee pays royalties.                                                                                                                                                                                                                                          

Our
Broadcasting HeadEnd License provides that we must pay fees in consideration
for the license as determined by the Ministry of Communications pursuant to the
Telecommunications Law and the Telegraph Ordinance [New Version], 1972.

In
December 2003, the Minister of Communications announced his intention to amend
the regulations in several aspects, and among them, in a way that will exclude
from the royalties payment obligation, income from certain data communication
and transmission services that are supplied by special licensees, which are not
obliged to pay royalties.

HOT
Telecom asked for certain amendments to the Minister of Communications
proposal. The proposed amendment to the regulation has not been executed
yet.

According
to a letter dated April 20, 2005, which was sent by the Ministry of Finance and
the Ministry of Communications to the Manager of the Government Companies
Authority in Israel, the Ministries intend to reduce the percentage of
royalties paid to the State of Israel by the holders of the international
communication licenses and the holders of domestic fixed communication services
licenses.  The amount of the reduction
is 0.5% per year commencing on January 1, 2006 up to a percentage of royalties
of 1% in the year 2010.  The execution
of this reduction is conditioned on the amendment of the Communication
Regulations (Royalties), the approval of the Minister of Communications and the
Minister of Finance, and the approval of the Finance Committee of the Knesset.  This intended reduction will supplement an
additional reduction already made with regard to holders of cellular
telecommunication licenses.

The
said position does not include the field of multi-channel broadcasting.  Therefore, in the event the reduction will
be implemented as detailed above, we will not be able to benefit from it.

60

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In
addition, although HOT Telecom may benefit from the intended reduction in its
activity as a provider of infrastructure services, this reduction will not be
significant due to the fact that HOT Telecom is a new operator with relatively
low revenues.  Furthermore, such a
reduction in the percentage of royalties may be of more significance to HOT
Telecoms competitor.

HOT
Vision and Cooperation of Cable Television Operators in Production of
Broadcasting

In
1989, we, together with the other Israeli cable television operators, formed
I.C.P. Israel Cable Programming Company Ltd., or ICP, for the purpose of
jointly purchasing and producing our local cable channels, which then consisted
of four channels: family, movies, sport and children.  The culture and science channel was later added.  In January 2004,
ICP changed its legal name
to HOT Vision Ltd. We currently hold approximately 26.2% of Hot Vision ordinary
shares and 28.6% of Hot Vision preferred shares.  In January 1995, the cable television operators and ICP (as it
was known at such time) reached an agreement for the approval of unified
channels with the Controller of Restrictive Business Practices, or the
Controller, regarding its operations, according to which, among other things,
it would produce, create or acquire at least 15% of its programming from local
agents and suppliers.  This agreement
was extended from time to time by the Restrictive Business Practices Court.

HOT
Vision executed agreements with certain shareholders in connection with the
provision of contents purchased by it from the owners of the said
contents.  The initial term of the
agreements was until December 31, 2000, and the shareholders are entitled to
extend them for additional periods of 12 months each, on terms to be determined
by the parties.  The shareholders have
exercised the extension option for an additional year in 2005.

For
information regarding certain guarantees we have provided to two banks in order
to secure certain liabilities of HOT Vision, see Item 5B. Operating and
Financial Review and Prospects  Liquidity and Capital Resources.

For
information regarding two lawsuits filed in the District Court of Los Angeles,
California, United States, by Warner Bros. International Television
Distribution, a provider of movie and series content broadcasted on HOT 3 and
HOT Movies of the Israeli cable television operators, including ours, against
the two other Israeli cable television operators, Tevel and Golden Channels,
alleging that they are in breach of their respective license agreements with
Warner Bros., see Item 8A.
Consolidated Statements and Other Financial Information  Legal and
Arbitration Proceedings.   As a result
of these lawsuits, we now provide content purchased from alternative studios
and content providers in place of the programs we previously purchased from
Warner Bros.

On June 30, 2003, HOT Vision and the cable  television  operators  signed an agreement for the  indemnification
of HOT Vision  relating to all of the amounts that it shall bear in  connection  with the debt to major studios
and expenses  associated with the management of the above legal  procedures.  According to the  indemnification
agreement,  the cable  television  operators are committed,  one towards the other,  to jointly finance through
HOT  Vision  the debt to the  major  studios  and  expenses  associated  with  the  management  of these  legal
procedures  which were  implemented  against  certain of the cable  television  operators  as well as any other
procedure  between Tevel and/or Golden Channels and the major studios in connection with agreements  which were
signed  and/or  terminated  with the major  studios -  regarding  content  which was  provided to HOT 3 and HOT
Movies.  As for the pay  channels  (HOT  Drama,  HOT  Action,  HOT Fun and HOT  Prime),  it was agreed that the
amounts will be paid  directly to Tevel.  According  to the  indemnification  agreement,  the debt to the major
studios  contains  amounts  that Tevel  and/or  Golden  Channels  have to pay, as the case may be, to the major
studios in connection with the legal  proceedings  associated with these  agreements,  including the amounts of
new  guarantees  provided to the major  studios,  if so provided,  and which the major studios will forfeit and
legal  fees that  Tevel  and/or  Golden  Channels  will have to pay to the  major  studios,  all by virtue of a
judgment or a decree rendered in the context of the  proceedings.  The  indemnification  agreement  stipulates,
inter alia, that each of the cable television  operators shall pay HOT Vision sums,  according to its relative
share in the market,  of the amounts that shall be actually  paid by Tevel or Golden  Channels  with respect to
the debt to the  major  studios  and  expenses  associated  with the  management  of the  legal  procedures  in
connection  with HOT Movies  and/or HOT 3. The  indemnification  does not include  amounts  that are payable by
the cable  television  operators to Tevel and/or Golden  Channels  through HOT Vision and Avdar for purchase of
content to channels 3 and 4 and to the pay channels (HOT Drama, HOT Action, HOT Fun and HOT Prime).

The
indemnification agreement further stipulates that the commitments of the cable
television operators shall be revoked in the following cases: (1) if the cable
television operators release HOT Vision in writing from its obligations under
this agreement (2) if Tevel, Golden Channels and we were to merge into another
cable company and the merged entity assumes, in writing and without any
condition, the commitments of all of the cable television operators towards Hot
Vision under this agreement even if HOT Vision is not released from all of its
said obligations given that the merged cable company holds all of the issued
share capital of HOT Vision and that its commitments cover all of HOT Visions
obligations under the indemnification agreement.

61

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Cooperation
Among the Cable television operators

Agreement for a Merger of the Cable Television Operators

As
of 2001, the cable television operators are acting in order to merge their
activities. The purpose of the merger, among other things, is to enable us to
provide additional telecommunications services, to increase our ability to
compete successfully with Bezeq in the field of domestic fixed line services,
including telephony, and, to cooperate in various areas, including purchase of
content, marketing, sales and unified networks and effect substantial cost
savings.  Prior to the merger we will
need to reach an agreement with the major Israeli banks, which are creditors of
the parties to the merger, addressing among other things, the assignment of
certain of the current debts and securities to the merged entity, and its
future financing.  The merger must also
receive approvals under applicable law, including the approvals of the Council,
the Income Tax Commission, the Controller, and by an Israeli court, after
receiving the approvals of certain creditors and the relevant corporate bodies
of the relevant parties.

To
date, approvals have been granted, subject to terms and conditions, from the Council,
the Controller and the Income Tax Commission.
Subject to the final terms of the merger, further approval of the Income
Tax Commission to the merger may be required.
The Supervisor of Banks of the Bank of Israel, or the Supervisor of
Banks, has yet to agree that the proposed merger is not in breach of certain
limitations under Israeli banking laws applicable to the Israeli banks, which
are creditors of the merged entity.

In
February 2003, we and the other Israeli cable television operators and us
agreed on a final version of an agreement, which sets forth the structure and
conditions of a merger among us, including, inter alia, the terms of the
agreement between the shareholders.  The
parties have agreed that this merger agreement, if, and when, it is signed,
will add to and broaden the terms of the previous arrangement between these
parties executed on December 31, 2001, which cancelled and replaced previous
arrangements between the parties dated December 29, 1999 and April 30, 2001.  In the event any terms of these agreements
shall conflict, the terms of the latter agreement of February 2003 shall
prevail.  Under the terms of this merger
agreement, on the date of the consummation of the merger, all of our cable
broadcast operations will be transferred to our subsidiary, Cable Systems Media
Haifa-Hadera Ltd., immediately following which all of the cable broadcast
operations of the cable television operators shall be merged into and together
with Gvanim Cable TV Ltd., such that Gvanim Cable TV Ltd. shall become the
merged broadcasting entity.   Likewise,
all of the infrastructure operations of the subsidiaries of the cable
television operators shall be merged into and together with a wholly owned
subsidiary of Gvanim Cable TV Ltd., such that this subsidiary shall become the
merged infrastructure entity.  The
parties have agreed that if the final version of the merger agreement has not
been signed by July 31, 2003, or a later date agreed upon by the parties, the
provisions of the agreement will not apply, the parties shall not have any
claim or suit towards another party with respect to the proposed merger
agreement and/or the shareholders agreement, and shall be free to act
independently or together with others, without any limitation.

According
to the position of the Supervisor of Banks, the merger of the cable television
operators and the formation of a merged cable entity would constitute a
deviation from the directives of the Bank of Israel and of Proper Bank
Management Directives of the Supervisor of Banks regarding, among other
things, restriction on debt amounts to a Group of Borrowers as such term is
defined in the Proper Bank Management Directives.  The relevant directives deal with certain limits applicable to
loan amounts given by banking corporations to Sole Borrower and/or Group of
Borrowers and as a result, attribution of the merged companys debts, among
other things, to an indirect controlling shareholder of us and the other cable
television operators.

Based
on the aforesaid, and due to the difficulties arising from the position of the
Supervisor of the Banks and the provisions of Proper Bank Management
Directives there is no certainty whether the merger will be actually completed
and if it will be completed when it will actually occur and what will be its
structure.

Since
April 2002, in accordance with the approval of the Controller of Restrictive
Business Practices to the proposed merger, we cooperate with the other two
Israeli cable television operators in order to strengthen our competitive
position in the telecommunications market and to achieve maximum operating
efficiency in a broad range of activities, including, among others, our
marketing and content related activities.

On
January 30, 2005, the Controller granted us and the other cable television
operators an exemption from the requirement to receive an approval of a
restrictive arrangement for a period of one year, until January 30, 2006.  On December 15, 2004, the Controller granted
us and the other cable television operators an additional extension of the
merger approval from April 2002 until January 29, 2005, which was further
amended on January 30, 2005 until the earlier of January 29, 2006 or the
consummation of the merger.

62

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Tevel
filed a motion for stay of proceedings on April 22, 2002.  The stay of proceedings was granted by the
Court on April 22, 2002. In September 2003, the meeting of creditors of the
shareholders of Tevel approved the creditors arrangement proposed by Tevels
trustee.  Following the approval of the creditors
arrangement by the meetings of creditors, the Court approved the
arrangement.  As of January 8, 2004, all
of the approvals that were required in order for the arrangement of creditors
to become effective had been obtained, and accordingly the arrangement of
creditors entered into effect.
According to this arrangement, Tevel has reached agreement with its
unsecured creditors, which has resulted in the settlement of all of the
debts.  According to the agreement
reached with the secured creditors, Tevels shares and remaining assets are subject
to the right of Tevels secured creditors which are banks to realize these
shares and assets to cover Tevels debts to these secured creditors.

We
have concluded preliminary discussions with Tevel and its shareholders
regarding the purchase by us of all Tevels assets including Tevels holdings
in Golden Channels. If we were to acquire Tevels assets, we would have over
560,000 cable subscribers, representing approximately 60% of the Israeli cable
television market, and we would hold 35% of Golden Channels, subject to certain
terms.  We have not signed a binding
agreement with Tevel, and cannot be certain that this transaction will be
completed, or if completed, on what timeframe or on what terms and conditions,
including price.  If this transaction
were to take place, we would likely incur or assume substantial additional
indebtedness.

However,
we believe that an acquisition by us of Tevels assets, might facilitate the
consummation of a merger among the cable television operators.

In order to
strengthen the cooperation of the three Israeli cable television operators, we,
Tevel and Golden Channels agreed to perform an operational merger in June 2004.
To this effect, a joint management was appointed to oversee the joint operation
of the marketing, sales, engineering, customer service, operations and
information systems activities of the three cable television operators. The
joint management conducts and manages the Companys activities in the ordinary
course of business in the areas of the joint activities.  Material decisions applicable to the
operational merger require our approval as well as the approval of Tevel and
Golden Channels.  Our approval is
subject to the decision of our board of directors and other corporate bodies,
as required by law.  Since the
appointment of the joint management and the commencement of the operational
merger, we, Tevel and Golden Channels have operated jointly on a regular
basis.  The three cable television
operators have agreed in principle that the allocation of the expenses deriving
from the joint activity among themselves shall be proportional to the number of
subscribers of each party.  The
operational merger does not include transfer of assets from any of the three
cable television operators to a merged entity or from any of the three cable
television operators to another cable operator.  Each of the three cable television operators remains the sole
owner of its assets and is entitled to the revenue generated from its own
subscribers.  Furthermore, the joint
activity does not include transfer of liabilities owed to third parties,
including, inter alia, banks or other creditors.  .

The Approval of The Council for Cable and
Satellite Broadcasting

The
approval of the Council to the merger of March 7, 2002, as amended on February
13, 2003, and that shall be effective only upon the consummation of the merger,
is subject to a number of conditions, including:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | an
  obligation upon the cable television operators, which has since expired, to
  allow direct broadcasting by YES, to broadcast the HOT 3, HOT Movies, sports
  and childrens channels, for consideration;                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|q | an
  obligation of unbundling, requiring the merged entity to grant special
  broadcast license holders which broadcast on a digital platform a
  non-exclusive permit, for consideration, to use its network in order to
  transfer their broadcasts (which will be up to a maximum of the higher of
  either: (i) one sixth of our broadcasting network capacity; or (ii) 75
  Mhz from the date of the approval of the merger, including the capacity
  required for dedicated channels and special cable broadcasting licensees (one
  sixth of the broadcasting network capacity); and 150Mhz after 2005);

63

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | a maximum
  subscriber fee for the basic packages (digital or analog) of NIS 156
  including VAT, linked to the combined index, that includes the Israeli
  consumer price index of December 2001 (published January 15, 2002) and the US
  dollar exchange rate as published by the Bank of Israel, or any other index
  as shall be determined in regulations.
  The effectiveness of the Councils approval regarding the said linkage
  to the combined index is subject to the amendment of the applicable
  regulations promulgated under the Telecommunications Law.  To date, the Ministry has not adopted such
  an amendment;
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | an
  obligation to sell 20% of the entity that shall control broadcasting content
  (as opposed to infrastructure) to third parties, within four years from the
  date of the decision (in relation to which a public offering will be
  considered such a sale) unless certain conditions stipulated in the decision
  shall occur;                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | a limitation
  upon the number of channels which the cable television operators shall be
  allowed to produce (not including up to 16 optional channels on a
  pay-per-view and Near Video on Demand basis); and                                                                                                                                                                                                                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|q | the
  provision by all of the cable television operators of a guarantee of NIS 45
  million to cover the obligations of the merged entity under the Councils
  approval, and all the Cable Broadcast Licensees (taking into account any amount
  already provided by way of guarantee pursuant to all the Cable Broadcast
  Licenses).  Our pro rata portion of
  the NIS 45 million amounts to approximately NIS 11 million.                                                                                                                                                                                                         

In
addition, in accordance with the approval of the Council, in the event that the
Council is convinced that there is a material decline in competition in the
multi-channel television market, the Council is entitled to instruct the cable
television operators to allow each special and general cable broadcast license
holder that broadcasts in a digital format use of our infrastructure in order
to access all potential subscribers, even if they are not our subscribers, so
long as our cable network infrastructure reaches their premises.  According to the Councils decision, a material
decline will be deemed to occur, among other things, in the event that YES
shall cease its operation or the merged entity shall provide services to more
than 80% of multi-channel television subscribers in Israel.

Pursuant
to the Councils amended approval, an application for a general broadcast
license was filed with the Council on behalf of the merged entity on March 5,
2003.

In
accordance with the Councils approvals to the merger, upon the merger, the
terms of the Councils approvals to the merger will be an integral part of the
terms of the Cable Broadcast License of the cable television operator or any
merged entity in place of the cable television operators.

The
eventual application of the above terms and other provisions are subject to
interpretation and clarification.

The
Approval of the Controller of Restrictive Business Practices to the Merger and
Exemption from the Requirement to Receive an Approval of a Restrictive
Arrangement

The
approval of the Controller to the merger, granted in April 2002, is also
subject to a number of terms and conditions, set forth below.   On April 14, 2003, the Controller extended
the validity of his approval to the merger until the earlier of June 6, 2003 or
the consummation of the merger.  In
June, November and December 2003, the Controller further extended the validity
of his approval to the merger until the earlier of December 15, 2004 or the
consummation of the merger.  On December
15, 2004, the Controller granted us and the other cable television operators an
additional extension of the merger approval from April 2002 until January 29,
2005, which was further amended on January 30, 2005 until the earlier of
January 29, 2006 or the consummation of the merger.  The eventual application of the terms and conditions of the
Controllers approval to the merger, as amended from time to time, and the way
in which they will be implemented together with the terms of the Councils
approval may be subject to interpretation and further clarification.

Separation
of activities: the merged entity shall conduct its
activities through a broadcasting entity and a cable infrastructure entity,
whose activities must be completely separated.

Unbundling:
the merged infrastructure entity must allow other cable broadcast license
holders to use its cable infrastructure on terms that are not inferior to those
offered to the merged broadcasting entity, up to the same maximum commitment as
provided by the terms of the approval of the Council, with the additional
stipulation of not less than 75 Mhz from the date of the consummation of the
merger, and not less than 100Mhz after January 2005 for third parties who are
not dedicated channels.  This obligation
shall not apply to any broadcaster of multi-channel national television
broadcasts, on a national infrastructure network in its control, unless there
is a material decline in the multi-channel television market.  In the event that the Controller considers
there to be a material regression in the multi channel television market for
subscribers, he shall have the authority to instruct the merged infrastructure
entity (and if necessary, the merged broadcast entity) to provide any cable
broadcast license holder the telecommunications infrastructure services needed
to supply the package of channels of such licensee to any person whose premises
is reached by the cable network even if such person is not a subscriber of the
merged broadcast entity; however, such instruction shall not oblige the merged
infrastructure entity to lay down additional telecommunications infrastructure
for such a cable broadcast license holder, to a person who is not a subscriber
of the merged broadcast entity. Without derogating from the above, in the event
that YES ceases to operate, it will be deemed to be such a material decline in
competition. Regarding these conditions, YES or its successor shall be deemed
to be such a cable broadcast license holder if it ceases its operation due to
insolvency.

64

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Restrictions
upon the corporate structure:  within 48 months of the Controllers
approval, at least 20% of the controlling entities of the merged broadcasting
entity must be owned by an entity that does not hold, directly or indirectly,
any means of control in any other cable or infrastructure entity.  This restriction may be amended or waived at
the discretion of the Controller, or will be deemed inapplicable, if either at
the end of 48 months there are at least two other holders of a general cable
broadcasting license in Israel that are not linked to either the merged
broadcasting entity or the merged infrastructure entity; or, if the Minister of
Communications has set rates for usage of the merged entitys infrastructure by
third parties within 30 months of the date of the approval (and the Controller
finds that such rates encourage competition significantly). According to
clarifications provided by the Controller in relation to this obligation, in
the event that 20% of the means of control of the merged infrastructure entity
is purchased by a third party and 20% of the means of control of the merged
broadcast entity is purchased by a different third party, neither of whom have
a connection to the existing cable television operators, it will not be
necessary to meet this requirement.

Restrictions
upon the ownership and purchase of broadcasting material:

(i)  The merged broadcasting entity and the
merged infrastructure entity shall be prohibited from holding means of control
of a producer of a channel, except HOT 3 and (HOT Movies in the basic packages,
and shall be prohibited from owning or having any interest in any other
producer of a channel, unless it has received authorization to the contrary
from the Controller by way of amendment of the terms of the Controllers
approval to the merger.  Subsequent to
the approval and pursuant to the said restriction, we sold and transferred an
option that we held to purchase certain interests in the Hop channel, we and
the other cable television operators sold and transferred options we held to
purchase certain interests in the sports channels (Channel 5 and the Sport 5+
channel), and we and the other cable television operators relinquished our
interests in the childrens channel and the culture and science channel.
Pursuant to the recent amendment to the merger approval granted to us by the
Controller in January 2005, the merged broadcasting entity is permitted to hold
means of control in four additional channels (channels that were not broadcasted
on the cable infrastructure as of January 1, 2005 and which will not substitute
a channel that is being broadcasted by a producer of a channel that was
broadcasted on the cable infrastructure on January 1, 2005).

(ii)  The merged broadcasting entity and the
merged infrastructure entity are permitted to use the content of another
producer, but shall be prohibited from owning the content of another producer,
and further, these entities shall be prohibited from determining to whom content
shall be sold or transferred to third parties for use (with the exception of
agreements with the major production companies, namely Warner Bros., Universal,
Buena Vista (Walt Disney), Paramount, MGM, Columbia, and Twentieth Century Fox,
which were signed prior to the date of the Controllers merger approval and
received prior regulatory approvals).

(iii)  The merged broadcasting entity shall only be
allowed to purchase content for HOT 3 and HOT Movies and for Pay-Per-View and
Near Video On Demand, and the additional channels purchased shall be in
accordance with restrictions concerning, among other things, the purchase of
exclusive content.  In addition, the
merged broadcasting entity shall have a must sell requirement to YES or any
other general license holder regarding certain material content broadcast on
HOT 3 and the HOT Movies channel stipulated in the Controllers approval.   Further, all content purchased, by any
party to the merger or any person related to such parties, from the major production
companies within 24 months following the Controllers approval to the merger
(April 2002), shall be subject to the must sell requirement to YES or any other
general license holder, provided that any person who receives content pursuant
to this must sell requirement shall also be subject to the must sell
requirement with respect to contents purchased or that may be purchased from
the major production companies during such period.

Obligation
to supply multi-channel television broadcasts to the entire population of
Israel: subject to price restrictions, and existence
of appropriate infrastructure.

Infrastructure:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | The merged
  infrastructure entity shall be prohibited from preventing the development of
  competing infrastructures, and shall be prohibited from using its control
  over the merged infrastructure to prevent or hinder competition.  Unless prior written consent has been
  received from the Controller, both the merged broadcasting entity and the
  merged infrastructure entity shall be prohibited from holding any interest,
  directly or indirectly, in any person or entity that holds an interest
  greater than 10% in any other company that owns infrastructure for cable
  television or any other infrastructure for telecommunications services. | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | The merged
  infrastructure entity shall be prohibited from preventing any registered
  building contractor from laying down infrastructure, regardless of the
  presence of infrastructure belonging to the merged entity already in such
  area.  Without derogating from the
  above, the infrastructure entity shall be prohibited from preventing a
  building contractor from laying down infrastructure in places where it has
  laid its own infrastructure, subject to the receipt of an indemnity for any
  damages to its infrastructure caused thereby.                                                                                                                                                                                                                                                                                                                                                            | 
| | The merged
  infrastructure entity and the merged broadcasting entity shall be separated
  entirely from Internet service providers.
  In addition, companies such as Barak I.T.C. (1995)  The International
  Telecommunications Services Corp. Ltd., and other Internet service providers
  connected to the cable television operators or their shareholders, are also
  prohibited from transferring Internet service provider activities to the
  merged entities.                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| | The merged
  infrastructure entity and the merged broadcasting entity shall be prohibited
  from preventing any end user which has Inside Wiring on his property from:
  (i) connecting with any other provider of multi- channel television; (ii) the
  common use of Inside Wiring by such user to connect to another provider in
  addition to the merged entities; and (iii) gaining access to Internet
  infrastructure, or access by such end user to Internet services, which are
  marketed either by the merged infrastructure entity or by the merged
  broadcasting entity, even in the event that such end user purchases
  multi-channel television from a competitor.
  The merged entities shall still be subject to the administrative
  directives published by the Minister of Communications governing the reciprocal
  obligation to lease Inside Wiring between the cable television operators and
  YES. | 

Restrictions
upon connected persons or entities:

The
terms of the Controllers approval shall equally apply to any person or entity
connected to the cable television operators, the infrastructure entity, or the
broadcast entity whose action is needed in order to fully and exactly comply
with all or part of such terms.  Any
restriction or condition applying under the terms of the Controllers approval
upon a party to the merger, on the infrastructure entity, or on the broadcast
entity, shall also equally apply to any person or entity connected to them, and
non-compliance with such restriction or condition by a connected person or
entity, or together with such connected person or entity, shall be deemed to be
non-compliance with the terms of the Controllers approval on the part of the
party to the merger to which such person is connected, and by non-compliance by
the broadcast entity and the infrastructure entity to which such person or
entity is connected.

Restrictions
shall also apply upon the activities of the officers or owners of the groups of
the controlling shareholders of the merged entities, including, among others,
as follows:

|  |                                                                                                                                                                                                                                                                                                                                                                                   | 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | prohibition
  upon such officers having activities in businesses that compete, directly or
  indirectly, with the business of the merged broadcasting entity and/or the
  merged infrastructure entity, without the written approval of the Controller;                                                                                                                           | 
|  |                                                                                                                                                                                                                                                                                                                                                                                   | 
| | prohibition
  upon such owners from sharing information related to the business of the
  merged broadcasting entity and/or the merged infrastructure entity;                                                                                                                                                                                                                      | 
|  |                                                                                                                                                                                                                                                                                                                                                                                   | 
| | an enforced
  total separation between specific named Israeli corporate entities such as
  cellular telecommunications companies and newspapers, on the one hand, and
  the merged broadcasting entity and the merged infrastructure entity, on the
  other hand; and                                                                                                             | 
|  |                                                                                                                                                                                                                                                                                                                                                                                   | 
| | if the
  merged broadcasting entity shall be allowed to air commercials in multi
  channel television channels, then the Controller shall have the authority to
  impose further restrictions stemming from concerns arising from the cross
  interests of the controlling shareholders of the parties to the merger in
  other entities that sell commercial time to the public. | 

Interests
in telephony services: According to the terms of the approval to the merger,  HOT Telecom is required to provide  telephony  services,
which  compete  with those of Bezeq,  to a minimum  number of  subscribers  as follows:  by November  20, 2005,
24,000  residential  subscribers  and 1,500  business  subscribers;  by November 20, 2006,  50,000  residential
subscribers  and 4,700 business  subscribers;  and by November 20, 2007,  98,500  residential  subscribers  and
10,000  business  subscribers.  As of the end of November 2004, HOT Telecom has gradually  commenced to provide
commercial  domestic  fixed  telephony  services.   The  merged  infrastructure  entity  is  bound  by  minimal
infrastructure  investment  commitments of not less than NIS 350 million, to be completed in stages as follows:
not less than NIS 190 million  until June 30, 2005,  not less than NIS 160 million  until June 30, 2006 and any
other  amount as shall be required for the  fulfillment  of its  business  plan for the  provision of telephony
services  which  fully  compete  with  the  telephony   services  of  Bezeq.  The  Companys   portion  of  the
infrastructure  investment  commitments (NIS 350 million),  pro rata to its proportionate  share in HOT Telecom
is estimated to be approximately NIS 93 million.

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In
accordance with the terms of the approval of the Controller to the merger, in
July 2002, the Israeli cable television operators filed an application for the
merged infrastructure entity for an infrastructure license, which includes the
provision of fixed line telephony services. This license was granted in
November 2003 to HOT Telecom.  HOT Telecom
has undertaken actions to meet the conditions and timetable set in the HOT
Telecom Infrastructure License and the approval of the Controller to the merger
with respect to the provision of telephony services.   For more information on HOT Telecoms domestic fixed line
telephony services, see Item 4B. Business Overview  Domestic Fixed Line
Telephony Services.

Bank
Guarantee: The approval of the Controller to the
merger is also conditional upon the provision of a bank guarantee in the amount
of US$ 15 million to ensure compliance with the terms of the approval of the
Controller. In the event that the Controller decides, in his discretion, that
there has been a material breach of the terms of the approval, he may fully
exercise the guarantee.  We have
provided our pro rata portion of this guarantee in the amount of US$ 3.75
million.

In
the event of a non-material breach, the Controller may exercise US$ 500,000 of
the bank guarantee in relation to each breach, and an additional US$ 500,000
per month, until such breach is remedied.
Such amounts are non-refundable and the guarantee must be maintained at
US$ 15 million at all times, including in the event of breach.  The provision and usage of the guarantee
does not derogate from the Controllers ability to take any other remedy
according to the provisions of the Restrictive Business Practices Law against
the merged entities in the event of breach.

On January 30, 2005, the Controller  granted us and the other cable television  operators an exemption from the
requirement  to receive an  approval of a  restrictive  arrangement  in  relation  to the  ongoing  cooperation
between the cable  television  operators.  The  exemption  was granted for a period of one year,  until January
30, 2006.  Pursuant to the exemption,  the cable  television  operators may continue  their  cooperation in the
multi-channel TV broadcasting  operations,  including  marketing,  content  acquisition and content production,
and in building  infrastructure and providing fixed line telecommunication  services,  including access to High
Speed Internet and telephony.  This exemption is conditional  upon,  among other things,  the cable  television
operators  compliance  with  the  terms  of the  Controllers  approval  to the  merger  and all of the  cable
television  operators  refraining from taking any irreversible actions which would prevent them from being able
to  undertake  separate  and  independent  activities  in the event that the merger will not be  completed.  If
the merger is not consummated, it will be necessary for us to receive an extension of this exemption.

67

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|    |                          
|--- | -------------------------
|4C. | ORGANIZATIONAL  STRUCTURE

We
have three significant subsidiaries, all of which are Israeli entities, which
we control directly or indirectly, as described below.

|  |                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | Matav Investments Ltd. is a company wholly
  owned by us and it owns 100% of the share capital of Matav Assets Ltd.  Through Matav Investments Ltd. we are the
  beneficial owners of:

| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                            
| | q | 10% of the
  share capital of Barak I.T.C. (1995)  The International Telecommunications
  Services Corp. Ltd., an international telephony service provider in Israel;                                                     
| |   |                                                                                                                                                                                                                            
| | q | approximately
  1.2% of the share capital of Partner Communications Company Ltd., the third
  of four licensed providers of mobile cellular telephone services in Israel,
  and one of the two operators which use GSM; and
| |   |                                                                                                                                                                                                                            
| | q | approximately
  26.6% of HOT Telecom L.P., Limited Partnership owned by the three cable
  television operators.                                                                                                            
| |   |                                                                                                                                                                                                                            

|  |                                                                                                                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|q | Cable Systems Media Haifa-Hadera Ltd. is a company wholly owned by us, and holds
  the Cable Broadcast License for the Haifa-Hadera area.                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                               
|q | Matav Infrastructure 2001 L.P., is a limited
  partnership, of which we own approximately 72% of the rights, with the
  remainder being held by our wholly owned subsidiary Cable Systems Media
  Haifa-Hadera Ltd.  Matav
  Infrastrucutre 2001 L.P. was the holder of the previous infrastructure
  license.

We
were formerly part of the Dankner Group.
As of June 20, 2003, Dankner Investments Ltd., or Dankner Investments,
held approximately 47.74% of our outstanding ordinary shares and 49.70% of the
voting rights.  In November and December
of 2003, and in January of 2004, Dankner Investments sold approximately 7.7% of
our outstanding shares in private transactions.  In February 2004, Dankner Investments sold approximately 18% of
our outstanding shares to Delek Investments and Properties Ltd., or Delek, and
granted to Delek an option exercisable for two years to purchase an additional
2% of our outstanding shares.   The
option was exercised by Delek in September 2004. In May 2004, the controlling
shareholders of Dankner Investments signed an agreement with Delek Real Estate
Ltd., an affiliate of Delek, for the purchase of 87.5% of the issued share
capital of Dankner Investments.  This
transaction was completed in August 2004.
In November 2004, Delek Real Estate Ltd. commenced a tender offer in
Israel to purchase all of the shares not already owned by it.    As a result of this transaction, which was
completed on November 25, 2004, Dankner Investments is a private company,
wholly owned by Delek Real Estate Ltd.
In December 2004, Dankner Investments sold approximately 20% of our
outstanding shares to Delek.  As a
result of this transaction, Dankner Investments does not own any shares in
Matav.  The Delek group holds directly
approximately 40% of our outstanding shares.

Delek
is a wholly-owned subsidiary of Delek Group Ltd., a public company whose shares
are traded on the Tel Aviv Stock Exchange. The Council approved the change of
means of control resulting from the sale of Matav shares to Delek by Dankner
Investments. Delek Group Ltd. is currently controlled by Mr. Yitzhak Sharon
(Tshuva).  Mr. Tshuva holds indirectly
approximately 78.64% of the shares of Delek Group Ltd.

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|    |                               
|--- | ------------------------------
|4D. | PROPERTY, PLANTS AND EQUIPMENT

We
own our telecommunications network infrastructure and related equipment.  Our network infrastructure covers covers
498,752 homes and is approximately 3,931 miles of underground cable.

Our
principal executive offices are in Netanya, Israel in a building purchased by
us in 1992 for approximately NIS 3.0 million, which currently has 1,528 square
meters of built space.

Our
HeadEnd, studio and regional administrative offices in Haifa are situated in a
1,700 square meter building on 6,690 square meters of land leased from the
Israel Lands Authority pursuant to a lease which will expire in 2040. In July
1991, we paid approximately NIS 1.5 million, constituting the entire amount due
under such lease in advance as well as approximately NIS 3.8 million to the
City of Haifa for the buildings on the plot. We have an option to renew the
lease for 49 additional years.

Our
HeadEnd in Bat-Yam is situated on a 200 square meter property, which we lease
under a lease agreement providing for a monthly rent of NIS 12,000.  The
lease is scheduled to expire in August 31, 2005.  We are currently in the process of relocating the HeadEnd in
Bat-Yam to the HeadEnd in Rishon-lezion.

Our
HeadEnd and microwave broadcast tower in Ramot-Naftali is situated on 520
square meters of land, owned by the Israel Lands Authority, which is subleased
to us by the Mevot Hermon Local Council under a lease agreement expiring in
October 2006, of which 160 square meters is the HeadEnd and 77 square meters is
a basement.  Pursuant to the terms of
the lease agreement, we are obligated to pay the Mevot Hermon Local Council an
annual fee of NIS 1 and to provide cable television services to the residents
of Moshav Kadesh Naftali free of charge. Upon termination of the lease
agreement, our interest in the property will pass to the Mevot Hermon Local
Council, although we will be entitled to remove all of our transmission
equipment.

We
also hold real property in Bat-Yam of 2,500 square meters, under a lease from
the Israel Lands Authority which is scheduled to expire in 2038. In 1989, we
paid approximately NIS 1.8 million for this lease, constituting the entire
amount due under the lease, in advance, and approximately an additional NIS
1.28 million in order to extend the deadline under the lease for completion of
a building on the property to January 1, 1997. In March 2004, the Israel Lands
Authority notified us that its management agreed to extend our lease agreement
for this property, subject to the payment of property value differentials
amounting to approximately NIS 1.3 million, plus VAT.  This amount was based on the valuation of a land appraiser. In
April 2004, we paid approximately NIS 1 million.  We have submitted an appeal on the valuation of the land
appraiser, and we provided a bank guarantee in the amount of approximately NIS
320,000.  In April 2004, we received a
supplement to the lease agreement from the Israel Lands Authority, according to
which, the lease agreement shall be extended to August 1, 2006.  This supplement has not yet been
signed.  In our appeal of the valuation,
the property was re-appraised for less than the prior valuation.   The amount of such re-appraisal was
equivalent to the amount that had already been paid to the Israel Lands
Authority by us up until June 8, 2003.
As a result, we addressed the Israel Land Authority on March 30, 2005,
with a request to repay the sums that were overpaid by us, cancel the bank
guarantee provided by us to the Israel Land Authority and amend the supplement
to the lease agreement according to the new valuation.

In
Pardess Hanna, we lease a 1,009 square meter plot of land from the Israel Lands
Authority.  Two structures which contain
a HeadEnd for the Hadera license area are located on this property.

In
1999, we purchased 1,927 square meters in a building near our headquarters in
Netanya, for approximately NIS 8.4 million.
We use this property, among other things, for our Netanya Hadera cable
operations and for our access to High Speed Internet over cable activities.

In
addition to the foregoing, we lease several other small properties totaling
approximately 2,200 square meters throughout our operating areas, which we use
for office space, storage, and microwave reception towers. Altogether with the
leased properties described above, the aggregate monthly rental payments made
by us are approximately NIS 75,000.

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|        |                                             
|------- | --------------------------------------------
|ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The
  following operating and financial review and prospects are based upon and
  should be read in conjunction with our financial statements and selected
  financial data, which appear elsewhere in this annual report. You should also
  read the risk factors appearing elsewhere in this annual report for a
  discussion of a number of factors that affect or could affect our financial
  condition and results of operations.

The
  financial statements have been prepared in conformity with accounting
  principles generally accepted in Israel, which differ in certain respects
  from the U.S. generally accepted accounting principles (as restated, see Note
  26 to the financial statements) followed in the United States.   The financial information in this section
  is presented in adjusted NIS, unless stated otherwise.

We
  reported certain amounts in adjusted NIS, which have been translated for
  convenience into US dollars using the representative exchange rate of the US
  dollar as published by the Bank of Israel on December 31, 2004 (US$ 1.00 =
  NIS 4.308). Except where otherwise stated, amounts appearing in dollars have
  been translated from NIS at this exchange rate.

Critical
  Accounting Policies

In
  order to improve understanding of the discussions below, it is important to
  obtain some degree of familiarity with our principal or significant
  accounting policies.  These policies
  are described in Note 2 to the Consolidated Financial Statements listed in
  Item 18.  We review our financial
  reporting, disclosure practices and accounting policies annually to ensure
  that the financial statements developed, in part, on the basis of these
  accounting policies provide complete, accurate and transparent information
  concerning the financial condition of our company.  As part of this process, we reviewed the selection and application
  of our critical accounting policies and financial disclosures as of December
  31, 2004.

In
  preparing our financial statements in accordance with generally accepted
  accounting policies, our management must often make estimates and assumptions
  which may affect the reported amounts of assets, liabilities, revenues,
  expenses and related disclosures as of the date of the financial statements
  and during the reporting period. These estimates and judgments are reviewed
  by management on an ongoing basis, and by our Audit Committee at the end of
  each quarter prior to the public release of our financial results.  Some of those judgments can be subjective
  and complex, and consequently actual results may differ from those estimates.  For any given individual estimate or
  assumption made by our management, there may be alternative estimates or
  assumptions which are also reasonable.
  We consider our most significant accounting policies to be those
  relating to depreciation of fixed assets, allowance for doubtful accounts,
  income taxes and contingent liabilities, which are discussed below.

Depreciation of fixed assets:

Our
  fixed assets are depreciated by the straight-line method over their estimated
  useful life. A significant portion of our operating expenses results from
  depreciation of fixed assets. The vast majority of our fixed assets are
  composed of cable network, equipment in the broadcasting centers, studios,
  converters and modems.  If rapid
  technological changes are to occur in our industry, the estimated useful life
  of some of our fixed assets could be shortened and consequently lead to an
  increase in annual depreciation costs and operating expenses.

Allowance for doubtful accounts:

The
  allowance is principally determined with respect to specific debts that are
  doubtful of collection based on the age of the customers debt.  Our revenues are derived from a large
  number of subscribers in the license areas.
  We perform ongoing credit evaluations of our subscribers for the
  purpose of determining the appropriate allowance for doubtful accounts, by
  taking into account variables such as disconnection, past experience, age of
  the receivable balance and current economic conditions that may affect a
  subscribers ability to pay. The use of different estimates or assumptions
  could produce different allowance balances. If the financial condition in
  Israel were to deteriorate, resulting in an impairment of our subscribers
  ability to make monthly payments, additional allowance for doubtful accounts
  may be required. If we were to face stronger competition, we might experience
  a higher rate of disconnections and hence additional allowance for doubtful
  accounts may be required.

70

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Contingent liabilities:

We
  are party to certain legal actions as described in Item 8A. Consolidated
  Statements and Other Financial Information  Legal and Arbitration
  Proceedings and described in Note 15 in the financial statements.

With
  regard to claims and petitions for certification of some of these actions as
  class actions, we believe, based on the opinion of our legal counsel, that
  since the claims and petitions for certification of them as class actions,
  and our response to the claims and petitions raise complex legal and factual
  questions, which have not yet been resolved in Israeli case law and for which
  there are no precedents based on similar facts, we cannot currently evaluate
  the likelihood of success of such claims, and therefore, no provision has
  been included in our financial statements with respect to such claims. With
  regard to other claims in which the proceedings are in early stages, the
  prospects of the claims cannot be estimated and no provision has been
  included in our financial statements with respect to such other claims. As to
  the remaining claims, we believe, based on the opinion of our legal counsel,
  that we have good defensive arguments against these claims, and therefore, no
  provision has been included in our financial statements with respect to such
  claims. However,  as detailed in our financial  statements,  we recorded  provisions in the financial  statements  with
respect to certain claims.

As
  additional information becomes available, we will assess our potential
  liability related to our pending litigation and revise our estimates if
  needed. Such revisions of our estimates of our potential liability under
  legal claims could materially impact our results of operation and financial
  position.

Impairments of assets:

The
  vast majority of our fixed assets are composed of cable network, equipment in
  the broadcasting centers, studios, converters and modems.  If rapid technological changes or other
  changes which may cause a rapid churn of our subscribers were to occur in our
  industry, the estimated fair value of some of our fixed assets could
  consequently be subjected to impairment.

Accounting for income taxes:

At
  the end of each reported period, we are required to estimate our provision
  for income taxes.  This process
  requires us to estimate our actual current tax liabilities and make an
  assessment of the amount of our tax operating carry forward losses.  We must then assess the likelihood that
  our deferred tax assets resulting from the carry forward losses will be
  realized through future taxable income and, to the extent we believe that
  realization is not likely, we must establish a valuation allowance.  Management judgment is required in
  determining our provision for income taxes, our deferred tax assets and any
  valuation allowance recorded against our net deferred tax assets.  Our judgment as to the probability to
  realize our net deferred tax assets is largely based upon our estimate of
  future taxable income.  Since we do
  not believe it is more likely than not that our deferred tax assets will be
  realized, we recorded a valuation allowance for the full amount of the
  deferred tax asset.  Our estimates of
  our tax provision is based on our assessment as to the outcome of our dispute
  with the tax authorities.  Actual
  outcome might differ from our current estimates and require us to record an
  additional loss.

New accounting standards in the United States:

On
  December 16, 2004, the Financial Accounting Standards Board (FASB) issued
  SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which is
  a revision of SFAS 123. Generally, the approach in SFAS 123(R) is similar to
  the approach described in SFAS 123. However, SFAS 123 permitted, but did not
  require share-based payments to employees to be recognized based on their
  fair values while SFAS 123(R) requires all share-based payments to employees
  to be recognized based on their fair values. SFAS 123(R)also revises, clarifies and expands guidance in
several
  areas, including measuring fair value, classifying an award as equity or as a
  liability and attributing compensation cost to reporting periods. The
  Company expects to adopt SFAS 123(R) on January 1, 2006.

SFAS
  123(R) permits companies to adopt its requirements using one of the following
  two methods:

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1. | The
    modified prospective method, in which compensation cost is recognized
    commencing with the effective date (i) based on the requirements of SFAS
    123(R) for all share-based payments granted after the effective date and
    (ii) based on the requirements of SFAS 123 for all awards granted to
    employees prior to the effective date of SFAS 123(R) that remain unvested
    at the effective date.

71

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| |  |    |                                                                                                                                                                                                                                                                                                             
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2. | The
    modified retrospective method, which includes the requirements of the
    modified prospective method described above, but also permits entities to
    restate based on the amounts previously recognized under SFAS 123, for
    purposes of pro forma disclosures, all prior periods presented.

The
  adoption of the SFAS 123(R) fair value method will have significant impact on
  the Companys results of operations, although it will have no impact on the
  Companys overall financial position. The impact of the adoption of SFAS
  123(R) cannot be predicted at this time, as it depends on levels of share-based
  payments for future grant. However, had the Company adopted SFAS 123(R) in
  prior periods, the impact of that standard would have approximated the impact
  of SFAS 123.

In
  March 2005, the SEC Staff issued Staff Accounting Bulletin No. 107 (SAB 107)
  to give guidance on implementation of SFAS 123(R), which the Company
  considers implementing.

New accounting standards in Israel:

In
  July 2004, Accounting Standard No. 19  Taxes on Income (the Standard) was
  approved by the Israel Accounting Standards Board. The Standard prescribes
  the principles for recognition, measurement, presentation and disclosure of
  taxes on income in the financial statements.

The
  principal change pursuant to the Standard in relation to the principles
  presently applied are the recognition of deferred taxes in respect of
  temporary differences arising when there is recognition of deferred taxes in
  respect of temporary differences relating to land.

The
  Standard is effective in respect of financial statements relating to periods
  beginning on or after January 1, 2005. Changes resulting from adoption of the
  Standard should be recorded by including the cumulative effect in the
  statement of operations as of the beginning of the period in which the Standard
  is adopted.

The
  Company estimates that the effect of the new Standard on the financial
  position, operating results and cash flows of the Company is not expected to
  be material.

72

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|    |                  
|--- | -----------------
|5A. | OPERATING RESULTS

We
were formed in June 1987. We began building out our cable television network
and offering cable television services on a trial basis in November 1989. In
March 1990, we began providing full cable television services. Between 1990 and
2002, we operated pursuant to five exclusive franchises granted to us by the
Ministry of Communications covering the following areas: Bat-Yam and Kiryat
Shemona, Holon, Safed and the Golan Heights, Haifa, Hadera, and Netanya and the
Sea of Galilee. During 2002, these franchises were replaced by two general
non-exclusive Cable Broadcast Licenses, a Telecommunications Infrastructure
License and a Broadcasting HeadEnd License.
The Telecommunications Infrastructure License was subsequently replaced
and cancelled by the HOT Telecom Infrastructure License. Under the terms of our previous franchises
and current licenses, we pay the Ministry of Communications variable and fixed
franchise/license royalties. For the
years ended December 31, 2002, 2003 and 2004, we recorded aggregate expenses
for royalties to the Ministry of Communications of NIS 20.6 million, NIS 17.6
million and NIS 15.9 million, respectively.

As
of December 31, 2004, we provided cable television services to 257,344 subscribers,
representing approximately 26.7% of all cable television subscribers in Israel,
and have achieved an average subscriber penetration rate of approximately 52%
for all of our license areas. (The
number of subscribers is calculated based on the number of connected customers
indicated in our billing system records.) 
For the years ended December 31, 2002, 2003 and 2004, we generated
revenues of NIS 495.5 million, NIS 545.5 million and NIS 584.6 million, respectively.
Our operating loss for the years ending December 31, 2002 and 2003, was NIS
98.7 million, NIS 7.8 million, respectively, and an operating income for the
year ended December 31, 2004 was NIS 3 million.

Our
net income for the year ended December 31, 2002 was NIS 33.8 million. Our net
loss for the years ended December 31, 2003 and 2004 was NIS 5.5 million and NIS
83 million, respectively. During the
years 2002, 2003 and 2004, we achieved EBITDA (Earnings Before Interest
Taxation Depreciation and Amortization) of NIS 56.7 million, NIS 147.0 million
and NIS 139.6 million, respectively. The EBITDA excludes other income or
expenses and equity in earnings of affiliates, net. Since the results for the year 2003 do not
include proportional consolidation with HOT Vision, for comparison purposes,
the EBITDA is presented assuming no consolidation with HOT Vision.

Through
December 31, 2004, we invested approximately NIS 2,119 million (US$ 491.9
million) in building out our cable television network and in other fixed assets
within our license areas. As of
December 31, 2004, our cable television network extended 3,931 miles and
covered approximately 500,000 homes, or approximately 95% of the households in
the areas in which we operate.

With
our transition to digital cable television services, we increased our revenues,
while, at the same time, we also increased our expenses by investments in
digital settop boxes, program content purchasing and providing other services
to our subscribers. Each digital set-top box costs us between approximately US$
130 to US$ 200. Due to marketing considerations, we do not charge the customer
the full cost of the digital set-top box, and we subsidize this cost. As of May 31, 2005, we have already purchased
approximately 258,000 digital set top boxes, and approximately 68% of our
subscribers were equipped with digital set-top boxes. In April 2002, we commenced providing access to High Speed
Internet over cable services. As of
December 31, 2004, we had 88,324 subscribers with access to High Speed
Internet.

Revenues

We
derive a substantial amount of our revenues from the cable television
services monthly subscription fee for
the analog and the digital Basic Packages of approximately NIS 170.9  176.5
including VAT and 186.5 including VAT, respectively. We also collect a one-time deposit of NIS 99 (including VAT), for
the regular analog set-top box (for
those subscribers without cable-ready televisions), or NIS 198 (including VAT),
for the addressable analog set-top box.
With respect to digital set-top boxes, we collect a one-time deposit of
NIS 399 (including VAT). We partially refund these deposits when the set-top
boxes are returned. The refund amount,
linked to the Israeli consumer price index, is reduced to reflect depreciation
of 10% of the value of the set-top box to us for each year or each partial year
(until September 2003 the refund amount was reduced to reflect a depreciation
of 10% of the deposits for each year or each partial year), commencing from the
date of installation of the set-top box and until the earlier of the date we
cease to provide services to such subscriber, or until the removal of a set-top
box. Such depreciation is included in our revenues, exclusive of VAT. Instead of paying the deposits referred to
above, our subscribers may elect to lease the set-top box for a monthly fee
that ranges between NIS 9 and NIS 11 including VAT, but in any event, not more
than the value of the set-top box. We are allowed to sell the set-top box to a
subscriber, at the subscribers option, in consideration for an amount not
exceeding the value of the set-top box. We also charge subscribers fees for
reconnection, installation of additional outlets in subscribers households,
and provision of cable television services on the additional outlets. The fees set forth above include value added
tax at a rate of 17%. In certain
marketing campaigns, we fully refund the first set-top box given to our new
customers, in return for certain obligations to the company. Additional revenues are derived from our
tiering services, Pay-Per-View services, interactive services, access to High
Speed Internet over cable services and other services.

73

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Our
revenues per subscriber, penetration rate and churn rate may vary in the future
from historical levels depending upon numerous factors, which are mostly beyond
our control. These factors include amongst others, the nature of our future
cable television and telecommunications services, the development of
competition for revenues per subscriber and the success of our marketing
strategies as well as market acceptance of our services by subscribers.

Cost of
Revenues and Other Operating Expenses

Our
principal operating expenditures are:

|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|q | programming costs;                                                                      
|q | depreciation and amortization of fixed assets;                                          
|q | payroll and related expenses;                                                           
|q | license (previously franchise) royalties and
  payments to the government of Israel; and
|q | maintenance.                                                                            

Churn

Churn
refers to subscriber disconnection from network services, either involuntary,
due to non-payment of bills or suspected fraudulent use, or voluntary, due to
subscribers terminating their use of our services.

We
recognize that managing subscriber churn is an important factor in maximizing
revenues and cash flow. In order to control churn caused by subscribers
voluntarily terminating our services, we attempt to ensure that our services
are of high quality and are competitive. We use our advanced information
technology systems as a tool to understand, monitor and control voluntary
churn. We have a retention team within our customer services group that makes
follow-up phone calls to subscribers who call us with complaints or problems in
order to resolve any problems and to retain the subscribers. We also host
exclusive subscriber events, such as shows and parties for subscribers, in
order to encourage subscriber loyalty. Following the launch of our high-speed
Internet access services, we offered our subscribers a television and Internet
bundled package on attractive terms so as to reduce churn and increase
loyalty. Our competitors have
introduced similar approaches. In March 2005, we launched our brand new
telephony over cable service using the IP technology, and started to offer our
subscribers with a bundled package of television, Internet access and voice
services (Triple Play). Our
competitors cannot offer such triple play offer until certain milestones in the
progress of our voice services are met. We expect that the Triple-Play
offering will reduce churn and increase customer loyalty. For the year ended December 31, 2004, our
churn rate for our operating areas averaged approximately 24%.

74

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Results
of Operations

The following table sets forth certain items from our
results of operations for the periods indicated:

|                                                |  |                            |        |      |  |       |   |  |       |  
|----------------------------------------------- |  | -------------------------- | ------ | ---- |  | ----- | - |  | ----- | -
|                                                |  | Years
  ended December 31, |       
|                                                |  |                            |       
|                                                |  |                            |       
|In adjusted NIS (in millions)                   |  | 2002                       |        | 2003 |  | 2004  |  
|                                                |  |                            |        |      |  |       |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|Revenues                                        |  |                            | 495.5  |      |  | 545.5 |   |  | 584.6 |  
|Operating expenses                              |  |                            | 507.4  |      |  | 466.7 |   |  | 472.5 |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|Gross profit (loss)                             |  |                            | (11.9  | )    |  | 78.8  |   |  | 112.1 |  
|Selling and marketing expenses                  |  |                            | 40.7   |      |  | 44.0  |   |  | 63.7  |  
|General and administrative expenses             |  |                            | 46.1   |      |  | 42.6  |   |  | 45.4  |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|Operating income (loss)                         |  |                            | (98.7  | )    |  | (7.8  | ) |  | 3     |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|Financial expenses, net                         |  |                            | 48.1   |      |  | 84.0  |   |  | 50.3  |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|Loss after financial expenses                   |  |                            | (146.8 | )    |  | (91.8 | ) |  | (47.3 | )
|Other income (expenses), net                    |  |                            | 278.6  |      |  | 81.0  |   |  | (42.7 | )
|                                                |  |                            |        |      |  |       |   |  |       |  
|Income (loss) before taxes on income            |  |                            | 131.8  |      |  | (10.8 | ) |  | (90   | )
|                                                |  |                            |        |      |  |       |   |  |       |  
|Taxes on income                                 |  |                            | 108.9  |      |  | 35.6  |   |  | 7.3   |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|Income (loss) after taxes on income             |  |                            | 22.9   |      |  | (46.4 | ) |  | (97.3 | )
|Equity in earnings of affiliated companies, net |  |                            | 10.9   |      |  | 40.9  |   |  | 14.3  |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|Net income (loss)                               |  |                            | 33.8   |      |  | (5.5  | ) |  | (83   | )
|                                                |  |                            |        |      |  |       |   |  |       |  
|                                                |  |                            |        |      |  |       |   |  |       |  
|EBITDA *                                        |  |                            | 56.7   |      |  | 147.0 |   |  | 139.6 |  
|                                                |  |                            |        |      |  |       |   |  |       |  

Comparison
of Years Ended December 31, 2002, 2003 and 2004

Operating results according to business
segments

The
following table sets forth our consolidated statement of operation according to
our various business segments:

|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|---------------------------------------------------------- |  | -------- | ------ | -------- |  | -------- | - | -------- | ------ | -------- |  | -------- |  |  | ------ | - |  | ---- | -
|                                                           |  | 2002     |        | 2003     |  | 2004     |  
|                                                           |  |          |        |          |  |          |  
|In adjusted NIS (in millions)                              |  | Cable TV |        | Internet |  | Cable TV |   | Internet |        | Cable TV |  | Internet | 
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          | 
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          | 
|Revenues                                                   |  |          | 486.4  |          |  | 9.1      |   |          | 511.1  |          |  | 34.4     |  |  | 518.9  |   |  | 65.7 |  
|Operating
  expenses                                       |  |          | 494.7  |          |  | 12.7     |   |          | 449.3  |          |  | 17.4     |  |  | 446.4  |   |  | 26.1 |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|Gross profit
  (loss)                                      |  |          | (8.3   | )        |  | (3.6     | ) |          | 61.8   |          |  | 17.0     |  |  | 72.5   |   |  | 39.6 |  
|Selling and
  marketing expenses                           |  |          | 37.5   |          |  | 3.2      |   |          | 38.3   |          |  | 5.7      |  |  | 53.7   |   |  | 10   |  
|General and
  administrative expenses                      |  |          | 45.1   |          |  | 1.0      |   |          | 41.7   |          |  | 0.9      |  |  | 44.3   |   |  | 1.1  |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|Operating income
  (loss)                                  |  |          | (90.9  | )        |  | (7.8     | ) |          | (18.2  | )        |  | 10.4     |  |  | (25.5  | ) |  | 28.5 |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|Financial
  expenses, net                                  |  |          | 48.1   |          |  |         |   |          | 84.0   |          |  |         |  |  | 50.3   |   |  |     |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|Income (loss)
  after financial expenses                   |  |          | (139.0 | )        |  | (7.8     | ) |          | (102.2 | )        |  | 10.4     |  |  | (75.8  | ) |  | 28.5 |  
|Other income
  (expenses), net                             |  |          | 278.6  |          |  |         |   |          | 81.0   |          |  |         |  |  | (42.5  | ) |  | (0.2 | )
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|Income (loss)
  before taxes on income                     |  |          | 139.6  |          |  | (7.8     | ) |          | (21.2  | )        |  | 10.4     |  |  | (118.3 | ) |  | 28.3 |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|Taxes on income                                            |  |          | 108.9  |          |  |         |   |          | 35.6   |          |  |         |  |  | 7.3    |   |  |     |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|Income (loss) after
  taxes on income                      |  |          | 30.7   |          |  | (7.8     | ) |          | (56.8  | )        |  | 10.4     |  |  | (125.6 | ) |  | 28.3 |  
|Equity in
  earnings (losses) of affiliated companies, net |  |          | 10.9   |          |  |         |   |          | 40.9   |          |  |         |  |  | 17.5   |   |  | (3.2 | )
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|Net income
  (loss)                                        |  |          | 41.6   |          |  | (7.8     | ) |          | (15.9  | )        |  | 10.4     |  |  | (108.1 | ) |  | 25.1 |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  
|EBITDA*                                                    |  |          | 58.5   |          |  | (1.8     | ) |          | 129.8  |          |  | 17.2     |  |  | 104.3  |   |  | 35.3 |  
|                                                           |  |          |        |          |  |          |   |          |        |          |  |          |  |  |        |   |  |      |  

*Since the results for the year 2003 do not include
proportional consolidation with HOT Vision, for comparison purposes, the EBITDA
is presented assuming no consolidation with HOT Vision.

75

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Revenues

|               |  |                             |       |      |  |       |  |                          |       |                          |  |       |  |  |  |      |  | 
|-------------- |  | --------------------------- | ----- | ---- |  | ----- |  | ------------------------ | ----- | ------------------------ |  | ----- |  |  |  | ---- |  | 
|               |  | Years
  ended December 31,  |       |      |  |       | 
|               |  | 2002                        |       | 2003 |  | 2004  |  |                          |       |                          | 
|               |  |                             |       |      |  |       |  | %Change 
  2002 vs. 2003 |       | %Change 
  2003 vs. 2004 | 
|               |  | in adjusted NIS in millions |       |      | 
|               |  |                             |       |      |  |       | 
|Cable TV       |  |                             | 486.4 |      |  | 511.1 |  |                          | 518.9 |                          |  | 5.1   |  |  |  | 1.5  |  | 
|Internet       |  |                             | 9.1   |      |  | 34.4  |  |                          | 65.7  |                          |  | 278.0 |  |  |  | 91.0 |  | 
|               |  |                             |       |      |  |       |  |                          |       |                          |  |       |  |  |  |      |  | 
|Total revenues |  |                             | 495.5 |      |  | 545.5 |  |                          | 584.6 |                          |  | 10.1  |  |  |  | 7.2  |  | 

Of
our total revenues, approximately 88.8% can be attributed to cable TV
activities in 2004, in comparison to 93.7% in 2003 and 98.2% in 2002. Our
revenues from cable TV activities increased by NIS 7.8 million in 2004 and NIS
24.7 million in 2003. Our revenues from
cable TV activities are derived from monthly subscription fees, Pay-Per-View
services, interactive services, depreciation of subscribers deposits for
set-top boxes, installation fees, payments from the Shopping Channel and other
minor sources.

The
following table sets forth the distribution of our subscribers for the periods
covered:

|                                                                                      |  |      |         |      |  |         |  |                           |         |                           |  |  |       |   |  |  |  |      |   | 
|------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ------- |  | ------------------------- | ------- | ------------------------- |  |  | ----- | - |  |  |  | ---- | - | 
|                                                                                      |  | 2002 |         | 2003 |  | 2004    |  | % Change 
  2002 vs. 2003 |         | % Change 
  2003 vs. 2004 | 
|                                                                                      |  |      |         |      |  |         |  |                           |         |                           | 
|Average of total
  number of subscribers for cable TV services*                       |  |      | 281,241 |      |  | 270,570 |  |                           | 262,462 |                           |  |  | (3.8  | ) |  |  |  | (3.0 | ) | 
|Average of total
  digital subscribers*                                               |  |      | 137,811 |      |  | 151,059 |  |                           | 158,753 |                           |  |  | 9.6   |   |  |  |  | 5.1  |   | 
|Average of total
  number of subscribers with access to High Speed Internet services* |  |      | 10,395  |      |  | 37,954  |  |                           | 75,622  |                           |  |  | 265.1 |   |  |  |  | 99.2 |   | 
|Average monthly
  revenue per subscriber (ARPU) in NIS                                |  |      | 147.1   |      |  | 166.3   |  |                           | 177.5   |                           |  |  | 13.1  |   |  |  |  | 6.7  |   | 

*The
average number of subscribers is calculated based on the number of connected
customers indicated in our billing system records.

The
increase in revenues from cable TV services is mainly attributed to the fact
that in 2004, our financial results are proportionally consolidated with HOT
Vision Ltd. for the first time.
Furthermore, despite a decline in the number of subscribers, there is an
increase in the rate of digital subscribers out of total subscribers from 55.8%
in 2003 up to 60.5% in 2004. Our
revenues from High Speed Internet services are derived mainly from monthly
subscription fees, and increased by NIS 31.3 million in 2004, compared to an
increase of NIS 25.3 million in 2003, and NIS 3.5 million in 2002. The sharp
increase in revenues from High Speed Internet services in 2004 is due to an
increase in the number of subscribers. We anticipate that in spite of our
continuing marketing efforts to increase our subscribers base for High Speed
Internet services, subscription fees might be eroded as a result of the
intensive competition in this field.

76

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Average
monthly revenue per subscriber (ARPU) for 2004 was NIS 177.5 compared to NIS
166.3 in 2003 and 147.1 in 2002. The
increase in ARPU is derived from a sharp increase in revenues from access to
high speed internet (NIS 65.7 million in 2004 compared to NIS 34.4 million in
2003) and an increase in the number of digital subscribers as described above.

Operating expenses

|                              |  |                               |       |      |  |       |  |                          |       |                         |  |  |      |   |  |  |  |     |  | 
|----------------------------- |  | ----------------------------- | ----- | ---- |  | ----- |  | ------------------------ | ----- | ----------------------- |  |  | ---- | - |  |  |  | --- |  | 
|                              |  | Years
  ended December 31,    |       |      |  |       | 
|                              |  | 2002                          |       | 2003 |  | 2004  |  |                          |       |                         | 
|                              |  |                               |       |      |  |       |  | % Change
  2002 vs. 2003 |       | %Change
  2003 vs. 2004 | 
|                              |  | in
  adjusted NIS in millions |       |      | 
|                              |  |                               |       |      |  |       | 
|Cable TV                      |  |                               | 494.7 |      |  | 449.3 |  |                          | 446.4 |                         |  |  | (9.2 | ) |  |  |  | *   |  | 
|Access to High Speed Internet |  |                               | 12.7  |      |  | 17.4  |  |                          | 26.1  |                         |  |  | 37.0 |   |  |  |  | 50  |  | 
|                              |  |                               |       |      |  |       |  |                          |       |                         |  |  |      |   |  |  |  |     |  | 
|Total operating expenses      |  |                               | 507.4 |      |  | 466.7 |  |                          | 472.5 |                         |  |  | (8.0 | ) |  |  |  | 1.2 |  | 

*Percentages not provided where negative number became
a positive number, or where resulting calculation is in thousands of percentage
points due to inability to provide a meaningful mathematical number.

Of
our total operating expenses, approximately 94.5% can be attributed to cable TV
only activities in 2004, in comparison to 96.3% in 2003 and 97.5% in 2002. As a percentage of revenues from cable TV
only activities, operating expenses from cable TV only activities decreased
from 101.7% in 2002 to 87.9% in 2003, and to 86% in 2004.

The
decrease in operating expenses in cable TV only activities in 2004 is derived mainly from a decrease in
depreciation of fixed assets which was partially offset by an increase in the
cable TV programming expenses. The decrease in operating expenses (excluding
depreciation and amortization) in 2003 is derived mainly from a decrease in
programming expenses.

The
access to high speed internet operating expenses include direct expenses only
and do not include expenses for the usage, services and the depreciation of the
cable infrastructure (which are fully recorded as part of the cable television
operating expenses)

Cable
TV operating expenses are comprised of:

|                                                    |  |                               |       |      |  |       |  |                           |       |                           |  |  |       |   |  |  |  |     |   | 
|--------------------------------------------------- |  | ----------------------------- | ----- | ---- |  | ----- |  | ------------------------- | ----- | ------------------------- |  |  | ----- | - |  |  |  | --- | - | 
|                                                    |  | Years
  ended December 31,    |       |      |  |       | 
|                                                    |  | 2002                          |       | 2003 |  | 2004  |  |                           |       |                           | 
|                                                    |  |                               |       |      |  |       |  | % Change 
  2002 vs. 2003 |       | % Change 
  2003 vs. 2004 | 
|                                                    |  | in
  adjusted NIS in millions |       |      | 
|                                                    |  |                               |       |      |  |       | 
|Cable TV
  programming expenses                     |  |                               | 242.8 |      |  | 194.4 |  |                           | 198.0 |                           |  |  | (19.9 | ) |  |  |  | 1.8 |   | 
|Depreciation and
  amortization of fixed assets     |  |                               | 156.0 |      |  | 153.7 |  |                           | 138.4 |                           |  |  | (1.5  | ) |  |  |  | (10 | ) | 
|Other operating
  expenses from Cable TV activities |  |                               | 95.9  |      |  | 101.2 |  |                           | 110   |                           |  |  | 5.5   |   |  |  |  | 8.7 |   | 
|Total                                               |  |                               | 494.7 |      |  | 449.3 |  |                           | 446.4 |                           |  |  | (9.2  | ) |  |  |  | *   |   | 

*Percentages not provided where negative number became
a positive number, or where resulting calculation is in thousands of percentage
points due to inability to provide a meaningful mathematical number.

77

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As a percentage of total revenues from cable TV
activities, our programming expenses remained at the same level in 2003 and
2004 (38.0% compared to 38.2%) and decreased from 49.9% in 2002. The decrease
in programming expenses in 2003 reflects lower costs for most of the channels
in spite of an increase in tiering services, which generates additional
expenses as a result of additional purchases of content.

Since all of our programming expenses are either paid
in US dollars or linked to US dollars, any substantial devaluation of the
shekel against the US dollar will increase the shekel cost of our US dollar
denominated expenses. The gradual decrease in depreciation of fixed assets and
amortization in 2004 and 2003 is mainly due to the fact that some of our fixed
assets are terminating their accounting life.

The increase in other operating expenses in 2004 and
2003 is primarily due to an increase in maintenance costs, mainly those which
related to digital set-top-boxes.

Selling and marketing expenses

|                                     |  |                               |      |      |  |      |  |                           |      |                           |  |  |      |  |  |  |  |      |  | 
|------------------------------------ |  | ----------------------------- | ---- | ---- |  | ---- |  | ------------------------- | ---- | ------------------------- |  |  | ---- |  |  |  |  | ---- |  | 
|                                     |  | Years
  ended December 31,    |      |      |  |      | 
|                                     |  | 2002                          |      | 2003 |  | 2004 |  |                           |      |                           | 
|                                     |  |                               |      |      |  |      |  | % Change 
  2002 vs. 2003 |      | % Change 
  2003 vs. 2004 | 
|                                     |  | in
  adjusted NIS in millions |      |      | 
|                                     |  |                               |      |      |  |      | 
|Cable TV                             |  |                               | 37.5 |      |  | 38.3 |  |                           | 53.7 |                           |  |  | 2.1  |  |  |  |  | 40.2 |  | 
|Access to High Speed Internet        |  |                               | 3.2  |      |  | 5.7  |  |                           | 10   |                           |  |  | 78.1 |  |  |  |  | 75.4 |  | 
|                                     |  |                               |      |      |  |      |  |                           |      |                           |  |  |      |  |  |  |  |      |  | 
|Total selling and marketing expenses |  |                               | 40.7 |      |  | 44.0 |  |                           | 63.7 |                           |  |  | 8.1  |  |  |  |  | 44.8 |  | 

Of
our total selling and marketing expenses, approximately 84.3% can be attributed
to cable TV only activities in 2004, in comparison to 87% in 2003, and 92.1% in
2002.

As
a percentage of total revenues from cable TV only activities, our selling and
marketing expenses decreased from 7.7% in 2002 to 7.5% in 2003, and increased to 10.3% in 2004. The increase in selling and marketing
expenses in 2004 compared to 2003 is mainly due to an increase in our
advertising expenditures in connection with the launch of the HOT brand name,
which occurred in the fourth quarter of 2003, and campaigns for the launches of
new channels.

As
a percentage of total revenues from access to high speed internet only
activities, our selling and marketing expenses decreased from 35.16% in 2002 to
16.6% in 2003 and to 15.2% in 2004. The high level of selling and marketing
expenses in 2002 is attributed to the launch of the internet activity.

General and administrative expenses

|                                            |  |                               |      |      |  |      |  |                           |      |                           |  |  |       |   |  |  |  |      |  | 
|------------------------------------------- |  | ----------------------------- | ---- | ---- |  | ---- |  | ------------------------- | ---- | ------------------------- |  |  | ----- | - |  |  |  | ---- |  | 
|                                            |  | Years
  ended December 31,    |      |      |  |     
|                                            |  | 2002                          |      | 2003 |  | 2004 |  |                           |      |                          
|                                            |  |                               |      |      |  |      |  | % Change 
  2002 vs. 2003 |      | % Change 
  2003 vs. 2004
|                                            |  | in
  adjusted NIS in millions |      |     
|                                            |  |                               |      |      |  |     
|Cable TV                                    |  |                               | 45.1 |      |  | 41.7 |  |                           | 44.3 |                           |  |  | (7.5  | ) |  |  |  | 6.2  | 
|Access to High
  Speed Internet             |  |                               | 1.0  |      |  | 0.9  |  |                           | 1.1  |                           |  |  | (10.0 | ) |  |  |  | 22.2 | 
|                                            |  |                               |      |      |  |      |  |                           |      |                           |  |  |       |   |  |  |  |      | 
|Total general
  and administrative expenses |  |                               | 46.1 |      |  | 42.6 |  |                           | 45.4 |                           |  |  | (7.6  | ) |  |  |  | 6.6  | 

Of
our total general and administrative expenses,
approximately 97.6% can be attributed to cable TV activities in 2004, in
comparison to 97.9% in 2003 and 97.8% in 2002.

As
a percentage of total revenues from cable TV activities, our general and
administrative expenses from cable activities decreased from 9.3 % in 2002 to
8.2% in 2003, and increased to 8.5% in 2004.
Our payroll and related expenses
increased in 2004 compared to 2003 due to 
non-recurring expenses provided with respect to senior employees as part
of their retirement benefits, which were offset by a decrease in the provision
for doubtful accounts and bad debts.
Our payroll and related expenses decreased significantly in 2003
compared to 2002 due to a one-time reduction.

78

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---



Operating income (loss) and total EBITDA (**)

|                              |  |                             |       |      |  |       |   |                           |       |                           |  |  |       |   |  |  |  |       |   | 
|----------------------------- |  | --------------------------- | ----- | ---- |  | ----- | - | ------------------------- | ----- | ------------------------- |  |  | ----- | - |  |  |  | ----- | - | 
|                              |  | Years
  ended December 31,  |       |      |  |       |  
|                              |  | 2002                        |       | 2003 |  | 2004  |   |                           |       |                           | 
|                              |  |                             |       |      |  |       |   | % Change 
  2002 vs. 2003 |       | % Change 
  2003 vs. 2004 | 
|                              |  | In adjusted NIS in millions |       |      | 
|                              |  |                             |       |      |  |       |  
|Cable TV                      |  |                             | (90.9 | )    |  | (18.2 | ) |                           | (25.5 | )                         |  |  | (79.9 | ) |  |  |  | 40.1  |   | 
|Access to High Speed Internet |  |                             | (7.8  | )    |  | 10.4  |   |                           | 28.5  |                           |  |  | *     |   |  |  |  | 174   |   | 
|Total operating income (loss) |  |                             | (98.7 | )    |  | (7.8  | ) |                           | 3     |                           |  |  | (92.1 | ) |  |  |  | *     |   | 
|EBITDA from Cable TV          |  |                             | 58.5  |      |  | 129.8 |   |                           | 104.3 |                           |  |  | 121.9 |   |  |  |  | (19.6 | ) | 
|Total EBITDA                  |  |                             | 56.7  |      |  | 147.0 |   |                           | 139.6 |                           |  |  | 159.3 |   |  |  |  | (5    | ) | 

*Percentages not provided where negative number became
a positive number, or where resulting calculation is in thousands of percentage
points due to inability to provide a meaningful mathematical number.

** Since the results for the year 2003 do not include
proportional consolidation with HOT Vision, for comparison purposes the EBITDA
is presented assuming no consolidation
with HOT Vision.

As
a percentage of total revenues from cable TV activities, EBITDA represented
20.1% in 2004 as compared to 25.4% in
2003, and 12.0% in 2002.

Total
EBITDA is comprised of the following:

|                                                                                                             |  |                            |       |      |  |       |   |  |       |   
|------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ----- | ---- |  | ----- | - |  | ----- | --
|                                                                                                             |  | Years
  ended December 31, |      
|In adjusted NIS in millions                                                                                  |  | 2002                       |       | 2003 |  | 2004  |  
|                                                                                                             |  |                            |       |      |  |       |  
|Net income
  (loss)                                                                                          |  |                            | 33.8  |      |  | (5.5  | ) |  | (83   | ) 
|Financial
  expenses, net                                                                                    |  |                            | 48.1  |      |  | 84    |   |  | 48.5  | * 
|Taxes on income                                                                                              |  |                            | 108.9 |      |  | 35.6  |   |  | 7.3   |   
|Depreciation and
  amortization, including deduction of income from amortization of set-top
  boxes deposits |  |                            | 155.4 |      |  | 154.8 |   |  | 138.9 | * 
|Other income
  (expenses), net                                                                               |  |                            | 278.6 |      |  | 81    |   |  | (42.2 | )*
|Equity in
  earnings of affiliates, net                                                                      |  |                            | 10.9  |      |  | 40.9  |   |  | 14.3  |   
|Total EBITDA                                                                                                 |  |                            | 56.7  |      |  | 147.0 |   |  | 139.6 |   

|  |                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Since the results for the
  year 2003 do not include proportional consolidation with HOT Vision, for
  comparison purposes, the EBITDA is presented assuming no consolidation with
  HOT Vision.

79

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Net financial expenses

|                               |  |                               |      |      |  |      |  |                           |      |                           |  |  |      |  |  |  |  |       |  
|------------------------------ |  | ----------------------------- | ---- | ---- |  | ---- |  | ------------------------- | ---- | ------------------------- |  |  | ---- |  |  |  |  | ----- | -
|                               |  | Years
  ended December 31,    |      |      |  |     
|                               |  | 2002                          |      | 2003 |  | 2004 |  |                           |      |                          
|                               |  |                               |      |      |  |      |  | % Change 
  2002 vs. 2003 |      | % Change 
  2003 vs. 2004
|                               |  | in
  adjusted NIS in millions |      |     
|                               |  |                               |      |      |  |     
|Total net
  financial expenses |  |                               | 48.1 |      |  | 84.0 |  |                           | 50.3 |                           |  |  | 74.6 |  |  |  |  | (40.1 | )

Net
financial expenses include interest on our borrowings in Israel and linkage
payments related to the fluctuations in the Israeli inflation rate (with
respect to our borrowings in shekels) and the US dollar exchange rate (with
respect to our borrowings in US dollars).
Accordingly, our net financial expenses are affected by the level of our
borrowings, from time to time, by changes in the interest rates announced by
the Governor of the Bank of Israel and as determined by our creditors, and by
changes in the Israeli inflation rate and the exchange rate of the US dollar
against the shekel. The decrease in our
net financial expenses in 2004 compared to 2003 is principally attributable to
a lower debt level and the decrease in interest rates during 2004. The increase in our net financial expenses
in 2003 compared to 2002, despite a reduction in our bank credit, is
principally attributable to fluctuations in the rate of inflation from +6.5% in
2002 to  1.9% in 2003. The reduction in
the rate of inflation in 2003 caused an increase in the real interest on
unlinked NIS credit, which is a principal component of our credit
portfolio. In addition, our net
financial expenses increased in 2003 as a result of losses derived from exchange
rate hedging transactions we performed.

Other income (expenses). This item includes non-recurring sources of
income (expenses) or other income (expenses) not derived from our ordinary
operations.

In
2004, other expenses in the amount of NIS 42.7 million were mainly composed as
follows:

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | During 2004, we wrote off the remaining portion of
  our investment in Barak I.T.C. (1995)  The International Telecommunications
  Services Corp. Ltd. (Barak) in the amount of approximately NIS 16 million,
  based on a valuation implemented by an independent appraiser. See Item 4B.  Information on the Company
   Business Overview  International Telecommunication Services and Note 5c in our financial statements.
|B. | During 2004, we recorded a provision of NIS 23.4
  million with respect to our indemnification to Golden Channels (through
  HOT Vision) for approximately 26.5%
  of the damages awarded to Columbia, Fox and Warner Bros. International
  Television Distribution (Warner). See also Note 15b3 in our financial
  statements.                                                                                                     

In
2003 and 2002, other income is primarily derived from the sale of 3,826,169
shares in Partner in November 2003 (in the amount of approximately NIS 97
million) and 13,778,668 shares in Partner in April 2002 (in the amount of
approximately NIS 296 million, approximately 50% of our holdings at such time),
respectively. See Item 4B Information on the Company  Business
Overview  Cellular Telecommunication Services and Note 19d in our financial
statements.

Taxes on income. Costs related to taxes on income decreased
by NIS 28.3 million, or 79.5%, from NIS 35.6 million in 2003 to NIS 7.3 million
in 2004. Costs related to taxes on
income decreased by NIS 73.3 million, or 67.3%, from NIS 108.9 million in 2002 to NIS 35.6 million in 2003. In
2003 and 2002, we recorded costs related to taxes on income with respect to
capital gains derived from our sales of shares in Partner. See the discussion
regarding our sales of shares in Partner in Item 5B. Operating and Financial
Review and Prospects  Liquidity and Capital Resources. For more information
regarding our taxes on income, see Note 17 in our financial statements.

Equity in earnings of affiliated companies, net. Our share in the earnings of affiliated companies
decreased by NIS
26.6 million, from NIS 40.9 million in 2003 to NIS 14.3 million in 2004, mainly
due to the decrease in our share in Partners profits (totaling NIS 17.5
million in 2004 compared to NIS 40.9 million in 2003) which was offset by our
share in HOT Telecoms losses (totaling NIS 3.2 million in 2004). Our share in the earnings of affiliated
companies increased by NIS 30.0 million, from NIS 10.9 million in 2002 to NIS
40.9 million in 2003. The increase is attributed to our share in Partners profits.

80

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|    |                                
|--- | -------------------------------
|5B. | LIQUIDITY AND CAPITAL RESOURCES

We
have financed our operations through cash we generated from our operations,
equity contributions and loans from our former principal shareholders, loans
and credit lines from banks and others, sale of financial assets (including
4.45% of our shares that were held by Cable Systems Media Haifa-Hadera Ltd., a
wholly owned subsidiary of ours, for aggregate consideration of approximately
NIS 40.1 million), and from the public offerings, in Israel of our ordinary
shares on the Tel Aviv Stock Exchange in October 1993 and of debentures and
warrants in August 1997, and in the United States of our American Depository
Shares in June 1996. For details
regarding the terms of the debentures, including outstanding amounts, please
see Note 14 of our financial statements.

In
April 2002, we sold 13,778,668 shares of Partner Communications Company
Ltd., or Partner, to a subsidiary of Hutchison Whampoa Ltd., representing
approximately 50% of our holdings in Partner at that time. The gross consideration we received was
approximately US$ 62.4 million. In November 2003 we sold 3,826,169 shares of
Partner. The gross consideration we
received was approximately US$ 25.5 million. In April 2005, we exercised our option to participate in the
share buyback of Partner together with Elbit Ltd., Eurocom
Communications Limited and Polar Communications Limited. At the closing of the transaction, we sold
to Partner 7,783,444 ordinary shares of Partner for total consideration of
approximately US$ 57 million. We currently
hold 1,884,926 ordinary shares of Partner, almost all of which are subject to
transfer restrictions under Partners communications license. The gain received
from the sales of our shares in Partner is subject to income tax (the taxation
of these sales is under dispute with the tax authorities). We have paid
approximately NIS 70 million as an advance payment on account of this income
tax. See Note 17 of our financial
statements. We currently own
indirectly, approximately 1.2% of the outstanding share capital of Partner.

During
the past several years, we made use of external funds to finance our operating
activities, capital expenditures associated with building-out our network and
investments in associated companies. We have relied on internal cash flows,
equity investments and loans from our principal shareholders, together with
loans from banks and the proceeds from the issuance of our ordinary shares,
American Depository Shares, debentures and warrants, and credit arrangements
with suppliers to provide us with the necessary funding for building-out of our
cable television network operating and investing activities. Our net capital
expenditures, as determined on a cash basis, were NIS 77.3 million for the year
ended December 31, 2002, NIS 56.6 million for the year ended December 31, 2003,
and NIS 107.4 million (including an investment in HOT Telecom in the amount of
approximately NIS 12 million) for the
year ended December 31, 2004. In 2002 and 2003, there is a decrease in capital
expenditures compared to the years 2000 and 2001 due to the fact that large
projects relating to infrastructure (such as upgrading the network and the
digital infrastructure), which required intensive capital expenditures, were completed in 2001. The increase in our
capital expenditures in 2004, is due to large investments in converters and
modems as a result of our market share strategy, our efforts to reduce churn
and the investment in HOT Telecom. We did not invest in affiliated or other
companies in 2002 and 2003. See Note 5
in our financial statements.

In
2002, we sold in private transactions in Israel an aggregate amount of 26,651
of our ordinary shares held by our subsidiary Cable Systems Media Haifa-Hadera
Ltd., in consideration for an aggregate gross amount of approximately NIS 1.0
million. In 2003, we sold the remaining 1,343,497 of our ordinary shares held
by Cable Systems Media Haifa-Hadera Ltd. in private transactions in Israel, in
consideration for an aggregate amount of approximately NIS 39.1 million.

In
2002, we wrote-off approximately NIS 8.8 million of our investment in Barak.
During 2004, we wrote off the remaining portion of our investment in Barak in
the amount of approximately NIS 16 million, based on a valuation implemented by
an independent appraiser. We may be required to make additional capital
contributions in proportion to our relative holdings in Barak in the
foreseeable future because Barak may not have readily available financing
resources, including from its shareholders. We provided a guarantee on behalf
of Barak to a bank in the amount of US$ 200,000. See Item 4B. Information on
the Company  Business Overview  International Telecommunication Services and
Note 5c in our financial statements.

As
of December 31, 2004, the principal amount of the bonds outstanding in Baraks
financial statements totaled US$ 122.4 million. The bonds bear interest payable
semi-annually, commencing May 15, 2003. Until the payment which was due on
November 15, 2004, Barak had met its interest payment obligations. Barak has
decided to defer payment of interest to bondholders in the amount of US$ 7.6
million due on November 15, 2004.

81

---

---



Since
Barak did not pay the interest payment within the 30-day period, the bondholders
may have the right to request for the immediate acceleration of the bonds,
subject to certain limitations. Barak does not have the financial ability to
repay currently these bonds in full. As of December 31, 2004, Barak had a
capital deficiency in the amount of NIS 527 million and a working capital
deficit in the amount of NIS 704 million.
For information regarding a non-binding term sheet entered into on June
15, 2005, by Barak, Clalcom, Clal Industries and Investments Ltd, Dial-the
Israeli Company for International Communications Ltd.  and we, which sets out the terms
of a proposed reconstructing of Baraks capital and debt, see Item 4B.
Business Overview  International Telecommunication Services.

We
hold approximately 26.6% of the outstanding shares of HOT Vision Ltd. The
results of HOT Vision were recorded based on the equity method until December
31, 2003. On December 31, 2003, the
accounts of HOT Vision were consolidated for the first time by the proportionate
consolidation method on the basis of our proportionate share in the issued
share capital of HOT Vision. We
provided an unlimited guarantee to Bank Leumi LIsrael B.M., or Bank Leumi, for
purposes of securing up to 24.6% of the credit the Bank Leumi will provide to
HOT Vision. The board of directors of
HOT Vision determined that the line of credit of HOT Vision from Bank Leumi
would be limited to approximately US$ 35 million, unless otherwise
determined. As of December 31, 2004, we
guaranteed to Bank Leumi US$ 4.6 million on this line of credit. In addition, we provided a guarantee in an
amount of up to US$ 16 million to Bank Hapoalim B.M., or Bank Hapoalim, to
secure approximately 25% of the credit provided by Bank Hapoalim to HOT Vision,
and upon the fulfillment of certain conditions, up to 44% of the total
credit. As of December 31, 2004, we
guaranteed to Bank Hapoalim between US$ 4.4 million to US$ 7 million. In January 2005, Bank Hapoalim demanded from
HOT Vision to repay all of its
outstanding borrowings in the amount of approximately US $16 million. HOT
Vision had some discussions with the bank to extend the credit period See Note 15c to the financial statements.

Since
March 26, 2002, Bank Leumi, Bank Igud, Bank Mizrachi, Israel Mercantile
Discount Bank and Investec Trust Company have floating charges over all of our
current and future assets, and specific fixed charges for an unlimited sum over
our unpaid share capital and goodwill. According to the charge documents, any
exercise of the charges shall be subject to the restrictions contained in our
licenses, including the right of the licensee to use its assets to continue to
supply services to its subscribers for so long as such license is valid. Furthermore, any terminal equipment situated
in the subscribers premises is exempted from the application of the charge.
The provisions of the Telecommunications Law prohibit the grant of a charge
over our licenses.

As
of December 31, 2004, our borrowings consist of short and long-term loans from
Israeli banks and other sources and debentures issued to the public, part of
which are linked to the Israeli consumer price index or the US dollar. Below is
a tabular summary of our outstanding indebtedness:

|                                   |  |       |       |                   |  |                          |  |                          |      |  |  |      | 
|---------------------------------- |  | ----- | ----- | ----------------- |  | ------------------------ |  | ------------------------ | ---- |  |  | ---- | 
|In adjusted NIS in millions        |  | Total |       | Up to one 
  year |  | Two to 
  three 
  years |  | Four to 
  five 
  years |     
|                                   |  |       |       |                   |  |                          |  |                          |     
|Short-term bank credit (1)         |  |       | 437   |                   |  | 437                      |  |                          |     |  |  |     | 
|Debentures (Series A) (2)          |  |       | 67.2  |                   |  | 34                       |  |                          | 33.2 |  |  |     | 
|Long-term bank loans and other (3) |  |       | 129.8 |                   |  | 28.3                     |  |                          | 27.9 |  |  | 73.6 | 
|Total                              |  |       | 634   |                   |  | 499.3                    |  |                          | 61.1 |  |  | 73.6 | 

(1)
In NIS (not linked to the Israeli consumer price index), and as of December 31,
2004, bears average annual interest of approximately 5.4%.

(2)
Linked to the Israeli consumer price index, and bears annual interest of
3.7%. See Note 14 of our financial
statements for the terms of these debentures.

(3)
In NIS (linked to the Israeli consumer price index and to the US dollar), and
bears annual interest at rates ranging from 5.5% to 6.2%, or in US dollars and
bearing average annual interest of LIBOR + 1.5-1.75%.

We
commenced negotiations regarding an increase of our present credit lines with
our banks, in order to have, together with our internal cash flow, sufficient
funds to finance the investment in the continued network build-out and
development, acquisition of additional digital set-top boxes, extension of our
cable television and IP networks, and loans granted to HOT Telecom to finance
its telephony project. In the framework
of our negotiations with the banks regarding the extension of our credit lines,
we agreed to enhance the security granted to the banks as collateral for our
credit lines by granting a floating charge in their favor, subject to the terms
of our licenses. These negotiations
were ceased due to the proceedings in connection with the proposed merger of
the Israeli cable television operators.
Thereafter, as the merger was not consummated, these negotiations were
recommenced. There is no assurance that we shall reach an agreement with the banks
and receive such increased credit lines.

82

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In
the event that we shall increase our present credit lines, we expect that the
amount and cost of the additional bank credit as well as the security we will
be obligated to make available to the banks will be influenced by many factors,
including: the volatility of private and public markets in debt and equity, our
financial results, the effect of competition and regulatory uncertainty. Therefore, we cannot assure you that the
additional financing, if any, will be on the same terms as our current
financing from the banks, or on terms which are favorable to us or which are
not significantly expensive.

Under
our credit agreements with the banks that finance our operations, we are subject
to conditions and limitations on our business activities, including limitations
on our ability to obtain additional credit, sell or purchase assets and
distribute dividends. One of our credit
agreements with a bank in Israel includes certain covenants according to which,
until the date of consummation of the merger of the three Israeli cable
television operators, we are required to maintain certain financial ratios,
such as, with respect to our level of equity, total financial credit,
operational costs and financing expenses.
We are also required to maintain a certain number of subscribers. If we fail to fulfill any of our covenants
we could be deemed to be in breach of our loan agreements with the bank. In such event, the bank will be entitled to
demand immediate payment of all amounts owing to it under the line of credit,
loans, banking services and any other obligation we have to such bank. The balance of credit taken from this bank
as of December 31, 2004 was approximately NIS 60 million. As of December 31, 2004, we did not comply with two covenants to
maintain the financial ratios, as defined in the agreement, as follows:

|   |                                       
|-- | --------------------------------------
|1. | The number of broadcast
  subscribers.
|   |                                       
|2. | Operating surplus.                    

During
March 2005, we received a letter from this bank according to which the bank
does not deem the non-compliance, described above, to be a violation by the
company to maintain the financial ratios for a period of one year, commencing
from the date of the letter (the waiver period).

Further
to the non-compliance of the financial covenants in 2004 and with regard to the
dictated increase in the required operating surplus, as defined in the
covenants, in 2005, the companys management anticipates that additional
negotiations shall take place with the bank, at the end of the waiver period
(March 2006).

Cash Flow (Cable TV and Internet activities
together)

Below
is a condensed presentation of certain aspects of our cash flow during 2003 and
2004. For our full cash flow statements,
please see the financial statements attached at Item 18. Financial
Statements.

|                                                      |  |                               |  |        |   |  |  |  |       |   | 
|----------------------------------------------------- |  | ----------------------------- |  | ------ | - |  |  |  | ----- | - | 
|                                                      |  | Years
  ended December 31,    | 
|                                                      |  | 2003                          |  | 2004   |  
|                                                      |  |                               |  |        |  
|                                                      |  | in
  adjusted NIS in millions | 
|                                                      |  |                               | 
|Net cash
  provided by (used in) operating activities |  |                               |  | 96.0   |   |  |  |  | 121.3 |   | 
|Net cash
  provided by (used in) investing activities |  |                               |  | 60.4   |   |  |  |  | (106  | ) | 
|Net cash used in
  finance activities                 |  |                               |  | (126.1 | ) |  |  |  | (29   | ) | 
|Increase
  (decrease) in cash and cash equivalents    |  |                               |  | 30.3   |   |  |  |  | (13.7 | ) | 
|Cash and cash
  equivalents at beginning of year      |  |                               |  | 7.6    |   |  |  |  | 37.9  |   | 
|Cash and cash
  equivalents at end of year            |  |                               |  | 37.9   |   |  |  |  | 24.2  |   | 

83

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The
increase in net cash provided by our operating activities in 2004 compared to
2003 derives from an increase in our revenues and a decrease in our financing
costs, which is partly offset by an increase in operating expenses.

Net
cash used in investment activities in 2004 in the amount of approximately NIS
106 million is primarily used for purchasing of property, plant and equipment
and investment in HOT Telecom. In 2003 net cash provided by investment
activities in the amount of approximately NIS 60.4 million, is primarily
derived from the proceeds of the sale of a portion of our shares in Partner in
the amount of NIS 114.4 million, which was offset by investments in fixed assets in the amount of NIS 56.6
million.

Net
cash used in financing activities in 2004 in the amount of approximately NIS 29
million mainly represent redemption of debentures. Net cash used in financing activities in 2003 is comprised of NIS
131.5 million used for repayment of bank loans, NIS 33.7 million used for
redemption of debentures, and NIS 39.1 million provided by sales of our shares
held by a subsidiary.

We
paid a dividend on January 26, 2000 of approximately NIS 222.0 million. We did
not pay a dividend in 2001, 2002, 2003 and 2004. We have not adopted any
dividend distribution policy, and we cannot assure you that we would pay
additional dividends in the future.

Our
management believes that our cash and cash equivalents reserve, as well as cash
flow from our operations and available credit lines, will be sufficient to meet
our anticipated cash needs for a period of at least twelve months commencing on
December 31, 2004.

Impact
of Inflation and Exchange Rate Fluctuations

Since
we may be unable or not permitted to raise our rates and fees pursuant to our
licenses in a manner that would fully compensate for any increase in the
Israeli consumer price index, inflation in Israel, which may impact our
borrowing costs with respect to Shekel amounts linked to the Israeli consumer
price index and may cause an interest increase in Israel, may have a material
adverse effect on us.

Substantially
all of our revenues and a majority of our operating expenses are denominated in
shekels. However, through December 31, 2004, a substantial amount of our
operating expenses were linked to non-shekel currencies. These expenses related mainly to programming
where the price paid by us is based on the US dollar. Some of our capital expenditures are incurred in, or linked to,
non-shekel currencies, mainly US dollars.
Thus, any devaluation of the shekel against the US dollar, will also
increase the shekel cost of our non-shekel denominated or linked expenses. Such increase may have an adverse impact
upon our operating results, which may be material. Our borrowings are mostly in
Israeli shekels with the remainder in US dollars.

Differences
Between Israeli GAAP and U.S. GAAP

Israeli
GAAP varies in certain respects from U.S. GAAP. The application of U.S. GAAP to our financial statements would
have affected the determination of net loss, determination of capital
deficiency, comprehensive income, investment in affiliates and marketable securities
available for sale, debentures and deferred taxes as of December 31, 2004 to
the extent summarized in Note 26 to the financial statements.

|    |                                               
|--- | ----------------------------------------------
|5C. | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

Not applicable.

|    |                  
|--- | -----------------
|5D. | TREND INFORMATION

1.          During
2004, our number of cable television subscribers declined, mainly due to
increased competition from YES, the Israeli satellite television broadcaster. However, during the same period, our number
of access to High Speed Internet subscribers increased. This trend has continued in 2005 so
far.

2.          In
the second half of 2004, we experienced a decrease in our total revenues and
our monthly average revenues per subscriber. The decrease in our revenues and
our monthly average revenues per subscriber has continued in the first quarter
of 2005, but at a more moderate pace. We believe that the decrease in our
revenues and our monthly average revenues per subscriber was a result of the
intensified market share strategy undertaken by the three cable television
operators in Israel. Such strategy has been replaced in the second quarter of
2005 with a retention strategy, as the three cable television operators are
moving into the era of marketing bundled television, high speed access internet
and telephony in one package known as the Triple Play.

84

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3.          In
recent years our results, such as gross profits, profit from operations and
EBITDA, have improved. There is a
deterioration in the parameters mentioned above as a result of the ongoing
intensified competition over the market share strategy in the Israeli
multi-channel television market .

4.          In
2000 and 2001, we made significant capital expenditures to upgrade our network.
In 2002 and 2003, we significantly reduced our capital expenditures. In 2004, our capital expenditures increased
due to large investments in converters and modems as a result of our market
share strategy, and our efforts to reduce churn. We also made capital
investment in the telephony project through the investment in HOT Telecom. For more information about other factors
that may affect our results of operations, see Item 3D. Key Information 3⁄4
Risk Factors.

|    |                               
|--- | ------------------------------
|5E. | OFF-BALANCE SHEET ARRANGEMENTS

We
hold approximately 26.6% of the outstanding shares of HOT Vision Ltd. The
results of HOT Vision were recorded based on the equity method until December
31, 2003. On December 31, 2003, the
accounts of HOT Vision were consolidated for the first time by the proportionate
consolidation method on the basis of our proportionate share in the issued
share capital of HOT Vision. We
provided an unlimited guarantee to Bank Leumi LIsrael B.M., or Bank Leumi, for
purposes of securing up to 24.6% of the credit the Bank Leumi will provide to
HOT Vision. The board of directors of
HOT Vision determined that the line of credit of HOT Vision from Bank Leumi
would be limited to approximately US$ 35 million, unless otherwise determined. As of December 31, 2004, we guaranteed to Bank
Leumi US$ 4.6 million on this line of credit.

We
hold approximately 26.6% of the outstanding shares of HOT Telecom. The results
of HOT Telecom are recorded based on the equity method. As of May 31, 2005, we provided a bank guarantee
of approximately NIS 7.7 million to secure the payments of HOT Telecom to
Lucent. In addition, we and Tevel guarantee, jointly and severally, in a total
aggregate amount of US$ 4.5 million to secure the payments of HOT Telecom to
Cisco. The cable television operators signed an indemnification agreement with
respect to the Cisco guarantee.

In
addition, we provided a guarantee in an amount of up to US$ 16 million to Bank
Hapoalim B.M., or Bank Hapoalim, to secure approximately 25% of the credit
provided by Bank Hapoalim to HOT Vision, and upon the fulfillment of certain
conditions, up to 44% of the total credit.
As of December 31, 2004, we guaranteed to Bank Hapoalim between US$ 4.4
million to US$ 7 million. In January
2005, Bank Hapoalim requested to exercise the guarantee. HOT Vision has discussed with the bank to
extend the credit period.

In
order to ensure compliance with our obligations pursuant to our licenses,
applicable law and regulatory bodies, and to ensure payment of fines that may be
imposed by the Council and the Ministry of Communications, we have provided a
guarantee of US$ 3.72 million pursuant to the HOT Telecom Infrastructure
License along with the other two cable television operators in an aggregate
amount of US$ 14 million.  For more information on this guarantee, see
Item 4B. Information on the Company 
Business Overview  Our Licenses.

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|    |                                              
|--- | ---------------------------------------------
|5F. | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The
following table sets forth, as of December 31, 2004, our known contractual
obligations by type of obligation and for the periods indicated:

|                                                        |  |                         |         |                       |  |           |        |           |  |                         |         |  |  |        |  |  |        | 
|------------------------------------------------------- |  | ----------------------- | ------- | --------------------- |  | --------- | ------ | --------- |  | ----------------------- | ------- |  |  | ------ |  |  | ------ | 
|                                                        |  | Payment
  due by period |        
|                                                        |  |                         |        
|In thousands of NIS adjusted as of 
  December 31, 2004 |  | Total                   |         | Less than
  1 
  year |  | 1-3 years |        | 3-5 years |  | more 
  than 5 
  years |        
|                                                        |  |                         |         |                       |  |           |        |           |  |                         |        
|Long-term debt
  obligations (banks and others)         |  |                         | 129,767 |                       |  |           | 28,310 |           |  |                         | 86,769  |  |  | 14,688 |  |  |       | 
|Operating lease
  obligations                           |  |                         | 15,221  |                       |  |           | 6,736  |           |  |                         | 7,851   |  |  | 634    |  |  |       | 
|Debentures                                              |  |                         | 67,206  |                       |  |           | 34,005 |           |  |                         | 33,201  |  |  |       |  |  |       | 
|Accrued
  severance pay*                                |  |                         | 20,394  |                       |  |           |       |           |  |                         |        |  |  |       |  |  | 20,394 | 
|Total                                                   |  |                         | 232,588 |                       |  |           | 69,051 |           |  |                         | 127,821 |  |  | 15,322 |  |  | 20,394 | 

*As of December 31, 2004, we had NIS 17,911 in a
severance pay fund to cover such liability.

Contingent
Obligations

In
order to ensure compliance with our obligations pursuant to our licenses,
applicable law and regulatory bodies, and to ensure payment of fines that may
be imposed by the Council and the Ministry of Communications, we have provided
a guarantee of NIS 9.3 million to the Council pursuant to the Cable Broadcast
Licenses.

The
approval of the Controller to the merger is also conditional upon the provision
of a bank guarantee in the amount of US$ 15 million to ensure compliance with
the terms of the approval of the Controller. In the event that the Controller
decides, in his discretion, that there has been a material breach of the terms
of the approval, he may fully exercise the guarantee. We have provided our pro rata portion of this guarantee in the amount
of US$ 3.75 million.

For
more information on these guarantees, see Item 4B. Information on the Company  Business Overview  Our
Licenses.

Pursuant
to the proposed reconstruction of Baraks capital and debt, we are entitled to
participate in the funding of a cash payment in the amount of US$ 6 million in
accordance with our proportional holdings in Barak. Our board of directors has recently decided to participate in the
funding. We will be required to provide
additional guarantees in the future of unknown amounts pursuant to the proposed
reconstruction. For more information on
the cash payment, see Item 4B. Information on the Company -- Business Overview  International
Telecommunication Services.

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|        |                                             
|------- | --------------------------------------------
|ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND
  EMPLOYEES

|    |                                
|--- | -------------------------------
|6A. | DIRECTORS AND SENIOR MANAGEMENT

Directors

Set forth below is certain information about our
officers and directors as of June 25, 2005.

Directors

|                            |  |    |     |                                    |          | 
|--------------------------- |  | -- | --- | ---------------------------------- | -------- | 
|Name                        |  |    | Age |                                    | Position | 
|                            |  |    |     |                                    |          | 
|Meir Srebernik              |  | 46 |     | Chairman of the Board of Directors
|Asaf Bartfeld               |  | 53 |     | Director                          
|Shimon Cheifetz (1)         |  | 62 |     | Director                          
|Moshe Amit (1) (2)          |  | 70 |     | Director                          
|Gabriel Last                |  | 58 |     | Director                          
|Menashe Raz                 |  | 58 |     | Director                          
|Hanania Gibstein            |  | 72 |     | Director                          
|Yair Keusch (1) (2) (3)     |  | 65 |     | Director                          
|Yeshayahu Drori (1) (2) (3) |  | 67 |     | Director                          
|Yehoshua Gibstein (1)       |  | 45 |     | Alternate Director                

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Officers

|                 |  |    |     |                                                          |          | 
|---------------- |  | -- | --- | -------------------------------------------------------- | -------- | 
|Name             |  |    | Age |                                                          | Position | 
|                 |  |    |     |                                                          |          | 
|Amit Levin       |  | 42 |     | Chief Executive Officer                                 
|Ori Gur Arieh    |  | 48 |     | Counsel and Company Secretary                           
|Tal Peres        |  | 39 |     | Chief Financial Officer                                 
|Shlomi Ashkenazi |  | 39 |     | Vice President, Sales, Marketing and Operational
  Areas

---

|    |                                 
|--- | --------------------------------
|(1) | Member of the Finance Committee.
|(2) | Member of the Audit Committee.  
|(3) | Independent Director.           

Meir
Srebernik has been a director of Matav since March 2002 and
its Chairman since September 2004. Mr.
Srebernik was the Chief Executive Officer of Dankner Investments Ltd., from
February 2002 to August 2004. Mr.
Srebernik served as a director of various other companies, including Matav
Investments Ltd., Cable Systems Media Haifa-Hadera Ltd., Matav Assets Ltd.,
Matav Infrastructure Ltd., HOT Telecom Ltd., Nonstop Ventures Ltd, and HOT
Vision. Between 1995 and 2000, he was
the president and Chief Executive Officer of Netia Holding SA, a leading Polish
alternative fixed line telecommunications company. He has also served as the head of the cable television division
of the Israeli Ministry of Communications from 1987 to 1993, as Vice President
of Telecommunications of Dankner Investments Ltd. from 1993 to 1994 and as a
director of Pelephone Communications Ltd., one of the four mobile phone service
providers in Israel, in 2001. Mr. Srebernik has a B.A. degree in economics and
business administration from the Hebrew University, Jerusalem.

Asaf
Bartfeld has been a director of Matav since June 2004. Mr.
Bartfeld is currently the President and CEO of Delek Group Ltd., and the CEO of
Delek Investments and Properties Ltd. Prior to holding his current positions in
the Delek Group he was CFO of Delek Group Ltd. Mr. Bartfeld serves as the chairman
of the board of directors of Delek Real Estate Ltd., Gadot Biochemical
Industries Ltd., Delek Belron International Ltd., and is a member of the board
of directors of several other entities within the Delek Group. Mr. Bartfeld has a B.A. degree in economics
from Tel Aviv University.

Shimon
Cheifetz has been a director of Matav since January 20,
1989. Mr. Cheifetz is also a director
of various companies in Israel: Matav Investments Ltd., Cable Systems Media
Haifa-Hadera Ltd., Matav Assets Ltd. and Barak I.T.C.- The International
Telecommunications Services Ltd. Mr.
Cheifetz served as the general manager of Maariv-Modiin Publishing House Ltd.
until April 1992. Since April 1992 Mr. Cheifetz has been the chairman of the
board of directors and a director in various other companies including, Mifratz
Flour Mills Ltd., Man Haifa Bay Flour Mills (1999) Ltd., Grand Moulins DIsrael
Ltd., Ugda Investment Ltd., Synet Industries Ltd., El-Mul Technologies Ltd.,
and Yeda Research and Development Co. Ltd.

Moshe
Amit has been a director of Matav since August 2004. He
serves as the Chairman of Continental Bank and as a director of several banks
and companies, including Bank Hapoalim (Swiss), Signature Bank (New York), and
the Delek Group. Mr. Amit served between 1980 to 2003 as member of the board of
management of Bank Hapoalim and his latest position was deputy CEO of Bank
Hapoalim. Mr. Amit has a B.A. degree in political science from Bar-Ilan
University and has a diploma in bank management.

Gabriel
Last has been a director of Matav since August 2004. Mr. Last
served as the CEO of Delek Group Ltd. from2001 to 2003. In 2003 he was
appointed as Chairman of the board of directors of Delek Group and is a
director in many subsidiaries of the Delek Group. From 1998 to 2001 he served
as CEO of the Israeli Society of Insurance Companies and of the Israeli
Association of Life Insurance Companies Ltd. From 1985 to 1998, Mr. Last served
in various command positions in the Israeli police force, including as the Vice
Inspector General from 1996 to 1998. Mr. Last has a L.L.B. degree from Tel Aviv
University and a M.A. degree in political science from Haifa University. He is
a graduate of A.M.P Harvard Business School.

88

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Menashe
Raz has been a director of Matav since August 2004. For over
30 years, Mr. Raz has been engaged in the electronic media in various
positions, including as editor, television and public radio reporter, T.V. show
host and documentary films maker. He serves as a news reporter, anchor and show
host in the News Company. Channel 10 since April 2002. From 1972 to 1999, Mr. Raz served in
various positions in Channel 1, the Israeli public television channel,
including as editor and anchor of Mabat Lachadashot, the main news edition of
Channel 1. He was the CEO of the Schruver Fund, a non-profit organization
engaged mainly in funding of development projects in Israel. Mr. Raz is a
graduate of the Hebrew University in political science and international
relations.

Hanania
Gibstein has been a director of Matav since August 14, 1987.
Mr. Gibstein also serves as a director of Cable Systems Media Haifa  Hadera
Ltd. and Matav Investments Ltd. Mr. Gibstein was a member of the Municipal
Council of the city of Rishon Le-Zion, and was the mayor of that city from 1969
to 1983. Mr. Gibstein is the chairman of the Society of Friends of The Beer
Yaacob Mental Health Center. Since 1991 Mr. Gibstein has been the vice-chairman
of the Association for Welfare of the Soldiers of Israel, and has managed
private businesses, primarily in real estate.

Yair
Keusch has been an external director of Matav since June 3,
2004. Mr. Keusch has served as an
economic and financial advisor to various companies since 2001. From 1972 to
2000, Mr. Keusch served as the Vice President of Finance of Delek The Israel
Fuel Corporation Ltd., an energy company publicly traded on the Tel-Aviv Stock
Exchange. Mr. Keusch also served as a
director in many companies. In the past, Mr. Keusch lectured in the Department
of Economics of Tel-Aviv University and at other institutions of higher
education in Israel. Mr. Keusch previously served as the Manager of the
Economics Department of the Institute for Productivity of Labor and
Manufacture. Mr. Keusch has a B.A. in
economics and an MBA from the Hebrew University in Jerusalem.

Yeshayahu
Drori has been an external director of Matav since June 3,
2004. Mr. Drori held various positions
with the Dan bus cooperative from 1978 to 2000, including heading the
inspection, planning/development and finance divisions, and served as the
Chairman of the cooperatives Secretariat from 1997 to 2000. From 1992 to 2000,
Mr. Drori served as the Chairman of AVIS Dan Rent a Car. Mr. Drori has served as a member of the Tel
Aviv municipal council since 1999. Mr.
Drori serves as a member of various municipal councils and committees,
environmental bodies and is a member of the board of directors of Netivey
Ayalon Ltd.

Yehoshua
Gibstein has been an alternate director of Matav for Mr.
Hanania Gibstein since May 24, 1998. Mr. Yehoshua Gibstein was a director of
Matav between 1992 and May 1998. Mr. Gibstein is also a director in Pikom Ltd.,
Exent Technologies Ltd., Cabletek Ltd. and Noa (G.P.A) Investment Company Ltd.,
which specializes in investment and project development. Mr. Gibstein is the son of Hanania
Gibstein.

Amit
Levin has been our Chief Executive Officer since October 7,
1999. In addition, Mr. Levin currently serves as Vice President of Service and
Logistics of the merged operations of the three cable television
operators. Mr. Levin served as Vice
President of Marketing and Programming of the merged operations of the three
cable television operators from June 2004 to June 2005. Before that and since September 1998, he
served as our interim Chief Executive Officer. Between October 1994 and
September 1998, he was Matavs Vice President of Israeli Operations. Mr. Levin
is a director of Nonstop Internet (1999) Ltd., Matav Assets Ltd. and Matav
Infrastructure Ltd. Between 1991 and 1994, Mr. Levin was Matavs area manager
for Netanya.

Ori Gur
Arieh has been Matavs Counsel and Company Secretary since
November 2000. Mr. Gur Arieh also
serves as General Counsel to HOT Telecom and General Counsel to the merged
operations of the three cable television operators, referred to as HOT. Prior to
his employment with Matav, Mr. Gur Arieh was a partner in the private law
practice of Avital, Dromi & Co.

Tal
Peres has been our Chief Financial Officer since May
2005. Prior to joining the Company and
since 2003, Mr. Peres served as chief financial officer and a member of the
executive committee of Hashmira Group.
Mr. Peres has served as chief financial officer and a member of the
executive committee of the DBM Group from 2001 to 2002 and of the Career Group,
a subsidiary of Manpower International, from 1996 to 2001. Mr. Peres is a certified public
accountant.

Shlomi
Ashkenazi has been Matavs Vice President of sales, marketing
and operational areas since August 2002.
Mr. Ashkenazi also serves as Vice President of Sales of the merged
operations of the three cable television operators, referred to as HOT. Between February 2002 and August 2002 he
served as Matavs Vice President of Marketing and Sales. Before that and since 1998, he served as
Matavs Vice President and Chief Operating Officer. Between 1995 and 1998 he
served as an operating area manager for our Bat-Yam, Holon and the Galilee
franchise areas.

89

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Except
as disclosed above, none of the above directors or members of senior management
has any family relationship with any other director or senior manager of Matav.

|    |             
|--- | ------------
|6B. | COMPENSATION

The
aggregate net compensation paid, and benefits in kind granted to or accrued on
behalf of all of our directors, officers and members of our extended
management, as a group, for their services in all capacities during the year
ended December 31, 2004 was approximately NIS 8.1 million. This amount includes pension, retirement and
similar benefits in the aggregate amount of NIS 1.5 million. This amount
excludes amounts we expended for vehicles we made available to our officers and
members of extended management and expenses (including business travel,
professional and business association dues and expenses) with which we
reimbursed our officers and members of extended management.

During
2001, we granted 770,500 options to purchase ordinary shares of the company to
45 employees under our 2001 Employee and Officers Option Plan, or the 2001
Plan. As of December 31, 2004, 608,300
options were cancelled, 90,732 options were forfeited, 37,235 options were
exercised and 34,233 options expired.

In
addition, as of December 31, 2003, options were granted to approximately 46
members of our senior management under our 2003 Employee and Officers Option
Plan, or the 2003 Plan, to purchase up to 770,000 of our ordinary shares. The options under the 2003 Plan vest in
three equal portions. The first portion
vested on January 31, 2004 and has an exercise price of 85% of the average 30
day trading price on the Tel Aviv Stock Exchange, or TASE prior to November 17,
2003. The second portion vested on
January 31, 2005 and has an exercise price of 90% of the average 30 day trading
price on TASE prior to the vesting date.
The third portion vests on January 31, 2006 and has an exercise price of
90% of the average 30 day trading price on TASE prior to the vesting date. In addition, all of the employees that were
entitled to receive options under the 2003 Plan that received options under the
2001 Plan were required to waive their vested options under the 2001 Plan as a
condition to receiving options under the 2003 Plan.

On
November 29, 2004, a special meeting of the Companys shareholders approved
the grant of 302,205 stock options of the 2003 Plan at no consideration to a
member of the Companys board of directors.
The exercise price of the options is NIS 38 per share.

As
of December 31, 2004, under the 2003 Plan, 1,072,205 options were issued to 46
employees, 36,483 options were exercised, and 11,000 options were forfeited.

For
more information see Item 6E. Share Ownership.

|    |                
|--- | ---------------
|6C. | BOARD PRACTICES

Israeli
Companies Law

We
are subject to the provisions of the Israeli Companies Law, 5759-1999, which
became effective on February 1, 2000 and regulations adopted thereunder, or the
Companies Law, which supersede most of the provisions of the Israeli Companies
Ordinance (New Version), 5743-1983.

Terms of
Directors

Generally,
each director is elected at the annual general meeting of shareholders and
holds office until the election of his/her successor at the next annual general
meeting, except for external directors, who hold office for three-year terms
and may be re-elected by the shareholders for an additional three-year
term. Currently, our articles of association
provide that our board of directors consists of at least 4 directors but not
more than 15. Our articles of association provide that a majority of our board
of directors, entitled to participate, may appoint additional directors, up to
the maximum number permitted. Our articles of association also provide that our
board of directors may delegate all of its powers to committees of the board of
directors, as it deems appropriate, subject to the provisions of the Companies
Law. No director has a service contract with our company or its subsidiary
providing for benefits upon termination of employment. Our officers serve at the discretion of our
board of directors or until their successors are appointed.

90

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Alternate
Directors

Our
articles of association provide that a director may at any time, appoint any
individual as an alternate director. In
addition, no person who already serves as a director or alternate director of
Matav may serve as the alternate director of another director of Matav. An alternate director may not serve as such
unless such person is qualified to serve as a director. Under the Companies
Law, an alternate director shall have all of the rights and obligations of the
director appointing him or her. The alternate director may not act at any
meeting at which the director appointing him or her is present. Unless the time
period or scope of any such appointment is limited by the appointing director,
such appointment is effective for all purposes and for an indefinite time, but
will expire upon the expiration of the appointing directors term. Mr. Yehoshua
Gibstein is alternate director for Mr. Hanania Gibstein, in his absence.

Independent
Directors and External Directors

Pursuant
to the current listing requirements of the Nasdaq National Market, as a foreign
private issuer which was already publicly traded in December 1999, we are
required to have at least two independent directors on our board of directors
and to establish an audit committee, a majority of whose members must be
independent.

The
Companies Law requires that we have two external directors. The election of an
external director under the Companies Law must be approved by a general meeting
of shareholders provided that either: (a) the majority of shares voted at the
meeting, including at least one third of the shares of non-controlling
shareholders voted at the meeting, vote in favor of such election; or (b) the
total number of shares voted against such election does not exceed one percent
of the aggregate voting rights in the company.

On
June 3, 2004, Mr. Yair Keusch and Mr. Yeshayahu Drori were appointed as
external directors to replace Mr. David Harnik and Mr. Michael Goldschmidt
whose terms expired on June 4, 2004. Our current external directors satisfy the
provisions of the Companies Law pursuant to which they were appointed, and also
satisfy the requirements of the Nasdaq National Market regarding independent
directors.

Audit
Committee

As
a foreign private issuer, we received an automatic exemption from the listing
requirements of Nasdaq relating to audit committees that were adopted in
2000. Accordingly, we are required to
have at least two, rather than three, independent directors on our audit
committee. The responsibilities of the
audit committee under the Nasdaq requirements include, among other things,
evaluating the independence of our directors. In addition, we are not required
to adopt a formal audit committee charter.

The
Companies Law requires public companies, including us, to appoint an audit
committee. The responsibilities of the audit committee include reviewing our
financial statements, identifying irregularities in the management of the
companys business (including in consultation with the internal auditor and the
companys independent accountants) and to suggest an appropriate course of
action to amend such irregularities, and approving certain related party
transactions as required by law. An audit committee must consist of at least 3
members, and include all of the companys external directors. However, the
chairman of the board, any director employed by the company or providing
services to the company on an ongoing basis, any controlling shareholder or any
relative of a controlling shareholder, may not be a member of the audit committee. The current members of our audit committee
are: Mr. Moshe Amit, Mr. Yair Keusch and Mr. Yeshayahu Drori.

Internal
Auditor

The
Companies Law requires the board of directors of a public company to appoint an
internal auditor proposed by the audit committee. A person who does not satisfy
certain independence requirements may not be appointed as an internal auditor.
The role of the internal auditor is to examine, among other things, the
compliance of the companys conduct with applicable law and orderly business
procedures. The accounting firm Elan
Katz Nagor was appointed as our internal auditor in November 17, 2003.

91

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Fiduciary
Duties of an Office Holder

The
Companies Law imposes fiduciary duties on an office holder of a company, which
consist of a duty of loyalty and a duty of care. An office holder is defined
in the Companies Law as a director, general manager, chief executive officer,
executive vice president, vice president, other manager directly subordinate to
the any other person assuming the responsibilities of any of the foregoing
positions regardless of that persons title and other managers directly
subordinate to the general manager. The
duty of loyalty requires the office holder to avoid any conflict of interest
between the office holders duties for the company and other duty or personal
affairs, and proscribes any competition with the company or the exploitation of
any business opportunity of the company in order to receive personal advantages
for himself or herself, or for others.
This duty also requires him or her to reveal to the company any
information or documents relating to the companys affairs that the office
holder has received due to his or her position as an office holder. The duty of care requires an office holder
to act with the level of care which a reasonable office holder in the same
position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain
information regarding the advisability of a given action submitted for his or
her approval or performed by virtue of his or her position, and all other
relevant information pertaining to such action.

Approval
of Related Party Transactions

Generally,
under the Companies Law the compensation of office holders who are directors
requires the approval of the audit committee, the board of directors and the
general meeting of the shareholders of the company (in that order). The
Companies Law also requires that arrangements as to the compensation of office
holders who hold a controlling interest in the company must be approved by the
audit committee, the board of directors and a meeting of the shareholders (in
that order) provided that either: (a) the majority of shares voted at the
meeting, including at least one third of the shares of shareholders not having
a personal interest in the matter voted at the meeting, vote in favor of such
arrangement; or (b) the total number of shares voted against such arrangement
does not exceed one percent of the aggregate voting rights in the company.

The
Companies Law requires that an office holder promptly disclose any direct or
indirect personal interest that he or his affiliates may have, and all related
material information known to him, in connection with any existing or proposed
transaction by the company. The office holder must make his disclosure orally
or in writing no later than the first meeting of the companys board of
directors meeting which discusses the particular transaction. The company may approve
the transaction in accordance with the provisions of its articles of
association and the Companies Law. Under the Companies Law, if the office
holder has a personal interest, the company may approve the transaction
provided that the transaction is not adverse to the companys interest. In
addition, if the transaction is an extraordinary transaction, then in addition
to any approval required by the articles of association, it also must be
approved by the companys audit committee, its board of directors (in that
order) and, in certain circumstances, the shareholders of the company at a
general meeting. Generally, a director
who has a personal interest in a matter that is considered at a meeting of the
board of directors or the audit committee may not attend that meeting or vote
on the matter, unless a majority of the board of directors or the audit
committee also has a personal interest in the matter.

For
information concerning the direct and indirect personal interests of certain of
our office holders and principal shareholders in certain transactions, see
Item 7. Major Shareholders and Related Party Transactions.

Under
the Companies Law, the disclosure requirements which apply to an office holder
also apply to a controlling shareholder of a public company. Moreover, under
the Companies Law, extraordinary transactions between a public company and a
controlling shareholder of the company or with a third party in which a
controlling shareholder has a personal interest, in addition to any approvals
stipulated by the articles of association, require the approval of the audit
committee, the board of directors and of the shareholders with the same
majority requirement as required for the approval of compensation arrangements
of office holders who hold a controlling interest in the company.

Duty of
a Shareholder

Under
the Companies Law, a shareholder has a duty to act in good faith towards the
company and other shareholders, and refrain from improperly exploiting his
power in the company, including when voting in the general meeting of
shareholders on (a) any amendment to the articles of association, (b) an
increase of the companys authorized share capital, (c) a merger or (d)
approval of transactions with interested parties which require shareholder
approval. In addition, any controlling shareholder, any shareholder who knows
that it possesses the power to determine the outcome of a shareholder vote and
any shareholder that, pursuant to the provisions of the articles of association,
has the power to appoint or prevent the appointment of an office holder in the
company or any other power towards the company, is under a duty to act in
fairness towards the company. The
Companies Law does not detail the substance of this duty.

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Exculpation
of Office Holders

Under
the Companies Law, an Israeli company may not exempt an office holder from
liability with respect to a breach of his duty of loyalty, but may exempt in
advance an office holder from his liability to the company, in whole or in
part, with respect to a breach of his duty of care, provided that the articles
of association of the company permit it to do so. Our articles of association allow us to exempt our office holders
to the fullest extent permitted by law.

Indemnification
of Office Holders

Our
articles of association permit us to undertake in advance to indemnify our
officers and directors, provided that the undertaking is restricted to the
events of a kind which the board of directors may anticipate at the time it
makes such undertaking and limited to an amount which the board of directors
determines is reasonable under the circumstances. In addition, we can indemnify
an officer or director for specific occurrences retroactively.

Our
articles of association further provide that the total amount as to which we
may indemnify our officers and directors under these provisions shall not
exceed 25% of our equity according to the last financial statements that were
published.

Our
articles of association also provide that we may indemnify an officer or
director for liability or expense imposed on him as a result of an action
performed by him in his capacity as our officer or director as follows:

(1)       Any
financial liability imposed on the officer or director in favor of a third
party 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 officer or director
or which he was ordered to pay by the court:

| |  |     |                                                                                                                      
| |  | --- | ---------------------------------------------------------------------------------------------------------------------
| |  | (a) | within the framework of proceedings filed against
  him by Matav or on Matav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.

In
November 2004, our shareholders approved and ratified our authority to
indemnify our officers and directors to the fullest extent permitted by law and
to provide each of them with an Indemnification Letter providing for the
same. Our officers and directors are
also exempted from any liability for damages caused as a result of a breach of
duty of care to the Company, to the fullest extent permitted by law.

Insurance
of Office Holders

Our
articles of association provide that, subject to the provisions of the
Companies Law, we may enter into a contract for the insurance of the liability
of any of our office holders with respect to an act performed by such
individual in his or her capacity as an office holder, for:

| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | a breach of an office holders duty of care to us or
  to another person; or                                                                                                                              
| |     |                                                                                                                                                                                                           
| | (2) | a breach of an office holders duty of loyalty to
  us, provided that the office holder acted in good faith and had reasonable
  cause to assume that his or her act would not prejudice our interests; or
| |     |                                                                                                                                                                                                           
| | (3) | a financial liability imposed upon an office holder
  in favor of another person.                                                                                                                         

We
have obtained a directors and officers insurance policy, currently valid until
August 31, 2005.

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Limitations
on Exculpation, Indemnification and Insurance

Under
the Companies Law, in no event may we enter into a contract for the insurance
of our office holders, indemnify an office holder or exempt an officer from
responsibility toward the company, for:

(1)       breach
of the duty of loyalty toward Matav, unless, with respect to insurance
coverage, the officer or director acted in good faith and had reasonable
grounds to assume that the action would not harm us;

(2)       breach
of the duty of care if it was committed intentionally or recklessly;

(3)       an
act or omission committed with the intent to yield a personal profit; or

(4)       any
fine or penalty imposed on the office holder.

|    |          
|--- | ---------
|6D. | EMPLOYEES

As
of December 31, 2004, we had 826 employees on a full-time or full-time
equivalent basis. Of these employees, 128 were in engineering and technical
support, 246 were in customer service and support, 166 were in marketing, 106
were in Internet activities, and the remainder in administration and
management.

As
at December 31, 2004, all of our employees are located in Israel. Substantially
all of our employees have entered into employment contracts with us, terminable
at will by either party. The majority
of our employees is managed by the joint management of the three cable
television operators, which oversees the operational merger. The payroll expenses related to these
employees are divided among the three cable television operators pursuant to
the operational merger. For more
information on the operational merger, see Item 4. Information on the Company.

Our
employees are not covered by any specific collective bargaining agreement. However, we are subject to various Israeli
labor laws and practices, as well as orders extending certain provisions of
collective bargaining agreements between the Histadrut, currently the largest
labor organization in Israel, and the Coordination Bureau of Economic
Organizations, the federation of employers organizations. Such laws,
agreements and orders cover a wide range of areas and impose minimum employment
standards including, working hours, minimum wages, vacation and severance pay,
and special issues, such as equal opportunity in employment, and employment of
women, youth, disabled persons and army veterans.

We
generally contribute funds on behalf of our employees to a fund known as
Managers Insurance. This fund provides a combination of savings plan,
insurance and severance pay benefits to the employees, giving the employees a
lump sum payment upon retirement or a pension upon retirement and securing some
of the severance pay, if legally entitled, upon termination of employment. Most
of our employees are entitled to participate in the plan upon the start of
employment or after an initial period. Each employee contributes an amount
equal to 5% of his salary and we contribute between 13.3% and 15% of such
employees salary.

We
also offer some of our employees the opportunity to participate in a
Continuing Education Fund, which functions also as a savings plan. Each of
the participating employees contributes an amount equal to 2.5% of his salary
and we contribute 7.5% of such employees salary.

According
to the National Insurance Law, Israeli employers and employees are required to
pay predetermined sums to the National Insurance Institute. These contributions
entitle the employees to health insurance and benefits in periods of
unemployment, work injury, maternity leave, disability, reserve military
service and bankruptcy or winding-up of the employer. We have never experienced
a strike or work stoppage.

Except
for one action pending against us, by a former service provider, claiming an
employer-employee relationship existed at the time he provided his services, no
material labor-related claims are pending. For more information on this claim,
also see Item 8A. Financial Information  Consolidated Statements and Other
Financial Information  Legal and Arbitration Proceedings.

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|    |               
|--- | --------------
|6E. | SHAREOWNERSHIP

As
of April 30, 2005, our directors and executive officers owned an aggregate of
2,737,653 or approximately 9% of our outstanding ordinary shares. Except
for Shimon Cheifetz and Hanania Gibstein, no individual director or senior
manager listed in Item 6A  Directors and Senior Management, owns directly
(or through fully owned companies) 1% or more of our outstanding ordinary
shares.

As
of April 30, 2005, our senior managers and directors, held, in the aggregate,
options to purchase up to 1,072,205 of our ordinary shares under the 2003 Plan, out of which 302,205 stock options granted
on November 2004 vest in 36 equal monthly installments at an exercise price of NIS
38 per share.  The remaining portion of the options
which were granted in 2003 (in the amount of 770,000) vest in three equal
annual installments as follows: the
first portion vested on January 31, 2004, and has an exercise price of NIS
26.82, which was determined based on the average 30 day trading price on the
Tel Aviv Stock Exchange, or TASE, prior to November 17, 2003.  The second portion vested on January 31,
2005 and has an exercise price of NIS 30.43, which was determined based on the
average 30 day trading price on TASE prior to the vesting date.  The third portion vests on January 31, 2006
and has an exercise price of 90% of the average 30 day trading price on TASE
prior to the vesting date.

As
of April 30, 2005, Mr. Hanania Gibstein owned 262,939 ordinary shares, or
approximately 0.87% of our outstanding ordinary shares directly, and an
additional 1,147,426 ordinary shares, or approximately 3.8% of our outstanding
ordinary shares indirectly, through his holdings in Gibstein Holdings Ltd.,
Gibstein Financial Holdings (1998) Ltd. and Gibstein Investments (1997) Ltd.

As
of April 30, 2005, Messrs. Shimon Cheifetz and Eli Cheifetz owned 616,896
ordinary shares or 2.04% of our outstanding ordinary shares directly, and
710,392 ordinary shares or 2.35% of our outstanding ordinary shares, indirectly
through their holdings in Cheifetz Holdings Ltd.

2001 Senior Employee Share Option Plan

On
January 30, 2001, our board of directors adopted the 2001 Employee Share Option
Plan, or the 2001 Plan, to promote the interests of our company and its
shareholders by providing our senior management and other key employees with
appropriate incentives and rewards to encourage them to enter into and continue
in the employ of Matav and to acquire a proprietary interest in our long-term success.

The
2001 Plan authorized the issuance of options to purchase up to 864,000 of our
ordinary shares, or 432,000 ADSs. Each option represents the right to receive,
upon exercise, our ordinary shares or ADSs in the value of the appreciation, if
any, of the price of our ordinary shares on the Tel Aviv Stock Exchange, on the
day of exercise, over the exercise price for each ordinary share subject to the
option.

As
of April 30, 2005, under the 2001 Plan, 770,500 options were issued to 45
employees, 608,300 options were cancelled, 90,732 options were forfeited,
37,235 options were exercised and 34,233 options expired.

The
ordinary shares which were issuable upon exercise of the options covered by the
2001 Plan, are registered for sale on both Nasdaq and the Tel Aviv Stock
Exchange.

2003 Employee and Officers Option Plan

In
November and December 2003, our board of directors adopted a new Employee and
Officers Option Plan, or the 2003 Plan, which provides for the grant of up to
770,500 (of which, 770,000 were issued until that date) options to purchase our ordinary shares to 46 of our employees.

In addition,  on November 2004, our board of directors  approved the grant of 302,205 stock options to a senior
employee.

 The 2003 Plan was approved by our
shareholders in December 2003.  All of
the employees that were entitled to receive options under the 2003 Plan and who
received options under the 2001 Plan were required to waive their vested
options under the 2001 Plan as a condition to receiving options under the 2003
Plan.  The options that were granted
under the 2001 Plan that were not yet vested were cancelled with the agreement
of the grantees.  As of December 31,
2004, under the 2003 Plan, 1,072,205 options were issued to 46 employees,
36,483 options were exercised and 11,000 options were forfeited.

For
an English summary of the principal terms of the 2003 Plan, please see Exhibit
4(c)(ii).

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|        |                                                    
|------- | ---------------------------------------------------
|Item 7. | MAJOR SHAREHOLDERS
  AND RELATED PARTY TRANSACTIONS

|    |                   
|--- | ------------------
|7A. | MAJOR SHAREHOLDERS

The
following table sets forth certain information with respect to the beneficial
ownership of our ordinary shares as of April 30, 2005 with respect to each
person or entity that we believe to be the beneficial owner of 5% or more of
our outstanding ordinary shares.  Except
where otherwise indicated, we believe, based on information furnished to us by
the principal shareholders, that the beneficial owners of the ordinary shares
listed below have sole investment and voting power with respect to such
ordinary shares.

|                                           |  |  |                                              |            |                                                                    |  |                                   |  |      |   |  |  |  |      |   |  | 
|------------------------------------------ |  |  | -------------------------------------------- | ---------- | ------------------------------------------------------------------ |  | --------------------------------- |  | ---- | - |  |  |  | ---- | - |  | 
|Name                                       |  |  | Number of Ordinary
  Shares Beneficial Owned |            | Percentage of
  Outstanding
  Ordinary Shares
  Beneficially Owned |  | Percentage of
  Voting Securities | 
|                                           |  |  |                                              |            |                                                                    |  |                                   | 
|Delek
  Investments and Properties Ltd.(1) |  |  |                                              | 12,088,618 |                                                                    |  |                                   |  | 40   | % |  |  |  | 40   | % | 
|Bank Leumi
  LIsrael B.M. (2)             |  |  |                                              | 2,566,844  |                                                                    |  |                                   |  | 8.49 | % |  |  |  | 8.49 | % | 

(1)   In
February 2004, Dankner Investments sold approximately 18% of our outstanding
shares to Delek Investments and Properties Ltd., or Delek, and granted to Delek
an option exercisable for two years to purchase an additional 2% of our
outstanding shares.   The option was
exercised by Delek in September 2004. In May 2004, the controlling shareholders
of Dankner Investments signed an agreement with Delek Real Estate Ltd., an
affiliate of Delek, for the purchase of 87.5% of the issued share capital of
Dankner Investments.  This transaction
was completed in August 2004.  In
November 2004, Delek Real Estate Ltd. commenced a tender offer in Israel to
purchase all of the shares of Dankner Investments not already owned by it.    As a result of this transaction, which was
completed on November 25, 2004, Dankner Investments is a private company,
wholly owned by Delek Real Estate Ltd.
In December 2004, Dankner Investments sold approximately 20% of our
outstanding shares to Delek.  As a
result of this transaction, Dankner Investments does not own any shares in
Matav.  Delek holds approximately 40% of
our outstanding shares.  Delek is a
wholly-owned subsidiary of Delek Group Ltd., a public company whose shares are
traded on the Tel Aviv Stock Exchange.
As of May 2005, Delek Group Ltd. is controlled by Mr. Yitzhak Sharon (Tshuva).  Mr. Tshuva holds indirectly
approximately
78.64% of the shares of Delek Group Ltd.
..

(2)   Bank
Leumi LIsrael Ltd., or BLL, is one of the two largest commercial banks in
Israel. The shares beneficially owned by BLL are held by various of its affiliated
mutual funds and provident funds.

Dankner
Investments Ltd., Bank Hapoalim B.M. and Maariv Modiin Publishing House Ltd.
ceased to own 5% or more of Matav during 2004.

Significant Changes in the Ownership of Major Shareholders

Set
forth below is a list of significant changes in the ownership of major
shareholders for the years ended 2002, 2003 and 2004, as applicable.

Transactions by Dankner Investments Ltd., a
former major shareholder, and Delek Investments and Properties Ltd.

|   |                                                                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | On November
  23, 2003, Dankner Investments Ltd. sold 1,270,000 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 35.50 and at an aggregate
  price of NIS 45,085,000.  
|   |                                                                                                                                                                                                    
|2. | On December
  16, 2003, Dankner Investments Ltd. sold 460,300 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 34.50 NIS and at an aggregate
  price of NIS 15,880,350.

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | On December
  31, 2003, Dankner Investments Ltd. sold 400,000 ordinary shares on the
  Tel  Aviv Stock Exchange at a price
  per share of NIS 34.50 NIS and at an aggregate price of NIS 13,800,000.                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4. | On January
  5, 2004, Dankner Investments Ltd. sold 200,000 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 35 and at an aggregate price
  of NIS 7,000,000.                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|5. | On February
  22, 2004, Dankner Investments sold 5,433,685 ordinary shares to Delek
  Investments and Properties Ltd. at a price per share of US$8.00, and at an
  aggregate price of US$43,500,000, and granted to Delek Investments and Properties
  Ltd. an option, exercisable for a period of two years, to purchase an
  additional 604,078 ordinary shares, which constitutes approximately 2% of our
  outstanding ordinary shares.  The
  option was exercised by Delek Investments and Properties Ltd. in September
  2004.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|6. | On December
  30, 2004, Dankner Investments sold 6,050,855 ordinary shares, the remainder
  of its shares, to Delek Investments and Properties Ltd., at a price per share
  of NIS $35.28 (approximately US$8.10), and at an aggregate price of NIS 213.5
  million (approximately US$49.1 million).                                                                                                                                                                                                                                 

Transactions by us

In
2002, we sold in private transactions in Israel an aggregate amount of 26,651
of our ordinary shares held by our subsidiary Cable Systems Media Haifa-Hadera
Ltd., in consideration for an aggregate gross amount of approximately NIS 1.0
million.  In 2003, we sold the remaining
1,343,497 of our ordinary shares held by Cable Systems Media Haifa-Hadera Ltd.
in private transactions in Israel, in consideration for an aggregate amount of
approximately NIS 39.1 million.

Our major
shareholders do not have different voting rights.

For
information on a proposed merger of the Israeli cable television operators, see
Item 4A. History and Development of the Company -- Proposed Merger of the
Israeli Cable Television Operators.

Number of Record Holders in the United States

On
April 30, 2005, 66,210 ADSs were held of record in the United States.  These ADSs were held by 9 record holders.
The number of record holders in the United States is not representative of the
number of beneficial holders, nor is it representative of where such beneficial
holders are resident, since many of these ADSs were held of record by brokers
or other nominees.

We
intend to delist voluntarily from the Nasdaq National Market and to terminate
our American Depositary Receipt (ADR) program in the future.  Our board of directors will examine the
timing of such termination in the next few months.  We intend to file a Form 15 with the SEC to terminate the
registration of the ADRs and ordinary shares, thereby suspending our obligation
to file annual and other reports with the SEC.
After the delisting, our shares will continue to trade in the TASE and
we will continue to make public reports in accordance with the Israeli
securities laws and regulations.

|    |                           
|--- | --------------------------
|7B. | RELATED PARTY TRANSACTIONS

Subcontractor Agreement

Mr.
Yehoshua Gibstein, an alternate director for Mr. Hanania Gibstein, indirectly
owns 57% of Geyser Communication Services Ltd. Geyser Communication Services
Ltd. owns 79% of the shares of Cabletek Ltd. In 1995, we entered into a
subcontractor agreement with Cabletek Ltd. Under this agreement Cabletek Ltd.
served as our subcontractor for building our network and operating our cable
television services in certain communities within our franchises. As of the
years ended December 31, 2002,  2003 and
2004, we paid Cabletek Ltd. a total of approximately NIS 2.9 million, NIS 2.4
million and NIS 1.5 million, respectively. As of the period beginning January
1, 2005 and ended May 31, 2005, we paid Cabletek Ltd. a total of approximately
NIS 0.8 million.

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Gavish Agreement

On
October 30, 2000, our audit committee and board of directors approved a bonus
incentive agreement with Mr. Moshe Gavish, who served as vice chairman of our
board of directors from December 31, 2000 until September 30, 2001.  This agreement and amendment thereto were
approved by our shareholders in its general meetings on December 31, 2000 and
December 27, 2001, respectively.
According to this agreement, Mr. Gavish served as active vice-chairman
of our board of directors.  Pursuant to
this agreement, Mr. Gavish was entitled to receive a bonus that was calculated
according to the value of our ordinary shares on the Tel-Aviv Stock Exchange.
Under this agreement, during the period Mr. Gavish served as vice chairman of
our company, Mr. Gavish was entitled to gradually accumulate a bonus, in an
amount equal to a total number of our ordinary shares constituting 1% of our
outstanding ordinary shares, in three equal portions at the end of 6 months, 18
months and 30 months following the beginning of his service with our company.
Under the agreement, Mr. Gavish was entitled to exercise such rights during a
period of 36 months following the accumulation of his rights under each
portion. The exercise price for each ordinary share underlying the first
portion of his right shall be an amount equal to a 17.5% discount on the
difference between the closing price of our ordinary shares on the Tel-Aviv
Stock Exchange on the day of the exercise, and the average price of our
ordinary share on the Tel-Aviv Stock Exchange during the 30 days period prior
to the approval of his agreement by our board of directors.  The exercise price for each ordinary share
underlying the second and third portions of his right shall be an amount equal
to a 17.5% discount on the average price of our ordinary shares on the Tel-Aviv
Stock Exchange during the 30 days period prior to the accumulation by Mr.
Gavish of each such portion of the right. The exercise price of each ordinary
share under the second and third portions of his right shall be linked to the
consumer price index.  The ordinary
shares underlying Mr. Gavishs bonus are subject to adjustments following any
distribution of bonus shares, dividend and other rights.

Upon
Mr. Gavishs retirement, pursuant to the amendment to the agreement approved by
the shareholders on December 27, 2001, he is entitled to receive the rights
accumulated in relation to the first portion of his right (in respect of which
a payment demand was to be provided to us until March 15, 2004), and half of
the rights in relation to the second portion of his right (in respect of which
a payment demand may be provided to us until September 30, 2004).Under the amendment, the exercise price for each ordinary
share underlying the rights to which he is entitled in relation to the second
portion of his right shall be an amount equal to the average price of our
ordinary shares on the Tel Aviv Stock Exchange during the 30 days period prior
to March 15, 2002. On April 13, 2004, we paid Mr. Gavish approximately NIS 1
million as payment in full for all of his rights.

Investments With Shareholders

In
May 2000, we decided that together with other of our former shareholders, we
will invest in start-up companies which engage in the fields of Internet, cable
television, data communications, applications, content, infrastructure and
Internet Protocol telephony.

To
this end, Nonstop Ventures Ltd. was formed by several of our shareholders, in
which we hold, as of November 2002, 50% of the issued share capital, following
the exercise of an option granted to us under a memorandum of understanding
dated December 31, 2000, as amended.
Pursuant to the exercise of the said option, 50% of certain amounts we
invested and loans we made on behalf of Nonstop Ventures Ltd. are deemed to be
provided by us to Nonstop Ventures Ltd., in consideration of the issuance to us
of a non-convertible promissory note by Nonstop Ventures Ltd., and the transfer
and assignment to Nonstop Ventures Ltd. of our rights and obligations towards
third parties in connection with such investments and loans.  The shareholders of Nonstop Ventures Ltd. have
agreed to finance its operations in proportion to their respective holdings in
the share capital of Nonstop Ventures Ltd. up to a total sum of US$ 15
million.  Investments made by the
respective shareholders in Nonstop Ventures Ltd. prior to October 30, 2002, are
in consideration of the issuance to such shareholders of non-convertible
promissory notes by Nonstop Ventures Ltd.

As
of December 31, 2004, we and the other shareholders invested through Nonstop
Ventures Ltd. in a few start-up companies an amount of approximately US$ 5.8
million.  Of the aggregate investment,
we invested approximately US$ 2.9_million. This amount does not include
costs related to such investments such as wages, consultant fees, legal fees,
etc.  Due to, among other things, market
factors, the financial situation of these companies and our accounting
policies, these investment amounts were reduced in our financial records, and
were set in our financial statements for the year ended December 31, 2004, at a
value of approximately US$ 0.3 million.

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B-Point Agreement

On May 5, 1997
we entered into two agreements with B-Point Systems Ltd., a company owned by
Mr. David Binmovitch, who is the son-in-law of Mr. Shmuel Dankner, the former
Chairman of our board of directors.
Under these agreements, B-Point Systems Ltd. provides us with cable
television installation services, and sets up and maintains our cable
television networks.  For the years
ended December 31, 2002, 2003 and 2004, we paid B-Point an amount of approximately
NIS 12.5 million, approximately NIS 11.5 million and approximately NIS 11.7
million, respectively.

Delek Agreement

On
April 17, 2005, our board of directors approved an agreement, dated March 1,
2005, between us and Delek, our principal shareholder, according to which Delek
shall provide us with automatic fueling services through computer systems,
which is known as Dalkan Delek, for our vehicles at a discounted rate.

Negotiations with
Cabletek Ltd.

Mr.
Yehoshua Gibstein, an alternate director for Mr. Hanania Gibstein, indirectly
owns 57% of Geyser Communication Services Ltd. Geyser Communication Services
Ltd. owns 79% of the shares of Cabletek Ltd.
Cabletek Ltd. operates our cable television services in Judea and
Samaria.  We are in negotiations with
Cabletek Ltd. for the purchase of assets (including equipment) and rights and
obligations of Cabletek with respect to its activities in the field of
providing cable broadcasting services.

See also
Note 22 to the financials statements attached in Item 18 for details of
additional related party transactions.

|    |                                   
|--- | ----------------------------------
|7C. | INTERESTS
  OF EXPERTS AND COUNSEL
|   
|    | Not
applicable.                   

|        |                      
|------- | ---------------------
|ITEM 8. | FINANCIAL INFORMATION

|    |                                                          
|--- | ---------------------------------------------------------
|8A. | CONSOLIDATED
  STATEMENTS AND OTHER FINANCIAL INFORMATION

Audited
financial statements for the three fiscal years ended December 31, 2004 are included at Item 18. Financial
Statements.

Legal and Arbitration
Proceedings

In
addition to the legal proceedings discussed below, we are a party to a number
of legal and administrative proceedings arising in the ordinary course of our
business. We do not expect the outcome of such matters in the aggregate to have
a material adverse effect upon our business and financial condition, results of
operations and cash flows.

(a)          On
April 22, 1999, a lawsuit and application to recognize the suit as a class
action were filed in the Tel-Aviv-Jaffa District Court against us. The suit
alleges that we constitute a monopoly, and that we adversely exploit our position
in the market, in a manner which is, or may be, damaging to the general public,
among other things, by setting and collecting an unreasonable and unfair price
for the services we provide. The plaintiff is seeking, among other things, that
we be required to reduce the subscriber fees we collect and to pay our
subscribers compensation in connection with the subscriber fees we collected
from May 10, 1996 through April 1, 1999. In this context, the plaintiff claims
he has sustained damages in an amount of reported NIS 1,387 and the sum of
compensation due to all of the members of the class in the action, if certified
as a class action, amounts to reported NIS 360 million. The plaintiff is further claiming
compensation for alleged damages caused to all of the members of the class in
the action, if certified as a class action, from the date of filing the lawsuit
up to the date judgment is rendered.  In
addition, the plaintiff is claming a mandatory injunction, according to which
we will be obliged to reduce the service fees which we charge from our
subscribers.  We opposed the action
being certified as a class action, claiming that the motion lacks any material
substance, inter alia, on grounds that the plaintiff disregarded the high
investments we made in infrastructure and equipment, that the franchise we were
granted for cable television broadcasts is limited in time, the comparisons
made by the plaintiff between our company and foreign companies dealing in
cable television broadcasts in countries where the situation is very different
are not relevant to our modus operandi, and finally because the subscriber fees
we charge are subject to supervision and highly regulated.

99

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At
the beginning of the hearing of the request, it was stated that the
clarification of the request will be joint with similar requests that were
filed against the cable television operators Tevel, Golden Channels and Idan
(however, in the meantime, this condition changed, see below). After the
unification of proceedings and pursuant to the arrangement reached by the
parties and which was validated as a court decision, it was agreed that the
Court will preliminarily decide with respect to the legal threshold claims that
were raised by the Company (and other cable television operators).

On
August 21, 2003, the Court dismissed our claims and determined that the
expenses of the proceeding would be determined at the conclusion of the
proceeding. The Court found, among other things, that the cable television
operators are not entitled to benefit from the immunity provided under Section
6 of the Torts Ordinance and the decision of the Restrictive Business Practices
Court in a similar matter that was granted in the past did not constitute
binding precedent on us.  According to
the procedural settlement reached by the parties, the Court must still hear the
remaining claims set forth in the application to recognize the suit as a class
action, and the responses of the cable television operators to the action.  In a pre-trial hearing held on November 26,
2003, the Court determined that the proceedings against the various cable
television operators would be separated and first the application to recognize
the suit as a class action against us would be heard.

The
parties reached a procedural arrangement concerning the hearing proceeding
according to which no examinations shall be conducted and each party shall
submit its summations. According to the said agreement, the summations on
behalf of the petitioner were submitted on April 1, 2005 and the summations on
our behalf were submitted on June 22, 2005. The petitioner is entitled to
submit a response to our summations by August 14, 2005.

(b)          On
November 8, 1999, the Controller of Restrictive Business Practices, declared us
to be a monopoly in the field of providing multi-channel television broadcasts
for payment, in the regions in which we operate. On December 28, 1999, we filed
an appeal against this determination with the Restrictive Business Practices
Court. In our appeal, we claim, among other things, that the Controllers
declaration should be revoked (i) due to lack of due process, including, among
other things, that the declaration lacks an appropriate factual foundation, and
(ii) on merit, due to the fact that in the relevant market we do not provide
over 50% of the services in our license areas in which we operate and therefore
we are not a monopoly in this market.
The Controller counter-claimed our appeal, requesting that it be
dismissed, together with appeals filed by the other cable television operators
on the same issues.  The Restrictive
Trade Practices Court concluded the deposition stage of the appeal on
October 30, 2001, and the parties have submitted their summaries to the
Court. In October 2004, the Restrictive Business Practices Court dismissed our
appeal.

(c)          On
March 28, 2000, a claim was filed in the Tel-Aviv-Jaffa District Court against
the cable television operators, including our company, by the Association for
the International Collective Management of Audiovisual Works  AGICOA, or
AGICOA, an international association of producers of cinema and television
works. The aggregate sum of the claim is not less than approximately US$ 171
million and for the purpose of court fees was limited to an initial sum of US$
20 million. AGICOA is an organization that represents numerous producers in a
suit against the cable television operators for the alleged breach of copyrights
of the represented producers due to the re-transmission of programs by the
cable television operators. AGICOA is also claiming unjust enrichment on the
part of the cable television operators and that they be ordered to submit their
accounts. In our statement of defense, filed on July 9, 2000, we claim, among
other things, that AGICOA have no right to file this claim in light of the
restrictive business practices laws in Israel. The dispute was transferred by
the Court to mediation in the second quarter of 2001. The mediation was not
successful and the matter was returned to the Court. At a preliminary hearing
held on June 18, 2002, the Court ruled to delay its decision in this matter
pending resolution of the Israeli Supreme Court in a further hearing in another
matter, which the Court believes will have material implications on all or part
of this dispute.  However, the Court
determined that the preliminary proceedings in this dispute may be commenced
and completed. On November 26, 2003, another preliminary hearing was held in
which it was agreed that the date for completion of preliminary proceedings
would be postponed until after the delivery of the judgment of the Supreme
Court in the further hearing mentioned above.

The
further hearing referred to by the Court was filed with respect to the ruling
of the Supreme Court (presiding as an appellate court), which determined that
the re-transmission of broadcasts as secondary broadcasts may also constitute
an infringement of copyrights, if such broadcasts include copyrights owned by
third parties who have not consented to their broadcast in Israel. AGICOAs
motion to be included as a party to the proceedings was denied by the Supreme
Court. On November 4, 2003, a hearing before the Supreme Court was held to
complete oral arguments. On June 16, 2004, the Supreme Court presiding over the
further hearing confirmed the earlier determination of the Supreme Court.

100

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In
January 2005, the parties completed the discovery proceedings and therefore in
the context of the preliminary proceedings, disclosing additional information
and questionnaires remain to be completed.

On
July 27, 2004, Tevels trustee notified the Court (with the consent of the
plaintiff) of the cessation of these proceedings with respect to Tevel and
Gvanim Cable Television Company Ltd., or Gvanim, in light of the entrance into
effect of the arrangement of creditors of these companies. On July 28, 2004,
the Court approved this notification.

(d)          In
September 2000, a claim was filed in the Tel-Aviv-Jaffa Labor Court against our
company by a plaintiff who claims that an employer-employee relationship
existed between him and our company and that as a consequence, our company is
required to pay him the amount of an adjusted NIS 2.6 million in respect of
severance pay and other salary components.
In parallel, in September 2000, our company and its subsidiary, Cable
Systems Media Haifa-Hadera Ltd., filed a monetary claim with the Netanya
Magistrates Court in an amount of at least NIS 786 thousand (subject to
adjustment) contending that the plaintiff violated, in a basic and severe
manner, undertakings to deliver an advanced telemarketing system to our company
and its subsidiary. This claim was transferred to mediation by the Netanya
Magistrates Court, which was not successful.
On November 15, 2001, the Netanya Magistrates Court issued a
resolution joining the above two claims to be heard in the Tel-Aviv Jaffa
District Labor Court.   The parties affidavits
have been submitted to the Court and a preliminary hearing was held.

(e)          On
December 3, 2002, a lawsuit and application to recognize the suit as a class
action were filed in the Tel Aviv-Jaffa District Court against us, the other
Israeli cable television operators, the Council and the Ministry.  The suit, filed by seven plaintiffs, alleges
that we and the other cable television operators violated the terms of the
approval of the Council for the transmission of the pay sport channel (offered
to subscribers through the tiering services) since we and the other cable
television operators did not maintain certain programs in the original sport
channel which is part of the basic packages offered to subscribers.  The plaintiff seeks to represent a group of
1,050,000 subscribers. The plaintiffs requested that we and the other cable
television operators pay compensation to all of the members of the class in the
action, if certified as a class action, in a total amount of approximately NIS
302 million as of the date of the motion, plus NIS 25.2 million for each
additional month from the date the suit was filed up to the date judgment is
rendered by the Court.  Our
proportionate share based on the ratio of number of subscribers as of May 31,
2005, is approximately NIS 80 million, in addition to a monthly amount of  approximately NIS 6.7 million accumulating
from the date the claim was filed until a ruling is rendered. A response to the
application was submitted to the Court on behalf of all of the
respondents.  In our response, we
opposed the action being certified as a class action on grounds that the class
of persons of the claim fail to meet the legal requirements of such an action
due to differences between the claimants that exist on the level of the content
of the broadcasts (program preference), as well as on the level of the damages
being claimed, and that the cable television operators and the original cable
sport channel producer have complied with most of the terms of the Councils approval.
On May 27, 2004, the application to recognize the suit as a class action
against us was denied. On July 5, 2004, the petitioners submitted an appeal to
the Supreme Court seeking to overturn the ruling of the District Court. The
parties submitted their summations. The date for a hearing of the appeal in the
Supreme Court is set for January 9, 2006.

(f)          On
August 28, 2002, a lawsuit and application to recognize the suit as a class
action were filed in the Tel Aviv-Jaffa District Court against us and the
other Israeli cable television operators.
The suit, filed by three plaintiffs, alleges that we and the other cable
television operators did not connect residents of peripheral settlements who
are the members of the class in the action.
The claim is for indemnification of residents in settlements for not
being connected to the cable networks within 6 years of the date on which the
cable franchises were granted.  The
plaintiffs are seeking that we and the other cable television operators pay
compensation to all of the members of the class in the action, if certified as
a class action.  In accordance with the
suit, our portion of the claimed compensation is approximately NIS 139 million.  We and one of the other cable television
operators,
Golden Channels & Co., or Golden Channels, filed a motion to dismiss the
suit without prejudice, due to the dismissal of a lawsuit identical in
substance to this suit.  The Court
determined that the motion for dismissal of the suit without prejudice will be
heard together with the application to recognize the suit as a class
action.  We and Golden Channels filed a
response to the application to recognize the suit as a class action. The
plaintiffs submitted their reply regarding the request to dismiss the claim
without prejudice, and we and Golden Channels filed a response to the
plaintiffs response. The plaintiffs request to join the hearing as creditors
of Tevel was dismissed by the court. No date was scheduled for a hearing.

(g)

101

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(1)
On November 27, 2002, Warner Bros. International Television Distribution  (Warner) filed a lawsuit against Tevel in
a court in California seeking, inter alia, a monetary compensation of US$ 17
million (Warner lawsuit in California), on the grounds that the agreement
from July 13, 1999, pursuant to which, Tevel (through which all the cable
television operators) acquired from Warner the rights to broadcast films, was
breached and consequently was rescinded by Warner.

Following
the Warner lawsuit in California and other actions taken by Warner, on December
5, 2002, the trustee for Tevel group filed with the District Court in Tel Aviv
a motion to instruct, among others, that Warner should take any measure
necessary to discontinue the lawsuit in California and this in view, among
others, of the stay of proceedings order that was granted with respect to
Tevel, which prohibits the institution of new proceedings against Tevel without
the approval of the District Court in Tel Aviv) and based on the proof of debt
submitted by Warner to the trustee under the same cause of action.

On
February 10, 2003, the court rendered its ruling on the trustees motion.
Pursuant to the ruling, the court dismissed Warners position and accepted the motion.
The court, inter alia, ruled that Warner instituted unlawful proceeding in the
United States and under circumstances substantiating doubts as to its good
faith, and such a proceeding cannot be materialized or enforced in the
boundaries of the state of Israel. On March 25, 2003, the trustee rendered it
decision of Warners proof of debt, in which the majority of the proof was
rejected. On April 24, 2003, Warner appealed to the district court on the issue
of proof of debt and following decisions rendered on the appeal, on June 24,
2003, Warner filed an amended appeal on the trustees decision in the matter of
the proof of debt.

On
October 21, 2003, the Supreme Court rejected Warners appeal on the courts
ruling of February 10, 2003, subject to the rights of Warner and the trustee to
argue on the issue of the applicable law on the proof of debt and this is in
the context of Warners appeal on the trustees decision on the proof of debt
and instructed Warner to file an amended appeal in order to include the
argument that Warners lawsuit should be litigated under California law.

The
amended appeal was filed, in the context of which, Warner seeks the reversal of
the trustees decision on the proof of debt (which approved the debt for Warner
in the amount of US$ 182 thousand only) and approve Warner a debt in the
aggregate of US$ 17 million and alternatively US$ 12 million.

On
September 1, 2004, the Court dismissed the amended appeal with respect to the
proof of debt determining that the Warners appeal contradicts the law and its
entire substance is nothing but an attempt to generate high profit in an unjust
and extraordinary manner at the expense of the ordinary creditors of Tevel. In
view of the extraordinary circumstances and the scope of litigation, the Court
ruled that Warner shall pay Tevel expenses and legal fees.

On
October 5, 2004, Warner filed an appeal with the Supreme Court. Simultaneously,
Warner filed, on that very day a motion for stay of performance with respect to
the ruling dated September 1, 2004, with the Court and an urgent motion for
hearing of the said motion. On October 5, 2004, the Court rendered a ruling
according to which, the facts referred to in the motion for stay of performance
were not supported by an affidavit and it was further determined that the
motion is inappropriate to be heard ex parte and the case shall be scheduled
for hearing. In addition, the court instructed the trustee to take into
consideration the fact that a motion for the stay of performance proceeding was
filed. On November 24, 2004, a reply to the motion for stay of performance was
filed on behalf of the trustee and on January 17, 2005, a reply on behalf of
the Official Receiver was filed.

On
February 9, 2005, the Court rendered its ruling in the matter of the motion for
stay of performance. The court indicated that it is of the opinion that the
prospects of Warners appeal to prevail are remote.  However, due to the
concern that if the stay of performance is
not granted the factual situation shall be irreversible (in the event that a
decision in the appeal shall be rendered in favor of Warner) and in order not
to completely nullify the appeal, the court instructed that until a ruling in
the appeal is rendered the trustee shall withhold an amount of US$ 4 million,
which would be necessary for dividend distribution to Warner if the Court shall
render a judgment in favor of Warner in the appeal. The stay of performance is
contingent upon a deposit of a bank guarantee by Warner in the amount of NIS 2
million to secure the creditors damages. The said amount was imposed in
addition to the guarantees that may be determined by the Supreme Court as a
prerequisite for hearing the appeal. The hearing of the appeal in the Supreme
Court is scheduled for September 19, 2005.

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(2)
On December 9, 2002, Warner filed a lawsuit against Golden Channels with the
district court in Los Angeles, California in the U.S. The lawsuit is seeking,
inter alia, monetary compensation on the grounds of breach of contract with
Golden Channels dated July 13, 1999 and a lawsuit for declaratory remedies, as
detailed in the complaint. On January 17, 2003, an amended complaint was filed
in context of which, Warner was seeking, inter alia, to compel Golden Channels
to pay compensation of at least US$ 16 million in addition to expenses. In
addition, among other things, declaratory remedies and an injunction were
requested. On February 14, 2003, Golden Channels filed its answer and a
counterclaim. In the context of the lawsuit, the parties also filed motions for
preliminary injunctions. A hearing for the preliminary injunctions was held on
March 31, 2003. The court rejected all of the motions for preliminary
injunctions. The evidential hearing for the complaint and the counterclaim was
held during January 2004 and on February 2004 the parties filed their
summaries. In Warners post trial brief it requested compensation in the amount
of approximately US$ 25 million. Golden Channels requested compensation in the
amount of approximately US$ 3.8 million.

On
September 29, 2004, the district court in Los Angeles, California, ruled in
favor of Warner. The district court awarded Warner damages in the amount of
approximately US$ 19.3 million (excluding attorney fees) and rejected Golden
Channels counterclaims in the matter. The Court originally entered judgment for Warner in the amount of US$
19 million. The Court subsequently granted Goldens motion to amend the
judgment to deduct US$ 0.6 million in tax certificate damages, and Warners
motion to add US$ 0.65 million in prejudgment interest. Following an amendment,
the judgment awarded Warner damages of US$ 19.4 million, US$ 0.2 million in costs,
and US$ 2.3 million in attorneys fees and other costs, for a total judgment
amount of US$  21.7 million (the Final
Amended Judgment).

On
March 7, 2005, Golden Channels filed a notice of appeal, pursuant to which, it
appeals to the Unites States Court of Appeals for the Ninth Circuit from the
Final Amended Judgment, including other prior orders and decisions granted by
the Court.

On
March 21, 2005, Warner filed a notice of cross appeal pursuant to which it
appeals to the United States Court of Appeals for the Ninth Circuit from the
order of the District Court denying Warners motion to amend the judgment to
add prejudgment interest, as reflected in the Final Amended Judgment, including
all orders and decisions pertaining thereto that are or may be merged into the
Final Amended Judgment.

Pursuant
to an agreement among the Israeli cable television operators (including Golden
Channels, Tevel and us) and Hot Vision, we are required to
indemnify Golden Channels (through HOT Vision) for approximately 26.6% of the
damages awarded to Warner, which will actually be paid by Golden Channels
amounting to a maximum of approximately US$ 5.8 million.

(3)
On or about the filing date of the above lawsuits, Warner drew-down letters of
credit it was granted by Golden Channels and Tevel in the amount of US$ 5
million each.  Further to the above
lawsuits and a demand made by Tevel and Golden Channels, Hot Vision board of
directors resolved that, in principle, Hot Vision shall bear the amounts borne
or to be borne by Tevel and Golden Channels with respect of the forfeiture of
letters of credit, as detailed above, and in respect of the aforesaid
agreements with the major studios, including their termination and related
expenses and/or in respect of legal proceedings taken as above, subject to
indemnification by its shareholders to cover these amounts. 



          For information on an  indemnification  agreement  entered into between the cable television  operators and HOT
Vision,  see Item 4B.  Business  Overview  -- HOT Vision and  Cooperation  of Cable  Television  Operators  in
Production of Broadcasting.

(h)
In December 31, 2003, Eshkolot  The Israeli Artists Society for Performers
Rights Ltd., or Eshkolot, filed an action in the District Court of Tel
Aviv-Jaffa against us and the other two cable television operators for certain
payments, for temporary and permanent injunctions, and to give instructions to
Tevels trustee.  Eshkolot claims that,
since January 1, 2003, the cable television operators broadcast programs in
violation of the rights of Israeli performers held by Eshkolot in that such
broadcasts were made without Eshkolots consent and without the payment of
royalties. In the context of the claim, the Court was requested to instruct and
affirm that Eshkolot is entitled to receive a usage payment of NIS 8.5 million
as compensation for 2003 royalties (net of payments already transferred to
Eshkolot), and that, from now on in each year the cable television operators
will have to pay this amount including linkage differentials and to update such
royalties relative to increases in the number of broadcasting minutes of
protected performances.  Additionally,
Eshkolot requested to obligate the cable television operators to pay the
maximum statutory compensation, as set in the Copyrights Law, in the total
amount of NIS 24.3 million.  Eshkolot
also requested a permanent injunction order against the cable television
operators that will prohibit the broadcast of protected performances employing
performers rights held by Eshkolot, unless expressly authorized by
Eshkolot.  Further, the Court was
requested to give a temporary injunction to prohibit the cable television
operators from broadcasting performances employing performers rights held by
Eshkolot, if an advance express written authorization from Eshkolot does not
exist, until the hearing and the decision in Eshkolots primary claim for
compensation for violating performers rights and in the request for the
permanent injunction against the cable television operators.

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On
May 13, 2004, the court approved the parties notice of arbitration and the case
was forwarded to arbitration with instructions to strike the suit with no order
for expenses.The statement of complaint on behalf of Eshkolot, in the
arbitration, was filed on June 25, 2004. The amount of the claim, which
significantly exceeds the amounts that were paid previously to Eshkolot by the
cable television operators pursuant to the agreement that was valid until 2002,
is NIS 8.5 million for 2003 and a similar amount plus 10% for each of the years
2004-2006. Eshkolot argues that this is the appropriate royalty as implied in
the Performers and Broadcasters Rights Law  1984, which is to be paid each
year.

The
statement of defense on behalf of the cable television operators was filed on
August 3, 2004. In the statement of defense, the cable television operators
refute Eshkolots arguments, inter alia, concerning the scope of the use of its
repertoire and claim that in view of the various developments in the
communications market in Israel, and particularly in view of entering of
competitors to the market such as Yes, the amount of the royalties paid to
Eshkolot should be decreased. It is further argued that Eshkolot is not the
owner of rights in certain musical works, which it refers to within its claim,
since the performing artists exclusively assigned their rights to production
companies. The Company also claims that Eshkolot misused its monopolistic powers
in the market in order to impose unreasonable prices on its consumers.

On
January 30, 2005, Eshkolot requested the arbitrator, due to the prolongation of
the arbitration proceedings, to order the cable television operators to pay
Eshkolot an intermediate payment in the amount of NIS 11.5 million for the
years 2003-2005, in addition to the sum of NIS 3.5 million, which the cable
television operators already paid to Eshkolot prior to the commencement of the
arbitration proceedings.

On
February 15, 2005, the cables companies filed their response, claiming that:
(i) the request has no legal grounds based on the arbitration agreement; (ii)
the arbitrator has no authority to rule in this matter; (iii) the causes for
this request have not occurred; and (iv) the request was filed in bad faith and
abuses the court proceedings.

On
February 25, 2005, the parties filed a request to postpone all legal procedures
(including the request for the intermediate payment) in order to try to enable
them to conduct negotiations.  The
negotiations between the parties have not yet been concluded. cable television
operators

(i)
On April 11, 2005, the Israeli Records and Cassettes Federation (the
Federation) filed in the District Court of Haifa a claim against the Company
and the other cable television operators as well as a request for payment of
temporary royalties. The Federation seeks to represent the Israeli record
companies as well as foreign record companies that impressed musical compositions
on records and compact disks, which the cable television operators broadcast.

The
Federation seeks a permanent injunction that shall prohibit the cable
television operators to use the compositions, which are included in the
Federations repertoire. The Federation further notified the Court that it
shall be willing to withdraw the claim for permanent injunction subject to
payment by the cable television operators of the license fees in the amount
demanded by the Federation or determined by the Court.

The
Federation contemplated that since March 15, 2004 the cable television
operators broadcast programs in violation of the rights held by the Federation,
due to the fact that the agreement between the cable television operators and the
Federation terminated on December 31, 2002 as well as the temporary license
rendered by the Federation to the cable television operators in order to
negotiate and execute a new agreement. The Federation claims that although the
cable television operators acknowledge its rights they continue to use the
compositions included in the Federations repertoire and violate the law.

The
Federation noted that it reserves the right to request a preliminary
injunction. The Federation further noted its consent that the Court shall
render a judgment in way of granting the operative legal ruling without
furnishing any reasoning. In addition the Federation informed the Court of its
consent to arbitration proceedings. The Court is further requested to instruct
the cable television operators to pay the Federation interim royalties until a
judgment is rendered. The Federation presented two main models in respect of a
calculation of the royalties as follows: (a) payment in the amount of 0.26% 
0.3% of the income of the cable television operators (plus VAT); (b) payment of
yearly royalties in a fixed sum per subscriber (plus VAT).

The
Federation requested the Court to oblige the cable television operators to pay
permanent royalties in the sum of US$ 2 per each subscriber that does not
receive the audio channels or US$ 5 per each subscriber that receives the audio
channels.

104

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The
cable television operators submitted the response to the request for payment of
temporary royalties and the statement of defense on June 6, 2005.  In the response,  the cable television operators claimed, inter
alia, that the
request made by the Federation for the payment of temporary royalties was not
timely and was not submitted in good faith.
In addition, the cable television operators claimed that the amount of
the request was extremely unreasonable in that it exceeded 11 times the amount
of the highest royalty amount paid to the Federation during the term of the
agreement. In that matter, the cable television operators claimed that the
request for payment of temporary royalties can be in an amount up to US$
200,000, which is the contractual amount that was paid to the Federation during
the term of the agreement.  The date of the
hearing was set for July 6, 2005.

(j)
We currently have the following tax matters pending:

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| | (1) | In light of a disagreement
  with the Tax Authorities, the Company and Cable Systems Media
  Haifa-Hadera Ltd., a wholly owned subsidiary of ours, received in 2002 and 2004, tax orders for
  tax years 1997  2001. Under these orders, the Company and Matav Haifa are
  required to pay additional aggregate amount of NIS 52 million (not
  including interest and CPI linkage) and to decrease their carry forward loss
  for the years 2000-2001 by NIS 96 million. The Company and Matav Haifa
  disagree with those mentioned tax orders. Managements opinion, based on the
  evaluation of its external advisers, has well founded arguments against all
  the claims included in these tax orders and therefore the Company intends to
  appeal against these tax orders. In light of previously non-concluded
  discussions and an unwritten understanding with the Tax Authorities, the
  Company recorded in the financial statements as of December 31, 2004, a
  provision of approximately NIS 6.5 million with respect to the aforementioned
  tax orders.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (2) | In May 2004, a subsidiary
  of ours, Matav Investments Ltd., received assessments for tax years 1998-2001
  and a tax order for 2002. The tax order for 2002 included a
  requirement to pay a tax amount of NIS 114 million. In addition, with respect
  to 2002 tax order, a deficit penalty was imposed on the Company in the amount
  of NIS 18 million (including interest and CPI linkage). According to the opinion of the Companys
  management, based on the evaluation of its external advisers, the Company has
  well founded arguments against these assessments and the mentioned penalty
  and therefore no provision has been made in the Companys accounts for the
  above-mentioned deficit penalty claim and the assessments for tax years
  1998-2001. During 2005,
  Matav Investments signed an agreement with the tax authorities regarding the
  tax assessment for the years 1998-2001.
  The agreement does not have an effect on the financial statements.                                                                                      

Dividend Distribution Policy

We have not
adopted any dividend distribution policy and we cannot assure that we would pay
additional dividends in the future. In the past we have distributed cash
dividends. See Item 3A. Key Information  Selected Financial Data  Payment of
Dividends to Shareholders.

|    |                    
|--- | -------------------
|8B. | SIGNIFICANT CHANGES

For
information on Barak and the recent settlement with Baraks creditors, see
Item 4B. Business Overview  International Telecommunication Services.

For
information on our recent sale of shares in Partner, see Item 4B. Business
Overview -- Cellular Telecommunication Services.

Other
than the matters mentioned above, no other significant change has occurred
since the date of our financial statements.

105

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|        |                      
|------- | ---------------------
|ITEM 9. | THE OFFER AND LISTING

|    |                          
|--- | -------------------------
|9A. | OFFER AND
LISTING DETAILS

Our
share capital consists of ordinary shares, which have been listed for trading
on the Tel Aviv Stock Exchange since October 1993 and ADSs, which have been
listed for quotation on the Nasdaq National Market since June 12, 1996, under
the symbol MATV. Each ADS represents
two ordinary shares.

106

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The
tables below set forth, for the periods indicated, the high and low closing
market prices for our ordinary shares and ADSs, as reported by the Tel Aviv
Stock Exchange and the Nasdaq National Market, respectively.

|                                      |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        |  |  |       | 
|------------------------------------- |  | -------------------- | ----- | ---------------------- |  | ------------------------- |  | -------------------------- | ------ | ---- |  | ------ |  | ---- | ----- | --- |  | ----- |  |  | ------ |  |  | ----- | 
|                                      |  |                      |       |                        |  | Tel Aviv Stock
  Exchange |  | Tel Aviv Stock
  Exchange  |       
|                                      |  | Nasdaq
  ($ per ADS) |       | Nasdaq
  (NIS per ADS) |  | ($ per ordinary
  share)  |  | (NIS per ordinary
  share) |       
|                                      |  | High                 |       | Low                    |  | High                      |  | Low                        |        | High |  | Low    |  | High |       | Low | 
|                                      |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     | 
|Most recent five full financial years |  |                      |       |                        |  |                           |  |                            |        |      |  |        | 
|                                      |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        |  |  |       | 
|2000                                  |  |                      | 69.25 |                        |  | 32.81                     |  |                            | 281.57 |      |  | 132.63 |  |      | 34.59 |     |  | 15.70 |  |  | 141.20 |  |  | 64.69 | 
|2001                                  |  |                      | 34.25 |                        |  | 9.74                      |  |                            | 140.70 |      |  | 38.45  |  |      | 17.02 |     |  | 5.22  |  |  | 69.90  |  |  | 22.75 | 
|2002                                  |  |                      | 18.58 |                        |  | 8.34                      |  |                            | 83.11  |      |  | 42.19  |  |      | 9.20  |     |  | 4.27  |  |  | 40.82  |  |  | 20.58 | 
|2003                                  |  |                      | 16.59 |                        |  | 9.91                      |  |                            | 74.26  |      |  | 48.43  |  |      | 8.13  |     |  | 4.96  |  |  | 36.31  |  |  | 24.22 | 
|2004                                  |  |                      | 20.39 |                        |  | 15.0                      |  |                            | 92.88  |      |  | 66.08  |  |      | 10.21 |     |  | 7.07  |  |  | 46.16  |  |  | 31.55 | 
|                                      |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        |  |  |       | 
|Most recent two full financial years  |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        | 
|                                      |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        |  |  |       | 
|2003                                  |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        |  |  |       | 
|First Quarter                         |  |                      | 12.0  |                        |  | 9.91                      |  |                            | 56.24  |      |  | 48.43  |  |      | 5.87  |     |  | 4.96  |  |  | 28.51  |  |  | 24.22 | 
|Second Quarter                        |  |                      | 15.70 |                        |  | 11.76                     |  |                            | 71.65  |      |  | 54.78  |  |      | 7.65  |     |  | 6.22  |  |  | 35.02  |  |  | 27.60 | 
|Third Quarter                         |  |                      | 13.50 |                        |  | 11.44                     |  |                            | 58.68  |      |  | 50.69  |  |      | 6.95  |     |  | 5.85  |  |  | 29.87  |  |  | 25.92 | 
|Fourth Quarter                        |  |                      | 16.59 |                        |  | 12.77                     |  |                            | 74.26  |      |  | 57.30  |  |      | 8.13  |     |  | 6.63  |  |  | 36.31  |  |  | 29.28 | 
|                                      |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        |  |  |       | 
|2004                                  |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        |  |  |       | 
|First Quarter                         |  |                      | 20.25 |                        |  | 15.0                      |  |                            | 90.78  |      |  | 66.08  |  |      | 10.0  |     |  | 7.68  |  |  | 44.98  |  |  | 33.82 | 
|Second Quarter                        |  |                      | 20.39 |                        |  | 17.0                      |  |                            | 92.88  |      |  | 78.17  |  |      | 10.21 |     |  | 9.02  |  |  | 46.16  |  |  | 40.47 | 
|Third Quarter                         |  |                      | 19.39 |                        |  | 15.01                     |  |                            | 87.02  |      |  | 67.64  |  |      | 9.63  |     |  | 7.59  |  |  | 43.21  |  |  | 34.45 | 
|Fourth Quarter                        |  |                      | 16.79 |                        |  | 14.1                      |  |                            | 74.43  |      |  | 62.46  |  |      | 8.59  |     |  | 7.07  |  |  | 37.90  |  |  | 31.55 | 
|                                      |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        |  |  |       | 
|Most recent six months                |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |       
|                                      |  |                      |       |                        |  |                           |  |                            |        |      |  |        |  |      |       |     |  |       |  |  |        | 
|December 2004                         |  |                      | 16.33 |                        |  | 14.3                      |  |                            | 71.31  |      |  | 62.39  |  |      | 8.01  |     |  | 7.36  |  |  | 34.97  |  |  | 31.89 | 
|January 2005                          |  |                      | 16.69 |                        |  | 15.18                     |  |                            | 72.7   |      |  | 66.32  |  |      | 8.12  |     |  | 7.32  |  |  | 35.49  |  |  | 32.29 | 
|February 2005                         |  |                      | 15.9  |                        |  | 14.64                     |  |                            | 69.64  |      |  | 63.86  |  |      | 8.31  |     |  | 7.51  |  |  | 36.37  |  |  | 32.79 | 
|March 2005                            |  |                      | 16.75 |                        |  | 15.21                     |  |                            | 72.33  |      |  | 65.92  |  |      | 8.94  |     |  | 7.69  |  |  | 38.56  |  |  | 33.44 | 
|April 2005                            |  |                      | 16.00 |                        |  | 15.34                     |  |                            | 69.82  |      |  | 66.51  |  |      | 8.23  |     |  | 7.78  |  |  | 35.93  |  |  | 34.0  | 
|May 2005                              |  |                      | 18.45 |                        |  | 15.39                     |  |                            | 80.45  |      |  | 67.96  |  |      | 9.36  |     |  | 7.87  |  |  | 40.82  |  |  | 34.74 | 

107

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|                |                     
|--------------- | --------------------
|9B.             | PLAN OF DISTRIBUTION
|                |                     
|Not applicable.
|                |                     
|9C.             | MARKETS             

Our
ADSs are quoted on the Nasdaq National Market under the symbol MATV and our
ordinary shares are traded on the Tel Aviv Stock Exchange.

We
intend to delist voluntarily from the Nasdaq National Market and to terminate
our American Depositary Receipt (ADR) program in the future. Our board of
directors will examine the timing of such termination in the next few
months. We intend to file a Form 15
with the SEC to terminate the registration of the ADRs and ordinary shares,
thereby suspending our obligation to file annual and other reports with the
SEC. After the delisting, our shares
will continue to trade in the TASE and we will continue to make public reports
in accordance with the Israeli securities laws and regulations.

|                |                      
|--------------- | ---------------------
|9D.             | SELLING SHAREHOLDERS 
|                |                      
|Not applicable.
|                |                      
|9E.             | DILUTION             
|                |                      
|Not applicable.
|                |                      
|9F.             | EXPENSES OF THE ISSUE
|                |                      
|Not applicable.

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|         |                       
|-------- | ----------------------
|ITEM 10. | ADDITIONAL INFORMATION

|                |                                       
|--------------- | --------------------------------------
|10A.            | SHARE CAPITAL                         
|                |                                       
|Not applicable.
|                |                                       
|10B.            | MEMORANDUM AND ARTICLES OF ASSOCIATION

Purposes
and Objects of the Company

We
are a public company registered under the Israeli Companies Law as Matav 
Cable Systems Media Ltd., registration number 52-004007-2.

Pursuant
to our memorandum of association, we were formed mainly for the purpose of establishing
television and cable television networks, broadcasting and to provide such
services and related and ancillary services in Israel and without derogating
from the above, we are also empowered to hold any right, obligation or legal
action and to operate in any business or matter approved by our company.

Pursuant
to our articles of association, our board of directors is entitled to donate
reasonable amounts to worthy causes, up to a limited sum.

The
Powers of the Directors

The
power of our directors to vote on a proposal, arrangement or contract in which
the director is materially interested is limited by the relevant provisions of
the Companies Law. In addition, the
power of our directors to vote compensation to themselves or any members of
their body requires the approval of the audit committee and the shareholders at
a general meeting. For information
regarding approval of related party transactions and fiduciary duties of
directors, see Item 6C. Directors, Senior Management and Employees  Board
Practices  Approval of Related Party Transactions.

Subject
to applicable laws, the powers of our directors to borrow are not limited,
except in the same manner as any other transaction by the company.

Our
articles do not limit the age of retirement of our directors.

Directors
in our company are not required to hold shares for director qualification.

Rights
Attached to Shares

Our
registered share capital consists of a single class of 100 million ordinary
shares, par value NIS 1.00 per share, of which 30,220,476 ordinary shares were
issued and outstanding as of December 31, 2004, and 30,222,774 ordinary shares
were issued and outstanding as of May 31, 2005. All outstanding ordinary shares are validly issued, fully paid
and non-assessable. The rights attached
to the ordinary shares are as follows:

Dividend rights

Under
our articles of association, holders of our ordinary shares are entitled to the
full amount of any cash or share dividend subsequently declared. Our board of
directors may propose a dividend with respect to any fiscal year out of profits
in accordance with the provisions of the Companies Law. For additional
information regarding Israeli tax consequences, see Item 10E. Additional
Information  Taxation.

Seven
years after a dividend has been declared and is still unclaimed, the person so
entitled to it is deemed to have waived his or her right to receive such
dividend and such amount is returned to the company. We are not obligated to
pay interest or linkage on an unclaimed dividend.

109

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Voting rights

Holders
of our ordinary shares have one vote for each ordinary share held on all
matters submitted to a vote of shareholders. Such voting rights may be affected
by the grant of special voting rights to the holders of a class of shares with
preferential rights that may be authorized in the future. The quorum required
for an ordinary meeting of shareholders consists of at least two shareholders
present or by proxies who hold or represent, in the aggregate, at least 40% of
the voting rights of the issued share capital. In the event that a quorum is
not present within 30 minutes of the scheduled time, the shareholders meeting
will be adjourned to the same day of the following week, at the same time and
place, or such time and place as the board of directors may determine. If at
such reconvened meeting a quorum is not present within half an hour of the time
fixed for the meeting any two shareholders present in person or by proxy or in
any other manner permitted by the Companies Law will constitute a quorum.

Under
the Companies Law, unless otherwise provided in the articles of association or
applicable law, all resolutions of the shareholders require approval by the
holders, in a general meeting, of a majority of the voting rights represented
at the meeting, in person or by proxy, and voting on the matter. Under our articles of association, a special
majority is required to approve a change of rights attached to a certain class
of shares or to cancel a class of shares. See Item 10B. Additional Information
 Memorandum and Articles of Association  Changing Rights Attached to Shares.

Under
our articles of association, our directors are appointed by a simple majority
of our shareholders at a general meeting, duly convened, and they serve until
the next annual meeting or until earlier termination of their office pursuant
to our articles of association, provided that, external directors shall be elected
in accordance with applicable law and/or relevant stock exchange rules
applicable to us. For information regarding the appointment of external
directors, see Item 6C. Directors, Senior Management and Employees  Board
Practices  Independent Directors and External Directors.  In each annual general meeting the directors
that were elected at the previous annual general meeting are deemed to have
resigned from their office. A resigning director may be reelected.

According
to our articles of association each ordinary share represents one vote. The
ordinary shares do not have cumulative voting rights in the election of
directors.

Currently,
our articles of association provide that a majority of our board of directors,
entitled to participate, may appoint additional directors, up to the maximum
number permitted.

Rights in the Companys profits

Our
shareholders have the rights to share in our profits distributed as a dividend
and any other permitted distribution. See Item 10B. Additional Information 
Rights Attached to Shares  Dividend Rights.

Rights in the event of liquidation

All
of our ordinary shares confer equal rights among them with respect to amounts
distributed to shareholders in case of liquidation.

Changing
Rights Attached to Shares

In
order to change the rights attached to our shares, the general meeting of the
shareholders must adopt a resolution to change such rights by a majority of the
votes of shareholders participating in the meeting and voting on the matter.
However, if our share capital is divided into different classes of shares, in
order to change the rights attached to a certain class of shares or cancel a
certain class of shares, our articles of association require the approval of a
special majority representing at least 75% of the votes of the shareholders
participating in the general meeting and voting on the matter, provided that
the holders of such class of shares have consented to such action by unanimous
written consent or by a special majority representing at least 75% of the
holders of such class of shares participating in a class meeting and voting on
the matter (unless the terms of such class of shares provide otherwise).

110

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Annual
and Special Meetings

According
to the Israeli Companies law, our board of directors must convene an annual
meeting of shareholders at least once every calendar year, within 15 months of
the last annual meeting. Notice of at least 21 days prior to the date of the
annual meeting is required. A special meeting may be convened by the board of
directors, as it decides or upon a demand of any two directors or 25% of the
presiding directors, or of one or more shareholders holding in the aggregate at
least 5% of our issued capital and 1% of our voting rights, or of one or more
shareholders holding in the aggregate at least 5% of our voting rights. A
special meeting must be held not more than 35 days from the publication date of
the announcement of the meeting.

Anti-Takeover
Provisions; Mergers and Acquisitions

Our
Cable Broadcast Licenses and HeadEnd License, and the HOT Telecom
Infrastructure Licenseinclude restrictions regarding changes of means of
control of the Licensees. See Item 4B.
Information on the Company  Business Overview  Our Licenses  Restrictions
Upon Changes of Means of Control. In
accordance with the Cable Broadcast Licenses, the restrictions set forth in
these licenses regarding changes of means of control of the licensees have been
entrenched in our articles of association, as approved by our shareholders at
the annual general meeting of October 31, 2002.

The
Israeli Companies Law allows for mergers, provided that each party to the
transaction obtains the approval of its board of directors and subject to
certain exceptions, a vote of the majority of its shares, at a shareholders
meeting called on at least 21 days prior notice. For the purpose of the shareholder vote, unless a court rules
otherwise, a merger will not be deemed approved if a majority of the voting
rights held by parties other than the other party to the merger, or by any
person who holds 25% or more of the shares or the right to appoint 25% or more
of the directors of the other party, have voted against the merger. Upon the request of a creditor of either
party to the proposed merger, the court may delay or prevent the merger if the
court concludes that there exists a reasonable concern that as a result of the
merger the surviving company will be unable to satisfy the obligations of any
of the parties to the merger. Finally,
a merger may not be completed unless 30 days have passed from the time in which
each of the merged companies shareholders have resolved to merger, and, at
least 50 days have passed from the time that the requisite proposals for
approval of the merger were filed with the Israeli Registrar of Companies by
each merging company.

The
Companies Law also provides, subject to several exceptions, that an acquisition
of shares in a public company must be made by means of a tender offer if, as a
result of such acquisition, the purchaser would hold 25% or more of the voting
rights of the company and there is no existing shareholder of the company who
holds 25% or more of the voting rights of the company. Similarly, the Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender
offer if, as a result of the acquisition, the purchaser would hold more than
45% of the voting rights of the company and there is no existing shareholder of
the company who holds more than 45% of the voting rights of the company. In any event, if as a result of an
acquisition of shares a purchaser would hold more than 90% of a companys
shares, the acquisition must be made by means of a tender offer for all of the
shares of such class. If more than 95%
of the outstanding shares are tendered in the tender offer, all shares that the
purchaser offered to acquire are transferred to such purchaser. However, the remaining minority shareholders
may seek to alter the consideration by court order.

Israeli
tax law treats stock-for-stock acquisitions between an Israeli company and
another company less favorably than does U.S. tax law. For example, Israeli tax law may, under
certain circumstances, subject a shareholder who exchanges his ordinary shares
for shares of another corporation to taxation prior to the sale of the shares
received in such stock-for-stock swap.

Changes
in Our Capital

Changes
in our capital are subject to the approval of the shareholders at a general
meeting by a majority of the votes of shareholders participating in the general
meeting and voting on the matter.

|     |                   
|---- | ------------------
|10C. | MATERIAL CONTRACTS

Except
for agreements listed below, we are not a party to any material contracts other
than those entered into in the ordinary course of business.

| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Arrangements in
  connection with the proposed merger of the Israeli cable television
  operators. For information, see Item
  4B. Information on the Company  Business Overview  Agreement for a Merger
  of the Cable Television Operators.

111

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| |  | Limited Partnership
  Agreement among the three cable television relating to HOT Telecom L.P.,
  dated October 2003.
| | - | --------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                     
| |  | Agreement relating to
  the establishment of HOT Telecom Ltd., dated October 2003.                                  

|     |                  
|---- | -----------------
|10D. | EXCHANGE CONTROLS

There
are currently no currency control restrictions on payments of dividends or
other distributions with respect to our ordinary shares or the proceeds from
the sale of shares, except for the obligations of Israeli residents to file
reports with the Bank of Israel regarding such transactions. However, legislation remains in effect under
which currency controls can be imposed by administrative action at any time.
Under Israeli law, persons who are neither residents nor nationals of Israel
may freely hold, vote and transfer ordinary shares in the same manner as
Israeli residents or nationals.

Neither
our articles of association nor our memorandum of association contain any
restrictions on non-residents or non-nationals of Israel concerning the
holding, voting or transfer of our ordinary shares.

|     |         
|---- | --------
|10E. | TAXATION

Holders
of our ordinary shares should consult their own tax advisors as to the United
States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any
foreign, state or local taxes.

ISRAELI TAX

The
following is a summary of the current tax laws of the State of Israel as they
relate to us. The following also
includes a discussion of the material Israeli tax consequences to persons
purchasing our ordinary shares. To the
extent that the discussion is based on legislation yet to be subject to
judicial or administrative interpretation, there can be no assurance that the
views expressed herein will accord with any such interpretation in the future
of the appropriate tax authorities or the courts. This discussion is not intended and should not be construed as
legal or professional tax advice, may not apply to all shareholders, and does
not cover all possible tax considerations.

General Corporate Tax Structure

Israeli
companies are generally subject to income tax on their taxable income at the corporate tax rate of 35% for the 2004 tax year, 34% for
the 2005 tax year, 32% for the 2006
tax year and 30% for the 2007 tax year and thereafter, and are generally subject to capital
gains tax at a rate of 25% for capital gains (other than gains deriving from
the sale of listed securities) derived after January 1, 2003.

Recently, the Israeli
Ministry of Finance has published a memorandum proposing an amendment  to the Israeli Tax Ordinance [New Version],
1961 (ITO)  under which the corporate tax rate will be reduced gradually to
25%, as follows: 31% for the 2006 tax year; 29% for the 2007 tax year; 27% for
the 2008 tax year; 26% for the 209 tax year; and 25% for the 2010 tax year and
thereafter. In order to enact such proposal as legislation, it must be
approved by the Israeli parliament and published. Because we cannot predict
whether, and to what extent, such proposal will eventually be enacted into law,
we face uncertainties as to the potential consequences of such proposal.

Taxation Under Inflationary Conditions

The
Income Tax (Inflationary Adjustment) Law 1985 (the Inflationary Adjustments
Law), attempts to overcome some of the problems presented to a traditional tax
system by rapid inflation. Generally,
the Inflationary Adjustments Law provides tax deductions and adjustments to
depreciation deductions and tax loss carry forwards to mitigate the effects
resulting from an inflationary economy.
Our taxable income is determined under this law.

112

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Stamp Duty

The
Israeli Stamp Duty on Documents Law, 1961 (the Stamp Duty Law), provides that
any document (or part thereof) that is signed in Israel or that is signed
outside of Israel and refers to an asset or other thing in Israel or to an
action that is executed or will be executed in Israel, is subject to a stamp
duty, generally at a rate of between 0.4% and 1% of the value of the subject matter
of such document. De facto, it has been common practice in Israel not to pay
such stamp duty unless a document is filed with a governmental authority. An
amendment to the Stamp Duty Law that came into effect on June 1, 2003,
determines, among other things, that stamp duty on most agreements shall be
paid by the parties that signed such agreement, jointly or severally, or by the
party that undertook under such agreement to pay the stamp duty. As a result of
the aforementioned amendment to the Stamp Duty Law, the Israeli tax authorities
have approached many companies in Israel and requested disclosure of all
agreements signed by such companies after June 1, 2003, with the aim of
collecting stamp duty on such agreements. The legitimacy of the aforementioned
amendment to the Stamp Duty Law and of said actions by the Israeli tax
authorities are currently under review by the Israeli High Court of Justice.

Based
on advice from our Israeli counsel, we believe that we may only be required to
pay stamp duty on documents signed on or after August 2004. However, we cannot
assure you that the tax authorities or the courts will accept such view.
Although at this stage it is not yet possible to evaluate the effect, if any,
on us of the amendment to the Stamp Duty Law, the same could adversely affect
our results of operations.

In
January 2005, an order was signed in accordance with which the said requirement
to pay stamp duty is cancelled with effect from January 1,
2008. Furthermore, pursuant to such order, as of January 1, 2005, stamp
duty is no longer chargeable on, among others, loan agreements.

Dividends

We
currently do not intend to pay dividends for the foreseeable future. See Item 8A. Financial Information 
Consolidated Statements and Other Financial Information  Dividend Distribution
Policy.  However, the following Israeli tax
consequences would apply in the event we actually pay any dividends in respect
of ordinary shares.

Taxation of Israeli Residents

The
distributions of dividends, other than bonus shares (stock dividends), are
generally subject to income tax at a rate of 25% (that is withheld at source)
for individuals. Distribution of dividends, other than bonus shares, to Israeli
corporations are subject to a tax at a rate of 25% (that is withheld at source)
if the source of such dividends is income derived outside of Israel and are
exempt from tax if the source of such dividends is income derived in
Israel. See Item 10E. Additional Information3⁄4Taxation3⁄4Capital Gains Tax  Taxation of Israeli
Residents.

The
aforementioned memorandum proposing an amendment of the ITO, which is
intended to come into effect on January 1, 2006, proposes to reduce the tax rate applicable to distributions of
dividends to a rate of 20% for individuals, excluding a shareholder holding a
controlling interest who shall continue to be subject to a 25% tax rate on such
distributions. As aforesaid, such proposal has yet to be enacted as
legislation, and we cannot predict whether, and to what extent, such proposal
will eventually be enacted into law.

Taxation of Non-Israeli Residents

Non-residents
of Israel are subject to income tax on income accrued or derived from sources
in Israel, including dividends from Israeli corporations. Distributions of
dividends other than bonus shares or stock dividends are subject to income tax
at a rate of 25% that is withheld at source, unless a different rate is
provided in an applicable treaty between Israel and the shareholders country
of residence.

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Capital Gains Tax

General

Israeli
law generally imposes a capital gains tax on the sale of any capital assets by
residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel or the sale of direct or indirect rights to assets
located in Israel, including on the sale of shares in Israeli companies, by
both residents and non-residents of Israel, unless a specific exemption is
available or unless a tax treaty between Israel and the shareholder country of
residence provides otherwise. The law
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
Israeli consumer price index or, in certain circumstances, a foreign currency
exchange rate, between the date of purchase and the date of sale. Real Gains (other than gains deriving from
the sale of listed securities) derived after January 1, 2003 are taxed at a
rate of 25% for both individuals and corporations. According to the
aforementioned memorandum proposing an amendment of the ITO, it is proposed to
reduce the aforementioned tax rate for individuals to 20%, excluding with
respect to a shareholder holding a controlling interest who shall continue to
be subject to a 25% tax rate.

Taxation of Israeli Residents

Generally,
capital gains tax is imposed at a rate of 15% on real gains derived on or after
January 1, 2003, from the sale of shares in (i) companies publicly traded
on the Tel Aviv Stock Exchange (TASE) or; (ii) Israeli companies publicly
traded on Nasdaq or on a recognized stock exchange or regulated market in a
country that has a treaty for the prevention of double taxation with Israel, or
(iii) companies dually traded on both the TASE and Nasdaq or a recognized stock
exchange or regulated market outside (such as us). This tax rate is contingent
upon the shareholder not claiming a deduction for financing expenses in
connection with such shares (in which case the capital gain will be taxed at a
rate of 25%) and does not apply to: (i) the sale of shares to a relative
(as defined in Israeli Income Tax Ordinance); (ii) the sale of shares by
dealers in securities (who will be taxed at corporate tax rates for corporations
and at marginal tax rates of up to 49% for individuals); (iii) the sale of
shares by shareholders that report in accordance with the Inflationary
Adjustments Law (who will be taxed at corporate tax rates for corporations and
at marginal tax rates of up to 49% for individuals); or (iv) the sale of
shares by shareholders who acquired their shares prior to our initial public
offering (that may be subject to a different tax arrangement). The tax basis of shares acquired prior to
January 1, 2003 will be determined in accordance with the average closing share
price in the three trading days preceding January 1, 2003. However, a request may be made to the tax
authorities to consider the actual adjusted cost of the shares as the tax basis
if it is higher than such average price.

According
to the memorandum proposing an amendment of the ITO, the tax rate applicable to
capital gains from the sale of traded securities will be generally be increased
to 20% for individuals (instead of 15%) and unified with the tax rate
applicable to capital gains from the sale of non-traded assets. Israeli
corporations will be subject to corporate tax rates on such gains and the
applicable provisions of the the Inflationary Adjustments Law will be
cancelled.

Taxation of Non-Israeli Residents

Pursuant
to a specific exemption, non-Israeli residents are exempt from Israeli capital
gains tax on any gains derived from the sale of shares publicly traded on the
TASE, and are exempt from Israeli capital gains tax on any gains derived from
the sale of shares of Israeli companies publicly traded on a recognized stock
exchange or regulated market outside of Israel, provided that such capital
gains are not derived from a permanent establishment in Israel and that such shareholders
are not subject to the Inflationary Adjustment Law and did not acquire their
shares prior to our initial public offering. However, non-Israeli corporations
will not be entitled to such exemption if an Israeli resident (i) has a
controlling interest of 25% or more in such non-Israeli corporation, or (ii) is
the beneficiary of or is entitled to 25% or more of the revenues or profits of
such non-Israeli corporation, whether directly or indirectly.

In
some instances where our shareholders may be liable to Israeli tax on the sale
of their ordinary shares, the payment of the consideration may be subject to
the withholding of Israeli tax at the source.

Taxation of Residents of the United States under the U.S.
Treaty

Residents
of the United States generally will be subject to withholding tax in Israel
deducted from dividends paid, if any, on our ordinary shares. Generally, under the Convention between the
Government of the United States and the Government of the State of Israel with
respect to Taxes on Income (referred to as the US Treaty), the maximum
Israeli withholding tax on dividends paid to a holder of ordinary shares or
ADSs who is a resident of the United States (as defined in the US Treaty) will
be 25% (and if such shareholder is a U.S. corporation holding at least 10% of
the issued voting power throughout the tax year in which the dividend is
distributed as well as the previous tax year then, the maximum Israeli
withholding tax on dividends is 12.5%).

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The
US Treaty exempts from taxation in Israel any capital gain realized on the
sale, exchange or other disposition of ordinary shares or ADSs by a holder that
is a resident of the United States for purposes of the US Treaty, and that owns
directly or indirectly, less than 10% of our voting power at all times during
the 12-month period preceding such sale, exchange or other disposition,
provided such capital gain cannot be allocated to a permanent
establishment of the such holder in Israel.

Sellers
of ordinary shares, who are residents of the United States and who hold 10% or
more of the outstanding ordinary shares at any time during such 12-month period
will be subject to Israeli Capital Gains Tax.
However, under the US treaty, residents of the United States (as defined
in the US Treaty) would be permitted to claim a credit for this tax against
U.S. federal income tax imposed on the sale, exchange or other disposition,
subject to the limitations in U.S. laws applicable to foreign tax credits. The US treaty does not relate to U.S. state
or local taxes.

Repatriation

Non
residents of Israel who acquire any of our ADSs using non Israeli currencies
will be able to repatriate dividends, liquidation distributions and the
proceeds from the sale of such ADSs, into non-Israeli currencies at the rate of
exchange prevailing at the time of repatriation provided that any applicable
Israeli income tax has been paid, or withheld, on such amounts if applicable.

U.S. TAX

United
States Federal Income Tax Considerations

Subject
to the limitations described below, the following discussion describes the
material United States federal income tax consequences to a holder of ordinary
shares, referred to for purposes of this discussion as a U.S. holder, that
is:

| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a citizen or resident
  of the United States;                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                   
| |  | a corporation created
  or organized in the United States or under the laws of the United States or
  of any state;                                                                                                               
| |   |                                                                                                                                                                                                                                   
| |  | an estate, the income
  of which is includible in gross income for United States federal income tax
  purposes regardless of its source; or                                                                                       
| |   |                                                                                                                                                                                                                                   
| |  | a trust, if a court
  within the United States is able to exercise primary supervision over the
  administration of the trust and one or more U.S. persons have the authority
  to control all substantial decisions of the trust.
| |   |                                                                                                                                                                                                                                   
| |  | In addition, certain
  material aspects of United States federal income tax relevant to a holder
  other than a U.S. holder, referred to as a Non-U.S. holder, are discussed
  below.                                           

This
summary is for general information purposes only. It does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to each persons decision to
purchase ordinary shares.

This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the Code), United States Treasury Regulations promulgated there
under and administrative and judicial interpretations thereof, all as in effect
as of the date of this Annual Report on Form 20-F, all of which are subject to
change, possibly on a retroactive basis. This discussion does not address all
aspects of United States federal income taxation that may be relevant to any
particular shareholder based on such shareholders individual circumstances. In particular, this discussion considers
only U.S. holders that will own ordinary shares as capital assets and does not
address the potential application of the alternative minimum tax or United
States federal income tax consequences to U.S. holders that are subject to
special treatment, including U.S. holders that:

| |   |                                             
| | - | --------------------------------------------
| |  | are broker-dealers or
  insurance companies;
| |   |                                             
| |  | have elected
  mark-to-marketing accounting;
| |   |                                             
| |  | are tax-exempt
  organizations;             

115

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| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | are financial
  institutions or financial services entities;                                                     
| |   |                                                                                                                    
| |  | hold ADSs or ordinary
  shares as part of a straddle, hedge or conversion transaction with other
  investments;
| |   |                                                                                                                    
| |  | own directly,
  indirectly or by attribution at least 10% of the Companys outstanding voting
  shares;            
| |   |                                                                                                                    
| |  | acquire their shares
  in a compensatory transaction; or                                                           
| |   |                                                                                                                    
| |  | have a functional
  currency that is not the dollar.                                                               

In
addition, this discussion does not address any aspect of state, local or
non-United States tax laws.

Additionally, the discussion does not consider the tax
treatment of persons who hold ADSs or ordinary shares through a partnership or
other pass-through entity or the possible application of United States federal
gift or estate tax. Material aspects of
United States federal income tax relevant to a holder other than a U.S. holder
are also discussed below.

Each
holder of ADSs or ordinary shares is advised to consult such persons own tax
advisor with respect to the specific tax consequences to such person of
purchasing, holding or disposing of the Companys ADSs or ordinary shares.

Dividends Paid on the Ordinary Shares

A
U.S. Shareholder generally will be required to include in gross income the
amount of any distributions paid in respect of the ordinary shares (including
the amount of any Israeli taxes withheld therefrom) to the extent that such
distributions are paid out of the Companys current or accumulated earnings and
profits as determined for U.S. federal income tax purposes. Under U.S.
legislation enacted in 2003, which is generally effective for tax years
beginning after December 31, 2002 and before January 1, 2009, a maximum U.S.
federal income tax rate of 15% (rather than the higher rates of tax generally
applicable to items of ordinary income) will apply to qualified dividend
income received by an individual (as well as certain trusts and estates)
provided certain holding period requirements are met. Qualified dividend income
generally includes dividends paid by a U.S. corporation or a qualified foreign
corporation. A non-U.S. corporation (other than a foreign personal holding
corporation, foreign investment company, or passive foreign investment company)
generally will be considered to be a qualified foreign corporation if (i) the
shares of the non-U.S. corporation are readily tradable on an established
securities market in the United States, or (ii) the non-U.S. corporation is
eligible for the benefits of a comprehensive U.S. income tax treaty determined
to be satisfactory to the United States Department of the Treasury. The United
States Department of the Treasury and the Internal Revenue Service have
determined that the United States-Israel Tax Treaty is satisfactory for this
purpose. In addition, the United States Department of the Treasury and the
Internal Revenue Service have determined that ordinary shares are considered
readily tradable on an established securities market if such shares are listed
on an established securities market in the United States such as the NASDAQ
National Market. Information returns reporting dividends paid to U.S.
Shareholders will identify the amount of dividends eligible for the reduced
rates. Distributions in excess of such earnings and profits will be treated
first as non-taxable return of capital reducing the U.S. Shareholders tax
basis in the ordinary shares to the extent of the distributions, and then as
capital gain from a sale or exchange of such ordinary shares. Such dividends
will generally not qualify for the dividends received deduction available to
corporations. The amount of any cash distribution paid in Israeli shekels will
equal the U.S. dollar value of the distribution, calculated by reference to the
spot exchange rate in effect on the date of the distribution.

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Credit for Israeli Taxes Withheld

Subject
to certain conditions and limitations, U.S. holders will have the option of
claiming the amount of any Israeli income taxes withheld at source either as a
deduction from gross income or as a dollar-for-dollar credit against their
United States federal income tax liability.
Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of the Israeli
income taxes withheld, but such amount may be claimed as a credit against the
individuals United States federal income tax liability. The amount of foreign income taxes which may
be claimed as a credit in any year is subject to complex limitations and
restrictions, which must generally be determined on an individual basis by each
shareholder. The limitations set out in
the Code include, among others, rules which limit foreign tax credits allowable
with respect to specific classes of income to the United States federal income
taxes otherwise payable with respect to each such class of income. Distributions of current or accumulated
earnings and profits will be foreign source passive income for United States
foreign tax credit purposes and will not qualify for the dividends received
deduction available to corporations.
The total amount of allowable foreign tax credits in any year cannot
exceed regular U.S. tax liability for the year attributable to foreign source
taxable income. However, a U.S. holder
who is a natural person may elect not to be subject to the foreign tax credit
limitation rules if all of that U.S. holders foreign source income is
qualified passive income and his or her creditable foreign taxes do not exceed
US$ 300, or US$ 600 for joint returns, in a taxable year. Qualified passive income includes dividends
and other amounts, but only to the extent the U.S. holder receives a Form 1099
or similar payee statement with respect to that qualified passive income. A U.S. holder will be denied a foreign tax
credit with respect to Israeli income tax withheld from dividends received on
the ordinary shares to the extent such U.S. holder has not held the ordinary
shares for at least 16 days of the 30-day period beginning on the date which is
15 days before the ex-dividend date or to the extent such U.S. holder is under
an obligation to make related payments with respect to substantially similar or
related property. Any days during which
a U.S. holder has substantially diminished its risk of loss on the ordinary
shares are not counted toward meeting the 16-day holding period required by the
statute. Special rules apply in determining the foreign tax credit limitation
with respect to qualified dividend income that is subject to the maximum 15%
tax rate.

Taxation of the Disposition of Ordinary Shares

Upon
the sale, exchange or other disposition of ordinary shares, a U.S. holder will
generally recognize capital gain or loss in an amount equal to the difference
between such U.S. holders basis in the ordinary shares, which is usually the
cost of such shares, and the amount realized on the disposition. Capital gain
from the sale, exchange or other disposition of ordinary shares held more than
one year is generally long-term capital gain and, if recognized on or after May
6, 2003 and before January 1, 2009, is generally taxed to individual U.S.
holders at a maximum rate of 15% (reduced from the 20% maximum rate that
applied to long-term capital gain recognized before May 6, 2003). Gains and
losses recognized by a U.S. holder on a sale, exchange or other disposition of
ordinary shares will generally be treated as United States source income or
loss for United States foreign tax credit purposes. The deductibility of a
capital loss recognized on the sale, exchange or other disposition of ordinary
shares is subject to limitations.

Tax Consequences
if the Company is a Passive Foreign Investment Company

The
Company will be a passive foreign investment company, or PFIC, if 75% or more
of its gross income in a taxable year, including the pro rata share of the
gross income of any company, U.S. or foreign, in which the Company is
considered to own 25% or more of the shares by value, is passive income.
Alternatively, the Company will be considered to be a PFIC if at least 50% of
the average value of its gross assets in a taxable year  calculated quarterly
and ordinarily determined based on fair market value, including the pro rata
share of the assets of any company in which the Company is considered to own
25% or more of the shares by value  are held for the production of, or produce,
passive income. For this purpose, passive income includes dividends, interest,
royalties, rents, annuities and the excess of gain over losses from the
disposition of assets which produced passive income. If the Company were a
PFIC, and a U.S. holder did not make an election to treat the Company as a
qualified electing fund (as described below), then:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | excess distributions by the Company to a U.S. holder would be
  taxed in a special way. Excess
  distributions are amounts received by a U.S. holder with respect to the
  Companys shares or ADSs in any taxable year that exceed 125% of the average
  distributions received by that U.S. holder from the Company in (i) the three
  previous years or (ii) the U.S. holders holding period for ordinary shares
  before the present taxable year, if shorter. Excess distributions must be
  allocated ratably to each day that a U.S. holder has held the Companys
  securities. A U.S. holder must
  include amounts allocated to the current taxable year, and any taxable year
  prior to the first taxable year in which the Company is a PFIC, in its gross
  income as ordinary income for that year.
  A U.S. holder must pay tax on amounts allocated to each prior taxable
  year during which the Company was a PFIC at the highest rate in effect for
  that year on ordinary income and the tax is subject to an interest charge at
  the rate applicable to deficiencies for income tax.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | the entire amount of gain that was realized by a U.S. holder upon
  the sale or other disposition of ordinary shares will also be treated as an
  excess distribution and will be subject to tax as described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | a U.S. holders tax basis in the Companys shares that were
  acquired from a decedent would not receive a step-up to fair market value as
  of the date of the decedents death but would instead be equal to the
  decedents basis, if lower.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

117

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The
special PFIC rules described above will not apply to a U.S. holder if the U.S.
holder makes an election to treat the Company as a qualified electing fund,
or QEF, in the first taxable year in which the U.S. holder owns ordinary shares
and the Company is a PFIC. Instead, a shareholder of a qualified electing fund
is required for each taxable year to include in income a pro rata share of the
ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the qualified electing fund as long-term
capital gain, subject to a separate election to defer payment of taxes, which
deferral is subject to an interest charge. A U.S. holder may make a QEF
election only if the Company agrees to furnish the U.S. holder annually with
certain tax information on a PFIC annual information statement. The Company
does not presently prepare or provide such information, and such information
may not be available to U.S. holders if the Company is subsequently determined
to be a PFIC.

A
U.S. holder of PFIC stock which is publicly traded could elect to make an
election to mark-to-market the ordinary shares annually, rather than be
subject to the above-described rules. Under such election, the U.S. holder will
include as ordinary income or loss each year an amount equal to the difference
as of the close of the taxable year between the fair market value of the PFIC
stock and the holders adjusted basis in the PFIC stock. Losses would be
allowed only to the extent of net mark-to-market gain previously included by
the U.S. holder under the election for prior taxable years. If the
mark-to-market election were made, then the rules set forth above would not
apply for periods covered by the election.

The
Company believes that it was not a PFIC in 2004. However, the tests for
determining PFIC status are applied annually and it is difficult to make
accurate predictions of future income and assets, which are relevant to this
determination. Accordingly, there can
be no assurance that the Company will not become a PFIC.

U.S.
holders who hold ordinary shares or ADSs during a period when the Company is a
PFIC will be subject to the foregoing rules, even if the Company ceases to be a
PFIC, subject to certain exceptions for U.S. holders who made a QEF or mark-to-market
election. A U.S. holder who beneficially owns shares in a PFIC must file an
annual return with the IRS on IRS Form 8621 that describes any distributions
received with respect to such shares and any gain realized on the disposition
of such shares.

U.S.
holders are urged to consult their tax advisors about the PFIC rules, including
the consequences to them of making a mark-to-market or QEF election with
respect to the Companys ordinary shares and ADSs in the event that the Company
qualifies as a PFIC.

Tax Consequences for Non-U.S. Holders of
Ordinary Shares

Except
as described in Information Reporting and Back-up Withholding below, a
Non-U.S. holder of ADSs or ordinary shares will not be subject to U.S. federal
income or withholding tax on the payment of dividends on, and the proceeds from
the disposition of, ordinary shares, unless:

| |   |                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | such item is
  effectively connected with the conduct by the Non-U.S. holder of a trade or
  business in the United States and, in the case of a resident of a country
  which has a treaty with the United States, such item is attributable to a
  permanent establishment or, in the case of an individual, a fixed place of
  business in the United States;
| |   |                                                                                                                                                                                                                                                                                                                                                                 
| |  | the Non-U.S. holder
  is an individual who holds ADSs or the ordinary shares as a capital asset and
  is present in the United States for 183 days or more in the taxable year of
  the disposition and does not qualify for an exemption; or                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                 
| |  | the Non-U.S. holder
  is subject to tax pursuant to the provisions of United States tax law
  applicable to U.S. expatriates.                                                                                                                                                                                                                                   

Information Reporting and Backup
Withholding

U.S.
holders generally are subject to information reporting requirements with
respect to dividends paid on, or proceeds from the disposition of, ADSs or
ordinary shares. U.S. holders are also
generally subject to back-up withholding on such dividends or sales proceeds at
a rate of up to 28% unless the U.S. holder provides IRS Form W-9 or otherwise
establishes an exemption.

118

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Non-U.S.
holders generally are not subject to information reporting or back-up
withholding with respect to dividends paid on, or upon the disposition of, ADSs
or ordinary shares, provided that the non-U.S. holder provides a taxpayer
identification number, certifies to its foreign status, or otherwise
establishes an exemption.

The amount of any back-up withholding will be allowed
as a credit against a U.S. or Non-U.S. holders United States federal income
tax liability and may entitle such holder to a refund, provided that certain
required information is furnished to the IRS.

|                |                            
|--------------- | ---------------------------
|10F.            | DIVIDENDS AND PAYING AGENTS
|                |                            
|Not applicable.
|                |                            
|10G.            | STATEMENT BY EXPERTS       
|                |                            
|Not applicable.
|                |                            
|10H.            | DOCUMENTS ON DISPLAY       

Reports
and other information of ours filed with the Securities and Exchange Commission
can be inspected without charge and copied at prescribed rates at the public
reference facilities maintained by the Securities and Exchange Commission at
450 Fifth Avenue, N.W., Washington, D.C. 20549, and at the regional offices of
the Securities and Exchange Commission located at Seven World Trade Center,
Suite 1300, New York, New York 10048 and the Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this material are also available
by mail from the Public Reference Branch of the Securities and Exchange
Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.

|                |                       
|--------------- | ----------------------
|10I.            | SUBSIDIARY INFORMATION
|                |                       
|Not applicable.

119

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|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

We
are exposed to risks deriving from changes in the exchange rate of the shekel
against foreign currencies, to risks deriving from changes in the interest
rates and inflation rates, and to other market risks.  From time to time, we examine the exposure and the risks that
such exposures create, and take hedging measures, while taking market
conditions into consideration.  However,
there is no assurance that our hedging measures will offset, either in whole or
in part, if at all, the financial effects deriving from adverse changes in
exchange rates, interest rates, inflation rates or other market risks.  We do not hold or issue hedging instruments
for the purpose of trading in them.  See
Note 18 of our financial statements.

Risks Deriving from
Exchange Rates

As
of December 31, 2004, we had liabilities denominated or linked to foreign
currency in an aggregate amount of approximately NIS 58.6 million, and assets
denominated or linked to foreign currency in an aggregate amount of
approximately NIS 2.4 million.  All of
our programming expenses and a portion of our other expenses are denominated or
linked to foreign currency (which, for the year ended December 31, 2004 was NIS
198.0 million).  On the other hand, all
of our revenues (which, for the year ended December 31, 2004, were NIS 584.6
million) are wholly denominated in shekels.

During
the years 2002, 2003 and 2004, in light of the fluctuation in the exchange rate
of the U.S. dollar in relation to the NIS, we entered into derivative
transactions to purchase U.S. dollars at predetermined exchange rates.  As of December 2004, we had a call option to
buy US$  24 million. As a result of the
above, we recorded a financial loss in our financial statements for the years
ended December 31, 2002, 2003 and 2004, in the amount of about NIS 0.4
million, NIS 11.2 million and NIS 3.8 million, respectively.

Risks Deriving from
Inflation

Our
financial expenses are affected by, among other things, the inflation rate in
Israel.  High rates of inflation cause a
decrease in the real value of our unlinked assets, which in turn, causes an
increase in our financial expenses.
Likewise, high rates of inflation cause a decrease in the real value of
our unlinked liabilities, which in turn, causes a decrease in our financial
expenses.

Regarding
our assets and liabilities that are linked to the Israeli consumer price index
and unlinked, see Note 18 of our financial statements.

Further,
we may be unable to update the fees we collect from our subscribers in order to
keep pace with inflation, due to regulatory restrictions and/or market factors.  This may cause a decrease of our income in
real terms.

The financial statements as of the
dates and for the reported periods subsequent to December 31, 2003 are
presented in reported amounts, in conformity with accounting standards of the Israel Accounting Standards
Board.  The financial statements as of the dates and for the reported periods until the aforementioned date
are presented in values that were adjusted until that date according to the changes in the general purchasing
power of the Israeli currency, in accordance with pronouncements of the Institute of Public Accounting in
Israel.

The effect of
the adoption of Accounting Standard No. 12 is dependent on the inflation rate
in Israel, on the composition of the Companys assets and its sources of
financing at that time.

Risks Deriving from
Interest Rates

In
addition to the exchange rate exposure, as described above, we have short term
loans bearing variable interest rates, which are linked to the prime interest
rate, determined by the Bank of Israel which is the standard interest rate for
inter-bank loans.  Since we present our
financial statements in real terms, we are exposed to the change in the Israeli
consumer price index on our interest expenses of short-term bank loans. The
long-term loans, including debentures which we have issued, are mainly linked
to the Israeli consumer price index plus a fixed interest percentage above the
Israeli consumer price index, and some are linked to the US dollar plus a fixed
interest percentage above the LIBOR.
See, Item 18.  Financial
Statements  Notes to Consolidated Financial Statements.  We do not hedge any of our risks deriving
from interest rates.

120

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Other Market Risks

Our
operations may be affected, among other things, by legislative and regulatory
changes, regulatory policy, technological changes and changes in the behavior
of our customers, particularly as a result of competition in the
telecommunications services market, in general, and the multi-channel
television market, in particular.

|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not
applicable.

PART II

|         |                                                
|-------- | -----------------------------------------------
|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None

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

Material Modifications to the Rights of
Security Holders

None

Use of Proceeds

None

|         |                        
|-------- | -----------------------
|ITEM 15. | CONTROLS AND PROCEDURES

In
June 2003, we established a Disclosure Controls Procedure Committee and adopted
Disclosure Controls and Procedures.

We carried
out an evaluation, under the supervision and with the participation of our
chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
the report. Based on this evaluation, our principal executive officer and
principal financial officer have concluded that, as of the end of such period,
our disclosure controls and procedures are effective to ensure that information
required to be included in our periodic reports to the Securities and Exchange
Commission is recorded, processed, summarized and reported in a timely manner.  In addition, there have been no significant
changes in our internal controls or in other factors that could significantly
affect those controls subsequent to the date of their last evaluation.

Although we
believe our pre-existing disclosure controls and procedures and internal
controls were adequate to enable us to comply with our disclosure obligations,
as a result of such review we intend to implement changes, primarily to
formalize and document procedures already in place.

|          |                                 
|--------- | --------------------------------
|ITEM 16.  | [RESERVED]                      
|          |                                 
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT

Our board
of directors has determined that Yair Keusch, one of the members of our audit
committee, qualifies as a financial expert under the applicable regulations.

121

---

---



|          |               
|--------- | --------------
|ITEM 16B. | CODE OF ETHICS

On April
29, 2004, we adopted a code of ethics that applies to all of the Companys
directors, officers and employees, including our principal executive officer,
principal financial officer, principal accounting officer or controller and
persons performing similar functions. We undertake to provide to any person
without charge, upon request, a copy of our code of ethics, which you may
request from Matavs legal department, tel: +972-9-860-2261.

|          |                                       
|--------- | --------------------------------------
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

For
2003 and 2004, we paid audit fees in the aggregate amount of approximately US$
84,000 and US$ 120,000, respectively.
Out of the total amounts paid for audit fees, we paid our principal
accountant, Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, aggregate amounts of approximately US$ 60,000 and US$ 120,000 for 2003
and 2004, respectively. Out of the
total amounts paid for audit fees, we paid Kesselman & Kesselman, a member
of PriceWaterhouse Coopers, aggregate amount of approximately US$ 24,000 for
2003.  Audit fees consist of fees billed
for the annual audit services engagements and other audit services which are
those services that only the external auditor can reasonably provide, and
include the group audit; statutory audit; consents; and assistance with review
of documents filed with the SEC.

Audit Related Fees

We
paid audit related fees in the aggregate amount of approximately US$ 75,000 to
Kost Forer Gabbay & Kasierer in 2003 and US$ 115,700 in 2004. Audit related
services 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 or that are traditionally performed by the external
auditor, and include consultations concerning financial accounting, reporting
standards and internal control reviews.

Tax Fees

For
2003 and 2004, we paid tax fees in the aggregate amounts of approximately US$
119,000 and US$ 134,700, respectively. Out of the total amounts paid for tax
fees, we paid approximately US$ 19,000 to Kesselman and Kesselman in 2003.  Out of the total amounts paid for tax fees,
we paid approximately US$ 100,000 and US$ 134,700 to Kost Forer Gabbay &
Kasierer in 2003 and 2004, respectively. 
Tax fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for tax refunds; tax
consultations such as assistance and representation in connection with tax
audits and appeals and tax planning services.

All Other Fees

We
did not pay any other fees in 2003 and 2004.

Pre-approval Policies and Procedures

Our
audit committee will approve each audit and non-audit service to be performed
by our independent accountant before the accountant is engaged.

122

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---



|          |                                                       
|--------- | ------------------------------------------------------
|ITEM 16D. | EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES

Not
applicable.

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

None.

PART III

|         |                     
|-------- | --------------------
|ITEM 17. | FINANCIAL STATEMENTS

We have
responded to Item 18. Financial Statements in lieu of responding to this Item.

|         |                     
|-------- | --------------------
|ITEM 18. | FINANCIAL STATEMENTS

The
following financial statements are filed as part of this annual report.

123

---

---



|         |         
|-------- | --------
|ITEM 19. | EXHIBITS

The
exhibits filed with or incorporated by reference into this annual report are
listed on the index of exhibits below.

|                  |  |                                                                                                                                                                                                                                                   
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  Number  |  | Description                                                                                                                                                                                                                                       
|                  |  |                                                                                                                                                                                                                                                   
|                  |  |                                                                                                                                                                                                                                                   
|***1.1            |  | Matavs
  Articles of Association, as adopted on December 31, 2000 and amended on
  October 31, 2002                                                                                                                                              
|                  |  |                                                                                                                                                                                                                                                   
|*1.2              |  | English
  translation of Matavs Memorandum of Association                                                                                                                                                                                        
|                  |  |                                                                                                                                                                                                                                                   
|*2(a)             |  | Specimen
  Certificate for American Depository Shares                                                                                                                                                                                             
|                  |  |                                                                                                                                                                                                                                                   
|**4(a)(i)-A       |  | English
  summary of Merger Arrangement dated December 31, 2001                                                                                                                                                                                   
|                  |  |                                                                                                                                                                                                                                                   
|***4(a)(i)-B      |  | English
  summary of final version of Merger Agreement dated February 2003                                                                                                                                                                        
|                  |  |                                                                                                                                                                                                                                                   
|****4(a)(i)-C     |  | English
  summary of Limited Partnership Agreement for HOT Telecom L.P., dated October
  2003, as amended in November 2003.                                                                                                                       
|                  |  |                                                                                                                                                                                                                                                   
|****4(a)(i)-D     |  | English
  summary of Agreement relating to the establishment of HOT Telecom Ltd., dated
  October 2003.                                                                                                                                           
|                  |  |                                                                                                                                                                                                                                                   
|4
  (b)(ii)(b)-A |  | English
  translation of Cable Broadcast License dated April 30, 2002, as amended,
  granted to Matav- Cable Systems Media Ltd., and Cable Broadcast License dated
  April 30 2002, as amended, granted to Cable Systems Media Haifa  Hadera Ltd.
|                  |  |                                                                                                                                                                                                                                                   
|**4(b)(ii)(b)-C   |  | English
  summary of Broadcasting HeadEnd License dated May 2, 2002 granted to Cable
  Systems Media Haifa  Hadera Ltd.                                                                                                                          
|                  |  |                                                                                                                                                                                                                                                   
|****4(b)(ii)(b)-D |  | English
  translation of Telecommunications Infrastructure License dated November 25,
  2003 granted to HOT Telecom L.P.                                                                                                                          
|                  |  |                                                                                                                                                                                                                                                   
|***4(c)(1)        |  | English
  translation of 2001 Senior Employee Option Plan                                                                                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|****4(c)(2)       |  | English
  summary of principal terms of 2003 Option Plan                                                                                                                                                                                          
|                  |  |                                                                                                                                                                                                                                                   
|6                 |  | See Note
  2(q) to our financial statements for information explaining how net loss per
  share information was calculated                                                                                                                        
|                  |  |                                                                                                                                                                                                                                                   
|8                 |  | List of
  Subsidiaries                                                                                                                                                                                                                            
|                  |  |                                                                                                                                                                                                                                                   
|10.1              |  | Consent of
  Independent Auditors                                                                                                                                                                                                                 
|                  |  |                                                                                                                                                                                                                                                   
|12.1              |  | Certification
  by CEO pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|12.2              |  | Certification
  by CFO pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|13.1              |  | Certification
  of CEO pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                              
|                  |  |                                                                                                                                                                                                                                                   
|13.2              |  | Certification
  of CFO pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                              

|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
| 
|* | Incorporated
  herein by reference to our registration statement on Form F-1 (No. 333-4822).

124

---

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**   | Incorporated
  herein by reference to Matavs Annual Report on Form 20-F for the fiscal year
  ending December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|***  | Incorporated
  herein by reference to Matavs Annual Report on Form 20-F for the fiscal year
  ending December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|**** | Incorporated
  herein by reference to Matavs Annual Report on Form 20-F for the fiscal year
  ending December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The terms of
  the Cable Broadcast License granted to Cable Systems Media Haifa - Hadera Ltd.
  are substantially identical to the terms of the Cable Broadcast License
  granted to Cable Systems Media Ltd.
  In accordance with Rule 12b-31, only the latter is exhibited hereto
  (Exhibit 4 (b)(ii)(b)-A).  The only
  substantial differences between the two licenses are in relation to fees and
  license areas.  An English translation
  of the annexes of the licenses relating to these issues is exhibited hereto
  separately for each license.

125

---

---



GLOSSARY OF SELECTED TERMS

The
following explanations are not intended as technical definitions, but to assist
the reader to understand certain terms as used in this annual report.

GLOSSARY

ADSL:asymmetric
digital subscriber line, refers to a modem technology that provides enhanced
and affordable access to the Internet, video streaming, and a wide variety of
other multimedia broadband services over existing copper twisted-pair
wire-lines. The ADSL is the basic and most commonly used technology (of the DSL
family) offered by telecommunication companies.

Broadband:a general
term used to describe wide bandwidth equipment or networks which carry large
amounts of analog and digital information over a frequency spectrum. A
broadband cable television and telecommunications network can deliver multiple
channels and other services.

Buildout:refers to
the process of digging, laying cable, filling, and covering underground
trenches in the streets which pass by the homes and installing and connecting
the necessary electronic equipment in a license area.

Cable television:refers
to a cable television network which employs transmission over coaxial and/or
fiber-optic cable to transmit multiple channels carrying images, sound and
data, between a central facility and an individual subscribers television set.
Networks may allow one-way or two-way transmission from a HeadEnd to a
subscriber with a return path to the HeadEnd.

Cable television operator:refers
to the entity which has been granted a Cable Broadcast License, by the Ministry
of Communications pursuant to its authority under regulations promulgated
within the scope of the Telecommunications Law, for the purpose of providing
cable television services for a specific license area, building and operating a
cable television network. The current cable television operators previously
operated under exclusive franchises granted by the Ministry of Communications.

Churn:refers to the
discontinuance of cable television services to a subscriber either, voluntarily
or involuntarily, and commonly measured as a rate from period to period.
Subscribers who disconnect and simultaneously reconnect are not included as
having disconnected for purposes of calculating the churn rate.

Churn rate:refers
to cable television subscriber termination rates expressed by calculating the
total number of disconnected cable television subscribers during the relevant
period as a percentage of the average number of cable television subscribers
during that period.

Coaxial cable:refers
to a cable consisting of a central conductor surrounded by and insulated from
another conductor. It is the standard material used in traditional cable
television networks. Signals are transmitted through this cable at different
frequencies, giving a channel capacity greater than the capacity of a twisted
pair cable, but smaller than the capacity of a fiber-optic cable.

Council:refers to
the Israeli Council for Cable and Satellite Broadcasting.

Dish:refers to an
antenna shaped like a dish used to receive television signals from a satellite.

DBS:refers to
direct broadcasting satellite services.

Download:refers to
the transfer of information from the network to a computer, such as games or
music files.

Downstream Path:refers
to a broad-band (85-860MHz), One-to-Many HFC network segment, which carries
RF signals (TV Channels) from the network HeadEnd, Down to all the
subscribers homes.  (Very basic, One-Way
Cable services utilize the downstream path only).

DSL:digital
subscriber line, refers to a modem technology that provides enhanced and
affordable access to the Internet, video streaming, and a wide variety of other
multimedia broadband services over existing copper twisted-pair wire-lines; DSL
operates with different data rates in the two directions.  The ADSL is part of the DSL technology
family.

126

---

---



EPG Services:refers
to electronic program guide services and broadcasting.

Fiber-optic cable:refers
to a cable made of glass fibers through which signals are transmitted as a
light energy. This cable is capable of carrying a large number of channels and
other data and telecommunications information.

GSM:refers to the
global system for mobile communications. This system is a comprehensive digital
standard for the operation of all elements of a cellular telephone system. GSM
originated in Europe, but is now the most popular digital mobile telephone
standard used worldwide.

HeadEnd:refers to a collection of hardware, typically
including, satellite dishes, satellite receivers, modulators, amplifiers and
videocassette playback machines. After being processed, signals are then
combined for distribution within the cable television network.

High Speed Internet over cable:refers
to High Speed Internet access over cable broadband infrastructure, through the
use of a cable modem and personal computer.

Homes passed:is an
expression in common usage and referring to the measurement of the size of a
cabled area, meaning the total number of premises which have the potential of
becoming connected to a cable television network. A home is deemed passed if it
can be connected to the cable television distribution network without further
extension of trunk transmission lines.

Inside Wiring:refers
to a part of the public telecommunications network that is located in the
premises of the subscriber, and is designed to serve the premises of only such
subscriber

Interactive services:refers
to different services by way of interactive applications that are provided to
our digital subscribers through the use of the subscribers digital set-top
box.

LMDS:refers to
local multipoint distribution system, which is a point to multipoint service
with a two-way capability to transmit voice, data and video information. LMDS
offers innovative consumer services such as two way interactive video, advanced
teleconferencing, telemedicine, telecommuting and high-speed data services.

Minister:refers to
the Israeli Minister of Communications

Off-air TV:refers
to over-the-air broadcast television channels that are available to viewers in
Israel free of charge.

Pay-Per-View:refers
to the payment made for individual cable television films or events on per
program basis.

Penetration:refers
to the measurement of the take-up of cable television services. Penetration is
calculated by dividing the total number of subscribers by the total number of
homes passed.

PVR:refers
to personal video recorder.  Refers to a
device, based on large storage (hard-drive) and an easy-to-use user interface.
PVR services allow the viewer to decide what content to record along with
providing them with the convenience of being able to watch them whenever they
want.  PVR services also allow the
viewer to stop, pause, fast-forward, rewind and restart the viewing, in a
similar manner to the operation of a video tape recorder.

SDH:refers to
Synchronous Digital Hierarchy.  SDH is
the international standard for transmitting digital information over optical
networks.  It is a synchronous digital
transport system with a built-in management channel for remote management of
complex topologies.

Set-top box:refers
to an auxiliary device that usually rests on top of or adjacent to a television
receiver. The set-top box is used to receive analog or digital transmissions
and digital television to be viewed on an ordinary television set. The set-top
device may convert television or signals to a form or format that allows
end-user channel selection or interaction. It may tune channels that the
television does not tune and may include descrambling circuitry. It may also
include an electronic program guide.

Subscriber:refers
to a subscriber to a cable television distribution system for cable television
services.

Telecommunications Law:refers
to the Israeli Telecommunications Law (Telecommunications and Broadcasting),
1982, as amended, and the rules and regulations promulgated thereunder by the
Ministry of Communications and the Council for Cable and Satellite
Broadcasting. The Telecommunications Law governs the licensing and operation of
the telecommunications industry in the State of Israel.

127

---

---



Telephony:refers to
the provision of telephone services.

Terminal equipment:refers
to telecommunications equipment for use by a subscriber, which is or is
intended to be connected from the subscribers premises to the public
telecommunications network by means of an interface intended for this purpose

Two-way network:refers
to a network which allows the sending and receiving of signals (as opposed to a
one-way network).

Upload:refers to
the transfer of information from a computer to the network, such as sending an
e-mail.

Upstream Path:refers
to a broad-band (5-65MHz), Many-to-One HFC network segment, which carries RF
signals back from all the subscribers homes UP to the network HeadEnd.
Together with the downstream path, the Upstream creates BI-Directional network,
which enables the deployment of advanced, Two-Way services (such as
Fast-Internet-Access, Interactive TV and cable telephony).

VOD:refers to video
on demand, a service that allows television viewers to instantaneously select
and view a wide range of contents at any time they choose. VOD services also
allow the viewer to stop, pause, fast-forward, rewind and restart the viewing,
in a similar manner to the operation of a video tape recorder.

128

---

---



SIGNATURES

The
Company hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.

|                                 |                          
|-------------------------------- | -------------------------
|MATAV  CABLE SYSTEMS MEDIA LTD.
|/s/ Tal
  Peres                 
|                                
|Name:                            | Tal Peres                
|Title:                           | Chief
  Financial Officer

|      |                
|----- | ---------------
|Date: | June 30,
  2005

|                 |                          
|---------------- | -------------------------
|/s/ Amit
  Levin
|                
|Name:            | Amit Levin               
|Title:           | Chief
  Executive Officer

|      |                
|----- | ---------------
|Date: | June 30,
  2005

129

---

---



MATAV - CABLE SYSTEMS MEDIA LTD.

FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2004

INDEX

|                                                          |             
|--------------------------------------------------------- | ------------
|                                                          | Page        
|                                                          |             
|                                                          |             
|Report of Independent Registered Public
  Accounting Firm | F2         
|                                                          |             
|Balance Sheets  Consolidated and the Company             | F3  F6   
|                                                          |             
|Statements of Operations  Consolidated and
  the Company | F7  F8   
|                                                          |             
|Statements of Changes in Shareholders
  Equity           | F9         
|                                                          |             
|Statements of Cash Flows  Consolidated and
  the Company | F10  F14 
|                                                          |             
|Notes to Financial Statements                             | F15  F109
|                                                          |             
|Appendix to Financial Statements                          | F110       

---

---



|                   |   |                                                                          |   |                                               
|------------------ | - | ------------------------------------------------------------------------ | - | ----------------------------------------------
|ERNST & YOUNG LOGO | 3⁄4 | Kost
  Forer Gabbay & Kasierer
  3 Aminadav St.
  Tel-Aviv 67067, Israel | 3⁄4 | Phone: 972-3-6232525
  Fax:      972-3-5622555

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

MATAV - CABLE SYSTEMS MEDIA LTD.

We
have audited the accompanying balance sheets of Matav  Cable Systems Media Ltd.
(the Company) as of December 31, 2004 and 2003 and the consolidated balance
sheets as of such dates and the related statements of operations, changes in
shareholders equity and cash flows  Company and consolidated  for each of the
three years in the period ended December 31, 2004. These financial statements
are the responsibility of the Companys board of directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We
did not audit the financial statements of a jointly controlled (proportionately
consolidated) company whose assets included in consolidation constitute
approximately 4.9% and 5.7% of total consolidated assets as of December 31,
2004 and 2003, respectively, and whose revenues constitute approximately 1% of
total consolidated revenues for the year ended December 31, 2004. Also, we did
not audit the financial statements of an affiliate (an available forsale
investment under US GAAP), the investment in which, at equity, amounted to NIS
91,334 thousand and NIS 65,373 thousand as of December 31, 2004 and 2003,
respectively, and the Companys equity in its earnings amounted to NIS 25,961
thousand, NIS 64,038 thousand and NIS 11,119 thousand for the years ended
December 31, 2004, 2003 and 2002, respectively, in financial statements
prepared under Israeli GAAP. Those financial statements were audited by other
auditors, whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for those companies, is based solely on the
reports of the other auditors.

We
conducted our audits in accordance with the Standards of Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.  Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits and
the reports of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position  of the Company and consolidated  as of
December 31, 2004 and 2003 and the results of operations and cash flows  of
the Company and consolidated  for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in Israel, which differ in certain respects from U.S. generally accepted
accounting principles (see Note 26 to the consolidated financial statements).

Without
qualifying our opinion, we draw attention to the matters described in Note 15
to the financial statements regarding contingent liabilities and claims filed
against the Company and its subsidiaries.

|                                                                              |                                                               
|----------------------------------------------------------------------------- | --------------------------------------------------------------
|Tel-Aviv,
  Israel                                                            | /s/ KOST FORER GABBAY & KASIERER
 KOST FORER GABBAY & KASIERER
|March 20,
  2005, except as to notes 24 and 26 which are dated June 30, 2005. | A Member of Ernst & Young Global                              

- F2 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|CONSOLIDATED BALANCE SHEETS     
|                                

|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|------------------------------------------------ |  | -------------- | -- | ------------ |  | ---------------------------------------- |  | ---------------------------------- | --------- |  |  | ------- | 
|                                                 |  |                |    | December 31, |  | Convenience
  translation
  (Note 2(b)3) | 
|                                                 |  |                |    |              |  |                                          | 
|                                                 |  |                |    | 2003         |  | 2004                                     |  | December 31,
  2004
  U.S. dollars |          
|                                                 |  |                |    |              |  |                                          |  |                                   
|                                                 |  |                |    | NIS          |  |                                         
|                                                 |  |                |    |              |  |                                          | 
|                                                 |  | Note           |    | Adjusted (2) |  | Reported (1)                             |  |                                    |          
|                                                 |  |                |    |              |  |                                          |  |                                    |          
|                                                 |  | (In thousands) |   
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|ASSETS                                           |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|CURRENT
  ASSETS:                                |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|Cash and cash equivalents                        |  |                | 3  |              |  | 37,948                                   |  |                                    | 24,250    |  |  | 5,629   | 
|Short-term deposit                               |  |                |    |              |  |                                         |  |                                    | 50        |  |  | 12      | 
|Trade receivables                                |  |                | 4a |              |  | 83,151                                   |  |                                    | 75,458    |  |  | 17,515  | 
|Other accounts receivable                        |  |                | 4b |              |  | 19,765                                   |  |                                    | 20,010    |  |  | 4,645   | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  | 140,864                                  |  |                                    | 119,768   |  |  | 27,801  | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|INVESTMENTS
  AND LONG-TERM RECEIVABLES:         |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|Investments in affiliates                        |  |                | 5b |              |  | 66,807                                   |  |                                    | 101,736   |  |  | 23,616  | 
|Investment in non-marketable equity
  securities |  |                | 5c |              |  | 16,241                                   |  |                                    |          |  |  |        | 
|Investment in limited partnerships               |  |                | 6  |              |  | 2,057                                    |  |                                    | 1,656     |  |  | 384     | 
|Rights to broadcast films and programs           |  |                | 7  |              |  | 34,927                                   |  |                                    | 26,509    |  |  | 6,153   | 
|Other receivables                                |  |                |    |              |  | 885                                      |  |                                    | 601       |  |  | 140     | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  | 120,917                                  |  |                                    | 130,502   |  |  | 30,293  | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|PROPERTY, PLANT AND EQUIPMENT:                   |  |                | 8  |              |  |                                          |  |                                    |           |  |  |         | 
|Cost                                             |  |                |    |              |  | 2,028,447                                |  |                                    | 2,119,060 |  |  | 491,890 | 
|Less  accumulated depreciation                  |  |                |    |              |  | 1,151,622                                |  |                                    | 1,293,549 |  |  | 300,267 | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  | 876,825                                  |  |                                    | 825,511   |  |  | 191,623 | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|INTANGIBLE
  ASSETS AND DEFERRED CHARGES, NET    |  |                | 9  |              |  | 3,946                                    |  |                                    | 3,101     |  |  | 720     | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 
|                                                 |  |                |    |              |  | 1,142,552                                |  |                                    | 1,078,882 |  |  | 250,437 | 
|                                                 |  |                |    |              |  |                                          |  |                                    |           |  |  |         | 

|    |                                        
|--- | ---------------------------------------
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F3 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|CONSOLIDATED BALANCE SHEETS     
|                                

|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --- | ------------ | ------------ | ------------ | ---------------------------------------- |  | --------- | - |  | ------- | -
|                                                                                                                                                                                                                              |  |                |     |              |              |              | Convenience
  translation
  (Note 2(b)3) | 
|                                                                                                                                                                                                                              |  |                |     |              | December 31, |              |                                          | 
|                                                                                                                                                                                                                              |  |                |     |              |              |              | December 31,                             | 
|                                                                                                                                                                                                                              |  |                |     |              | 2003         |              | 2004                                     |  | 2004      |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |  
|                                                                                                                                                                                                                              |  |                |     | NIS          |              | U.S. dollars |                                         
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                         
|                                                                                                                                                                                                                              |  | Note           |     | Adjusted (2) |              | Reported (1) |                                          |  |          
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |          
|                                                                                                                                                                                                                              |  | (In thousands) |    
|LIABILITIES AND
SHAREHOLDERS EQUITY                                                                                                                                                                                          |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|CURRENT
  LIABILITIES:                                                                                                                                                                                                        |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|Bank credit                                                                                                                                                                                                                   |  |                | 10  |              |              | 435,403      |                                          |  | 465,339   |   |  | 108,018 |  
|Current maturities of debentures                                                                                                                                                                                              |  |                | 14  |              |              | 33,701       |                                          |  | 34,005    |   |  | 7,893   |  
|Trade payables                                                                                                                                                                                                                |  |                | 11a |              |              | 94,699       |                                          |  | 104,282   |   |  | 24,207  |  
|Jointly controlled entity  current
account                                                                                                                                                                                   |  |                |     |              |              | 17,690       |                                          |  | 18,112    |   |  | 4,204   |  
|Other accounts payable                                                                                                                                                                                                        |  |                | 11b |              |              | 158,982      |                                          |  | 201,943   |   |  | 46,876  |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              | 740,475      |                                          |  | 823,681   |   |  | 191,198 |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|LONG-TERM
  LIABILITIES:                                                                                                                                                                                                      |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|Loans and debentures (net of current
  maturities):                                                                                                                                                                           |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|Loans from bank and others                                                                                                                                                                                                    |  |                | 13  |              |              | 127,403      |                                          |  | 101,457   |   |  | 23,551  |  
|Debentures                                                                                                                                                                                                                    |  |                | 14  |              |              | 66,145       |                                          |  | 33,201    |   |  | 7,707   |  
|Customers deposits for converters, net of
  accumulated amortization                                                                                                                                                         |  |                | 2l  |              |              | 25,675       |                                          |  | 20,279    |   |  | 4,707   |  
|Accrued severance pay, net                                                                                                                                                                                                    |  |                | 12  |              |              | 2,106        |                                          |  | 2,483     |   |  | 576     |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              | 221,329      |                                          |  | 157,420   |   |  | 36,541  |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|COMMITMENTS,
  CONTINGENT LIABILITIES AND LIENS                                                                                                                                                                               |  |                | 15  |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|SHAREHOLDERS
  EQUITY:                                                                                                                                                                                                       |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|Share capital:                                                                                                                                                                                                                |  |                | 16  |              |              |              |                                          |  |           |   |  |         |  
|Ordinary shares of NIS 1.00 par value
   authorized: 100,000,000 shares as of December 31, 2004 and 2003; issued and
  outstanding: 30,220,477 shares and 30,203,918 shares as of December 31, 2004
  and 2003, respectively |  |                |     |              |              | 48,882       |                                          |  | 48,899    |   |  | 11,351  |  
|Additional paid-in capital                                                                                                                                                                                                    |  |                |     |              |              | 375,538      |                                          |  | 375,538   |   |  | 87,172  |  
|Accumulated deficit                                                                                                                                                                                                           |  |                |     |              |              | (243,672     | )                                        |  | (326,656  | ) |  | (75,825 | )
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              | 180,748      |                                          |  | 97,781    |   |  | 22,698  |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              | 1,142,552    |                                          |  | 1,078,882 |   |  | 250,437 |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |              |              |                                          |  |           |   |  |         |  

|                                                                         |                                        
|------------------------------------------------------------------------ | ---------------------------------------
|(1)                                                                      | See Note 2.                            
|(2)                                                                      | Adjusted to
  the NIS of December 2003.
|                                                                         |                                        
|The
accompanying notes are an integral part of the financial statements.

- F4 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|BALANCE SHEETS - THE COMPANY    
|                                

|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|---------------------------------------------------- |  | -------------- | -- | ------------ |  | ------------ |  | ---------------------------------------- | --------- |  |  | ------- | 
|                                                     |  |                |    |              |  |              |  | Convenience
  translation
  (Note 2(b)3) |          
|                                                     |  |                |    | December 31, |  |              | 
|                                                     |  |                |    |              |  | December 31, | 
|                                                     |  |                |    | 2003         |  | 2004         |  | 2004                                     |          
|                                                     |  |                |    |              |  |              |  |                                          |          
|                                                     |  |                |    | NIS          |  | U.S. dollars | 
|                                                     |  |                |    |              |  |              | 
|                                                     |  | Note           |    | Adjusted (2) |  | Reported (1) |  |                                          |          
|                                                     |  |                |    |              |  |              |  |                                          |          
|                                                     |  | (In thousands) |   
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|ASSETS                                               |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|CURRENT
  ASSETS:                                    |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|Cash and cash equivalents                            |  |                | 3  |              |  | 35,879       |  |                                          | 21,602    |  |  | 5,014   | 
|Trade receivables                                    |  |                | 4a |              |  | 45,400       |  |                                          | 37,398    |  |  | 8,682   | 
|Other accounts receivable                            |  |                | 4b |              |  | 19,431       |  |                                          | 15,321    |  |  | 3,556   | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  | 100,710      |  |                                          | 74,321    |  |  | 17,252  | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|INVESTMENTS
  AND LONG-TERM RECEIVABLES:             |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|Investments in subsidiaries and long-term
  accounts |  |                | 5a |              |  | 247,348      |  |                                          | 254,100   |  |  | 58,983  | 
|Investments in affiliates                            |  |                | 5b |              |  | 75,992       |  |                                          | 114,230   |  |  | 26,516  | 
|Investment in non-marketable equity
  securities     |  |                | 5c |              |  | 16,227       |  |                                          |          |  |  |        | 
|Other receivables                                    |  |                |    |              |  | 885          |  |                                          | 601       |  |  | 140     | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  | 340,452      |  |                                          | 368,931   |  |  | 85,639  | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|PROPERTY,
  PLANT AND EQUIPMENT:                     |  |                | 8  |              |  |              |  |                                          |           |  |  |         | 
|Cost                                                 |  |                |    |              |  | 1,429,183    |  |                                          | 1,473,217 |  |  | 341,972 | 
|Less  accumulated depreciation                      |  |                |    |              |  | 816,948      |  |                                          | 915,730   |  |  | 212,565 | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  | 612,235      |  |                                          | 557,487   |  |  | 129,407 | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|INTANGIBLE
  ASSETS AND DEFERRED CHARGES, NET        |  |                | 9  |              |  | 1,330        |  |                                          | 616       |  |  | 143     | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 
|                                                     |  |                |    |              |  | 1,054,727    |  |                                          | 1,001,355 |  |  | 232,441 | 
|                                                     |  |                |    |              |  |              |  |                                          |           |  |  |         | 

|    |                                        
|--- | ---------------------------------------
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F5 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|BALANCE SHEETS  THE COMPANY    
|                                

|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --- | ------------ |  | ---------------------------------------- | - | ---- | --------- | - |  | ------- | -
|                                                                                                                                                                                                                              |  |                |     |              |  | Convenience
  translation
  (Note 2(b)3) |  
|                                                                                                                                                                                                                              |  |                |     | December 31, |  |                                          |  
|                                                                                                                                                                                                                              |  |                |     |              |  | December 31,                             |  
|                                                                                                                                                                                                                              |  |                |     | 2003         |  | 2004                                     |   | 2004 |          
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |          
|                                                                                                                                                                                                                              |  |                |     | NIS          |  | U.S. dollars                             |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |  
|                                                                                                                                                                                                                              |  | Note           |     | Adjusted (2) |  | Reported (1)                             |   |      |          
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |          
|                                                                                                                                                                                                                              |  | (In thousands) |    
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                          |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|CURRENT LIABILITIES:                                                                                                                                                                                                          |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|Bank credit                                                                                                                                                                                                                   |  |                | 10  |              |  | 394,896                                  |   |      | 424,992   |   |  | 98,652  |  
|Current maturities of debentures                                                                                                                                                                                              |  |                | 14  |              |  | 33,701                                   |   |      | 34,005    |   |  | 7,893   |  
|Trade payables                                                                                                                                                                                                                |  |                | 11a |              |  | 63,617                                   |   |      | 74,917    |   |  | 17,390  |  
|Subsidiaries  current account                                                                                                                                                                                                |  |                |     |              |  | 15,988                                   |   |      | 18,619    |   |  | 4,322   |  
|Other accounts payable                                                                                                                                                                                                        |  |                | 11b |              |  | 140,608                                  |   |      | 184,498   |   |  | 42,827  |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  | 648,810                                  |   |      | 737,031   |   |  | 171,084 |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                                        |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|Loans and debentures (net of current
  maturities):                                                                                                                                                                           |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|Loans from bank and others                                                                                                                                                                                                    |  |                | 13  |              |  | 127,403                                  |   |      | 101,457   |   |  | 23,552  |  
|Debentures                                                                                                                                                                                                                    |  |                | 14  |              |  | 67,402                                   |   |      | 34,005    |   |  | 7,893   |  
|Losses over investment in subsidiaries                                                                                                                                                                                        |  |                | 5a  |              |  | 10,778                                   |   |      | 15,157    |   |  | 3,518   |  
|Customers deposits for converters, net of
  accumulated amortization                                                                                                                                                         |  |                | 2l  |              |  | 18,882                                   |   |      | 14,901    |   |  | 3,459   |  
|Accrued severance pay liability, net                                                                                                                                                                                          |  |                | 12  |              |  | 704                                      |   |      | 1,023     |   |  | 237     |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  | 225,169                                  |   |      | 166,543   |   |  | 38,659  |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|COMMITMENTS, CONTINGENT LIABILITIES AND
  LIENS                                                                                                                                                                               |  |                | 15  |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|SHAREHOLDERS EQUITY:                                                                                                                                                                                                         |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|Share capital:                                                                                                                                                                                                                |  |                | 16  |              |  |                                          |   |      |           |   |  |         |  
|Ordinary shares of NIS 1.00 par value 
  authorized: 100,000,000 shares as of December 31, 2004 and 2003; issued and
  outstanding: 30,220,477 shares and 30,203,918 shares as of December 31, 2004
  and 2003, respectively |  |                |     |              |  | 48,882                                   |   |      | 48,899    |   |  | 11,351  |  
|Additional paid-in capital                                                                                                                                                                                                    |  |                |     |              |  | 375,538                                  |   |      | 375,538   |   |  | 87,172  |  
|Accumulated deficit                                                                                                                                                                                                           |  |                |     |              |  | (243,672                                 | ) |      | (326,656  | ) |  | (75,825 | )
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  | 180,748                                  |   |      | 97,781    |   |  | 22,698  |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  
|                                                                                                                                                                                                                              |  |                |     |              |  | 1,054,727                                |   |      | 1,001,355 |   |  | 232,441 |  
|                                                                                                                                                                                                                              |  |                |     |              |  |                                          |   |      |           |   |  |         |  

|    |                                        
|--- | ---------------------------------------
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F6 -

---

---



|                                     
|-------------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.     
|                                     
|CONSOLIDATED STATEMENTS OF OPERATIONS
|                                     

|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|------------------------------------------------------------------------------ |  | ---------------------------------------- | --- | ----------------------- |  | -------------------------------- | - | ---- | ------- | ---------------------------------------- |  | ------- | - |  | ------- | -
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         | Convenience
  translation
  (Note 2(b)3) | 
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          | 
|                                                                               |  |                                          |     | Year ended December 31, |  | Year ended
  December 31,
  2004 |  
|                                                                               |  |                                          |     |                         |  |                                 
|                                                                               |  |                                          |     | 2002                    |  | 2003                             |   | 2004 |         |                                         
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          | 
|                                                                               |  |                                          |     | NIS                     |  | U.S. dollars                     |  
|                                                                               |  |                                          |     |                         |  |                                  |  
|                                                                               |  | Note                                     |     | Adjusted (2)            |  | Reported (1)                     |   |      |        
|                                                                               |  |                                          |     |                         |  |                                  |   |      |        
|                                                                               |  | (In thousands, except per share amounts) |    
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Revenues                                                                       |  |                                          | 2j  |                         |  | 495,536                          |   |      | 545,480 |                                          |  | 584,564 |   |  | 135,693 |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Operating expenses:                                                            |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Depreciation                                                                   |  |                                          |     |                         |  | 161,996                          |   |      | 160,521 |                                          |  | 144,902 |   |  | 33,636  |  
|Other operating expenses                                                       |  |                                          | 19a |                         |  | 345,441                          |   |      | 306,165 |                                          |  | 327,586 |   |  | 76,041  |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Total operating
  expenses                                                     |  |                                          |     |                         |  | 507,437                          |   |      | 466,686 |                                          |  | 472,488 |   |  | 109,677 |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Gross profit (loss)                                                            |  |                                          |     |                         |  | (11,901                          | ) |      | 78,794  |                                          |  | 112,076 |   |  | 26,016  |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Selling, marketing, general and
  administrative expenses:                     |  |                                          | 19b |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Selling and marketing                                                          |  |                                          |     |                         |  | 40,643                           |   |      | 43,954  |                                          |  | 63,676  |   |  | 14,782  |  
|General and administrative                                                     |  |                                          |     |                         |  | 46,137                           |   |      | 42,659  |                                          |  | 45,391  |   |  | 10,536  |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  | 86,780                           |   |      | 86,613  |                                          |  | 109,067 |   |  | 25,318  |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Operating income (loss)                                                        |  |                                          |     |                         |  | (98,681                          | ) |      | (7,819  | )                                        |  | 3,009   |   |  | 698     |  
|Financial expenses, net                                                        |  |                                          | 19c |                         |  | (48,089                          | ) |      | (83,958 | )                                        |  | (50,333 | ) |  | (11,684 | )
|Other income (expenses), net                                                   |  |                                          | 19d |                         |  | 278,535                          |   |      | 80,996  |                                          |  | (42,680 | ) |  | (9,907  | )
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Income (loss) before taxes on income                                           |  |                                          |     |                         |  | 131,765                          |   |      | (10,781 | )                                        |  | (90,004 | ) |  | (20,893 | )
|Taxes
  on income                                                              |  |                                          | 17  |                         |  | 108,851                          |   |      | 35,576  |                                          |  | 7,281   |   |  | 1,690   |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Income (loss) after taxes on income                                            |  |                                          |     |                         |  | 22,914                           |   |      | (46,357 | )                                        |  | (97,285 | ) |  | (22,583 | )
|Equity in earnings of affiliates, net                                          |  |                                          | 5   |                         |  | 10,910                           |   |      | 40,907  |                                          |  | 14,301  |   |  | 3,320   |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Net income (loss)                                                              |  |                                          |     |                         |  | 33,824                           |   |      | (5,450  | )                                        |  | (82,984 | ) |  | (19,263 | )
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Basic and diluted net earnings (loss) per Ordinary share  NIS                 |  |                                          | 2q  |                         |  | 1.17                             |   |      | (0.19   | )                                        |  | (2.74   | ) |  | (0.64   | )
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Basic and diluted net earnings (loss) per ADS  NIS                            |  |                                          | 2q  |                         |  | 2.34                             |   |      | (0.38   | )                                        |  | (5.48   | ) |  | (1.28   | )
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Weighted average number of shares
  outstanding during the year (in thousands) |  |                                          | 2q  |                         |  | 28,860                           |   |      | 29,347  |                                          |  | 30,217  |   |  | 30,217  |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  
|Weighted average number of ADS outstanding
  during the year (in thousands)    |  |                                          | 2q  |                         |  | 14,430                           |   |      | 14,674  |                                          |  | 15,108  |   |  | 15,108  |  
|                                                                               |  |                                          |     |                         |  |                                  |   |      |         |                                          |  |         |   |  |         |  

|                                                                         |                                        
|------------------------------------------------------------------------ | ---------------------------------------
|(1)                                                                      | See Note 2.                            
|(2)                                                                      | Adjusted to
  the NIS of December 2003.
|The
accompanying notes are an integral part of the financial statements.

- F7 -

---

---



|                                      
|--------------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.      
|                                      
|STATEMENTS OF OPERATIONS - THE COMPANY
|                                      

|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|------------------------------------------------------------------------------ |  | ---- | --- | ------------ | ---------------------------------------- | ------------ | ------------------------- |  | ------- | - | ---- | -------- | - | ---------------------------------------- | ------- | -
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   | Convenience
  translation
  (Note 2(b)3) |        
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |        
|                                                                               |  |      |     |              | Year ended
  December 31,                |              | Year ended
  December 31, | 
|                                                                               |  |      |     |              |                                          |              |                          
|                                                                               |  |      |     |              | 2002                                     |              | 2003                      |  | 2004    |   | 2004 |         
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |         
|                                                                               |  |      |     |              | NIS                                      |              | U.S.
  dollars            | 
|                                                                               |  |      |     |              |                                          |              |                           | 
|                                                                               |  | Note |     | Adjusted (2) |                                          | Reported (1) |                           |  |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |  
|                                                                               |  |      |     |              | (In thousands, except per share amounts) |             
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Revenues                                                                       |  |      | 2j  |              |                                          | 347,890      |                           |  | 367,326 |   |      | 370,275  |   |                                          | 85,951  |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Operating
  expenses:                                                          |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Depreciation                                                                   |  |      |     |              |                                          | 116,151      |                           |  | 116,878 |   |      | 103,715  |   |                                          | 24,075  |  
|Other operating expenses                                                       |  |      | 19a |              |                                          | 229,917      |                           |  | 207,205 |   |      | 223,632  |   |                                          | 51,911  |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                              
|Total
  operating expenses                                                     |  |      |     |              |                                          | 346,068      |                           |  | 324,083 |   |      | 327,347  |   |                                          | 75,986  |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Gross profit                                                                   |  |      |     |              |                                          | 1,822        |                           |  | 43,243  |   |      | 42,928   |   |                                          | 9,965   |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Selling, marketing, general and
  administrative expenses:                     |  |      | 19b |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Selling and
  marketing                                                        |  |      |     |              |                                          | 29,124       |                           |  | 26,878  |   |      | 34,988   |   |                                          | 8,122   |  
|General and
  administrative                                                   |  |      |     |              |                                          | 29,899       |                           |  | 28,288  |   |      | 30,340   |   |                                          | 7,043   |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          | 59,023       |                           |  | 55,166  |   |      | 65,328   |   |                                          | 15,165  |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Operating
  loss                                                               |  |      |     |              |                                          | (57,201      | )                         |  | (11,923 | ) |      | (22,400  | ) |                                          | (5,200  | )
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Financial
  expenses, net                                                      |  |      | 19c |              |                                          | (44,125      | )                         |  | (79,387 | ) |      | (45,961  | ) |                                          | (10,669 | )
|Other income
  (expenses), net                                                 |  |      | 19d |              |                                          | 286,574      |                           |  | 84,941  |   |      | (41,976  | ) |                                          | (9,744  | )
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Income
  (loss) before taxes on income                                         |  |      |     |              |                                          | 185,248      |                           |  | (6,369  | ) |      | (110,337 | ) |                                          | (25,613 | )
|Taxes on
  income                                                              |  |      | 17  |              |                                          | 108,851      |                           |  | 35,496  |   |      | 4,516    |   |                                          | 1,048   |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Income
  (loss) after taxes on income                                          |  |      |     |              |                                          | 76,397       |                           |  | (41,865 | ) |      | (114,853 | ) |                                          | (26,661 | )
|Equity in earnings (losses) of affiliates
  and subsidiaries, net              |  |      | 5   |              |                                          | (42,573      | )                         |  | 36,415  |   |      | 31,869   |   |                                          | 7,398   |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Net income
  (loss)                                                            |  |      |     |              |                                          | 33,824       |                           |  | (5,450  | ) |      | (82,984  | ) |                                          | (19,263 | )
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Basic and diluted net earnings (loss) per
  Ordinary share  NIS               |  |      | 2q  |              |                                          | 1.17         |                           |  | (0.19   | ) |      | (2.74    | ) |                                          | (0.64   | )
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Basic and diluted net earnings (loss) per
  ADS  NIS                          |  |      | 2q  |              |                                          | 2.34         |                           |  | (0.38   | ) |      | (5.48    | ) |                                          | (1.28   | )
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Weighted average number of shares
  outstanding during the year (in thousands) |  |      | 2q  |              |                                          | 28,860       |                           |  | 29,347  |   |      | 30,217   |   |                                          | 30,217  |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  
|Weighted average number of ADS outstanding
  during the year (in thousands)    |  |      | 2q  |              |                                          | 14,430       |                           |  | 14,674  |   |      | 15,108   |   |                                          | 15,108  |  
|                                                                               |  |      |     |              |                                          |              |                           |  |         |   |      |          |   |                                          |         |  

|                                                                         |                                        
|------------------------------------------------------------------------ | ---------------------------------------
|(1)                                                                      | See Note 2.                            
|(2)                                                                      | Adjusted to the NIS of
  December 2003.
|The
accompanying notes are an integral part of the financial statements.

- F8 -

---

---



|                                             
|---------------------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.             
|                                             
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                                             

|                                          |  |                                 |        |                                |  |                       |  |                                                   |         |   |  |          |   |  |         |   |  |         |  
|----------------------------------------- |  | ------------------------------- | ------ | ------------------------------ |  | --------------------- |  | ------------------------------------------------- | ------- | - |  | -------- | - |  | ------- | - |  | ------- | -
|                                          |  | Share
  capital                 |        | Additional
  paid-in
  capital |  | Accumulated
  deficit |  | Cost of
  Company
  shares held
  by
  subsidiary |         |   |  |         
|                                          |  |                                 |        |                                |  |                       |  |                                                   |        
|                                          |  | Number of
  shares              |        | Amount                         |  |                       |  |                                                   | Total   |  
|                                          |  |                                 |        |                                |  |                       |  |                                                   |         |   |  |          |  
|                                          |  | Adjusted
  NIS in thousands (2) |       
|                                          |  |                                 |       
|                                          |  |                                 |        |                                |  |                       |  |                                                   |         |   |  |          |   |  |         |   |  |         |  
|Balance at January 1, 2002                |  |                                 | 30,204 |                                |  | 48,882                |  |                                                   | 401,654 |   |  | (272,046 | ) |  | (66,205 | ) |  | 112,285 |  
|Sale of Company shares held by
subsidiary |  |                                 |       |                                |  |                      |  |                                                   | (325    | ) |  |         |   |  | 1,288   |   |  | 963     |  
|Net income for the year                   |  |                                 |       |                                |  |                      |  |                                                   |        |   |  | 33,824   |   |  |        |   |  | 33,824  |  
|                                          |  |                                 |        |                                |  |                       |  |                                                   |         |   |  |          |   |  |         |   |  |         |  
|                                          |  |                                 |        |                                |  |                       |  |                                                   |         |   |  |          |   |  |         |   |  |         |  
|Balance at December 31, 2002              |  |                                 | 30,204 |                                |  | 48,882                |  |                                                   | 401,329 |   |  | (238,222 | ) |  | (64,917 | ) |  | 147,072 |  
|Sale of Company shares held by subsidiary |  |                                 |       |                                |  |                      |  |                                                   | (25,791 | ) |  |         |   |  | 64,917  |   |  | 39,126  |  
|Loss for the year                         |  |                                 |       |                                |  |                      |  |                                                   |        |   |  | (5,450   | ) |  |        |   |  | (5,450  | )
|                                          |  |                                 |        |                                |  |                       |  |                                                   |         |   |  |          |   |  |         |   |  |         |  
|                                          |  |                                 |        |                                |  |                       |  |                                                   |         |   |  |          |   |  |         |   |  |         |  
|Balance at December 31, 2003              |  |                                 | 30,204 |                                |  | 48,882                |  |                                                   | 375,538 |   |  | (243,672 | ) |  |        |   |  | 180,748 |  
|                                          |  |                                 |        |                                |  |                       |  |                                                   |         |   |  |          |   |  |         |   |  |         |  

|                                       |  |                               |        |  |  |        |  |  |         |  |  |          |   |  |   |  |  |         |  
|-------------------------------------- |  | ----------------------------- | ------ |  |  | ------ |  |  | ------- |  |  | -------- | - |  | - |  |  | ------- | -
|                                       |  | Reported NIS in thousands (1) |       
|                                       |  |                               |       
|                                       |  |                               |        |  |  |        |  |  |         |  |  |          |   |  |   |  |  |         |  
|Balance at January 1, 2004             |  |                               | 30,204 |  |  | 48,882 |  |  | 375,538 |  |  | (243,672 | ) |  |  |  |  | 180,748 |  
|                                       |  |                               |        |  |  |        |  |  |         |  |  |          |   |  |   |  |  |         |  
|Exercise of stock options by employees |  |                               | 17     |  |  | 17     |  |  |        |  |  |         |   |  |  |  |  | 17      |  
|Loss for the year                      |  |                               |       |  |  |       |  |  |        |  |  | (82,984  | ) |  |  |  |  | (82,984 | )
|                                       |  |                               |        |  |  |        |  |  |         |  |  |          |   |  |   |  |  |         |  
|                                       |  |                               |        |  |  |        |  |  |         |  |  |          |   |  |   |  |  |         |  
|Balance at December 31, 2004           |  |                               | 30,221 |  |  | 48,899 |  |  | 375,538 |  |  | (326,656 | ) |  |  |  |  | 97,781  |  
|                                       |  |                               |        |  |  |        |  |  |         |  |  |          |   |  |   |  |  |         |  

|                                       |  |                                      |        |  |  |        |  |  |        |  |  |         |   |  |   |  |  |         |  
|-------------------------------------- |  | ------------------------------------ | ------ |  |  | ------ |  |  | ------ |  |  | ------- | - |  | - |  |  | ------- | -
|                                       |  | Convenience translation (Note 2(b)3) |       
|                                       |  |                                      |       
|                                       |  | U.S. dollars in thousands            |       
|                                       |  |                                      |       
|                                       |  |                                      |        |  |  |        |  |  |        |  |  |         |   |  |   |  |  |         |  
|Balance at January 1, 2004             |  |                                      | 30,204 |  |  | 11,347 |  |  | 87,172 |  |  | (56,562 | ) |  |  |  |  | 41,957  |  
|                                       |  |                                      |        |  |  |        |  |  |        |  |  |         |   |  |   |  |  |         |  
|Exercise of stock options by employees |  |                                      | 17     |  |  | 4      |  |  |       |  |  |        |   |  |  |  |  | 4       |  
|Loss for the year                      |  |                                      |       |  |  |       |  |  |       |  |  | (19,263 | ) |  |  |  |  | (19,263 | )
|                                       |  |                                      |        |  |  |        |  |  |        |  |  |         |   |  |   |  |  |         |  
|                                       |  |                                      |        |  |  |        |  |  |        |  |  |         |   |  |   |  |  |         |  
|Balance at December 31, 2004           |  |                                      | 30,221 |  |  | 11,351 |  |  | 87,172 |  |  | (75,825 | ) |  |  |  |  | 22,698  |  
|                                       |  |                                      |        |  |  |        |  |  |        |  |  |         |   |  |   |  |  |         |  

|    |                                        
|--- | ---------------------------------------
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F9 -

---

---



|                                     
|-------------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.     
|                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     

|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | ------------------------- |  | -------- | - | ---- | -------- | - | ---------------------------------------- | ------- | -
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   | Convenience
  translation
  (Note 2(b)3) |        
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |        
|                                                                                                        |  | Year ended
  December 31, |          | Year ended
  December 31, | 
|                                                                                                        |  |                           |          |                          
|                                                                                                        |  | 2002                      |          | 2003                      |  | 2004     |   | 2004 |         
|                                                                                                        |  |                           |          |                           |  |          |   |      |         
|                                                                                                        |  | NIS                       |          | U.S.
  dollars            | 
|                                                                                                        |  |                           |          |                           | 
|                                                                                                        |  | Adjusted (2)              |          | Reported (1)              |  |          |   |     
|                                                                                                        |  |                           |          |                           |  |          |   |     
|                                                                                                        |  | (In
  thousands)          |         
|Cash flows from operating activities:                                                                   |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Net income (loss) for the year                                                                          |  |                           | 33,824   |                           |  | (5,450   | ) |      | (82,984  | ) |                                          | (19,263 | )
|Adjustments to reconcile net income (loss)
  to net cash provided by (used in) operating activities (a) |  |                           | (123,249 | )                         |  | 101,503  |   |      | 204,244  |   |                                          | 47,410  |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Net cash provided by (used in) operating
  activities                                                   |  |                           | (89,425  | )                         |  | 96,053   |   |      | 121,260  |   |                                          | 28,147  |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Cash flows from investing activities:                                                                   |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Short-term deposit                                                                                      |  |                           |         |                           |  |         |   |      | (50      | ) |                                          | (12     | )
|Investment in Hot Telecom                                                                               |  |                           |         |                           |  |         |   |      | (12,209  | ) |                                          | (2,834  | )
|Investment in limited partnerships                                                                      |  |                           |         |                           |  |         |   |      | (88      | ) |                                          | (20     | )
|Newly consolidated jointly controlled
  company (proportionate consolidation) (b)                       |  |                           |         |                           |  | 1,980    |   |      |         |   |                                          |        |  
|Purchase of property, plant and equipment                                                               |  |                           | (77,296  | )                         |  | (56,642  | ) |      | (95,217  | ) |                                          | (22,102 | )
|Repayment of long-term loans to affiliate                                                               |  |                           | 461      |                           |  | 292      |   |      |         |   |                                          |        |  
|Deposit in trust, net                                                                                   |  |                           | 1,838    |                           |  |         |   |      |         |   |                                          |        |  
|Investment in intangible assets                                                                         |  |                           | (2,924   | )                         |  |         |   |      |         |   |                                          |        |  
|Proceeds from sale of investment in
  affiliate                                                         |  |                           | 305,088  |                           |  | 114,440  |   |      |         |   |                                          |        |  
|Proceeds from sale of property, plant and
  equipment                                                   |  |                           | 1,243    |                           |  | 1,700    |   |      | 1,393    |   |                                          | 323     |  
|Grant of long-term loan for the purchase of
  fixed assets                                              |  |                           |         |                           |  | (1,394   | ) |      |         |   |                                          |        |  
|Collection of long-term loans granted for
  the purchase of property, plant and equipment               |  |                           |         |                           |  |         |   |      | 278      |   |                                          | 65      |  
|Grant of capital note to affiliate                                                                      |  |                           |         |                           |  |         |   |      | (68      | ) |                                          | (16     | )
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Net cash provided by (used in) investing
  activities                                                   |  |                           | 228,410  |                           |  | 60,376   |   |      | (105,961 | ) |                                          | (24,596 | )
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Cash flows from financing activities:                                                                   |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Exercise of stock options by employees                                                                  |  |                           |         |                           |  |         |   |      | 17       |   |                                          | 4       |  
|Sale of Company shares held by subsidiary                                                               |  |                           | 963      |                           |  | 39,126   |   |      |         |   |                                          |        |  
|Receipt of long-term loans from banks and
  others                                                      |  |                           | 6,508    |                           |  | 31,676   |   |      | 3,759    |   |                                          | 873     |  
|Repayment of long-term loans from banks and
  others                                                    |  |                           | (129,430 | )                         |  | (73,522  | ) |      | (45,965  | ) |                                          | (10,670 | )
|Redemption of debentures                                                                                |  |                           | (33,637  | )                         |  | (33,701  | ) |      | (34,107  | ) |                                          | (7,917  | )
|Short-term bank credit, net                                                                             |  |                           | 23,721   |                           |  | (89,664  | ) |      | 47,299   |   |                                          | 10,979  |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Net cash used in financing activities                                                                   |  |                           | (131,875 | )                         |  | (126,085 | ) |      | (28,997  | ) |                                          | (6,731  | )
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Increase (decrease) in cash and cash
  equivalents                                                      |  |                           | 7,110    |                           |  | 30,344   |   |      | (13,698  | ) |                                          | (3,180  | )
|Cash and cash equivalents at beginning of
  year                                                        |  |                           | 494      |                           |  | 7,604    |   |      | 37,948   |   |                                          | 8,809   |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  
|Cash and cash equivalents at end of year                                                                |  |                           | 7,604    |                           |  | 37,948   |   |      | 24,250   |   |                                          | 5,629   |  
|                                                                                                        |  |                           |          |                           |  |          |   |      |          |   |                                          |         |  

|    |                                        
|--- | ---------------------------------------
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F10 -

---

---



|                                     
|-------------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.     
|                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     

|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|--- | ------------------------------------------------------------------------------------------------------- | ------------------------- |  | ----------------------------- | - | ---- | ------- | --- |  | ------- | ---------------------------------------- |  | ------ | -
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         | Convenience
  translation
  (Note 2(b)3) | 
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          | 
|    |                                                                                                         | Year ended
  December 31, |  | Year ended
  December 31,2004 |  
|    |                                                                                                         |                           |  |                              
|    |                                                                                                         | 2002                      |  | 2003                          |   | 2004 |         |    
|    |                                                                                                         |                           |  |                               |   |      |         |     | 
|    |                                                                                                         | NIS                       |  | U.S.
  dollars                |  
|    |                                                                                                         |                           |  |                               |  
|    |                                                                                                         | Adjusted (2)              |  | Reported (1)                  |   |      |         |    
|    |                                                                                                         |                           |  |                               |   |      |         |    
|    |                                                                                                         | (In
  thousands)          | 
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |       
|(a) | Adjustments to reconcile net income (loss)
  to net cash provided by (used in) operating activities:    |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    | Income and expenses not involving cash
  flows:                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    | Equity in earnings of affiliates, net                                                                   |                           |  | (10,910                       | ) |      | (62,840 | )*) |  | (22,652 | )                                        |  | (5,258 | )
|    | Depreciation and amortization                                                                           |                           |  | 165,745                       |   |      | 171,820 |     |  | 146,488 |                                          |  | 34,004 |  
|    | Deferred income taxes, net                                                                              |                           |  |                              |   |      | 15,630  | *)  |  | 8,351   |                                          |  | 1,938  |  
|    | Severance pay, net                                                                                      |                           |  | (424                          | ) |      | 1,685   |     |  | 377     |                                          |  | 88     |  
|    | Loss (gain) from:                                                                                       |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    | Changes in shareholding in affiliate
  (including from sale of shares of affiliates)                    |                           |  | (295,933                      | ) |      | (96,662 | )   |  |        |                                          |  |       |  
|    | Write-off of investment in non-marketable
  equity securities                                           |                           |  | 8,962                         |   |      |        |     |  | 16,241  |                                          |  | 3,770  |  
|    | Sale of property, plant and equipment                                                                   |                           |  | 44                            |   |      | 1,428   |     |  | 197     |                                          |  | 46     |  
|    | Linkage differences on principal of
  debentures                                                        |                           |  | 692                           |   |      | 355     |     |  | 1,467   |                                          |  | 340    |  
|    | Linkage and exchange differences in respect
  of long-term loans from banks and loans granted to others |                           |  | (390                          | ) |      | (3,647  | )   |  | (1,097  | )                                        |  | (255   | )
|    | Purchasing power loss on deposit in trust                                                               |                           |  | (1,838                        | ) |      |        |     |  |        |                                          |  |       |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  | (134,052                      | ) |      | 27,769  | *)  |  | 149,372 |                                          |  | 34,673 |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    | Changes in operating assets and
  liabilities:                                                          |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    | Decrease in rights to broadcast movies and
  programs                                                   |                           |  |                              |   |      |        |     |  | 8,418   |                                          |  | 1,954  |  
|    | Decrease in trade receivables                                                                           |                           |  | 3,642                         |   |      | 9,718   |     |  | 7,693   |                                          |  | 1,786  |  
|    | Decrease (increase) in affiliate  current
  accounts                                                   |                           |  | (5,194                        | ) |      | 15,008  |     |  | 422     |                                          |  | 98     |  
|    | Increase in other accounts receivable                                                                   |                           |  | (743                          | ) |      | (29     | )   |  | (245    | )                                        |  | (57    | )
|    | Increase (decrease) in trade payables                                                                   |                           |  | (24,382                       | ) |      | (1,832  | )   |  | 9,717   |                                          |  | 2,256  |  
|    | Increase in other accounts payable                                                                      |                           |  | 31,903                        |   |      | 50,003  | *)  |  | 34,263  |                                          |  | 7,953  |  
|    | Increase (decrease) in customers deposits
  for converters, net                                        |                           |  | 5,577                         |   |      | 866     |     |  | (5,396  | )                                        |  | (1,253 | )
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  | 10,803                        |   |      | 73,734  | *)  |  | 54,872  |                                          |  | 12,737 |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  
|    |                                                                                                         |                           |  | (123,249                      | ) |      | 101,503 |     |  | 204,244 |                                          |  | 47,410 |  
|    |                                                                                                         |                           |  |                               |   |      |         |     |  |         |                                          |  |        |  

|    |                                        
|--- | ---------------------------------------
|*)  | Reclassified.                          
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F11 -

---

---



|                                     
|-------------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     

|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|--- | ----------------------------------------------------------- |  | ------------------------- | ------ | ----------------------------- |  | ------- | - |  | ------ |  | ---------------------------------------- | ----- | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  | Convenience
  translation
  (Note 2(b)3) |      
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |      
|    |                                                             |  | Year ended
  December 31, |        | Year ended
  December 31,2004 | 
|    |                                                             |  |                           |        |                              
|    |                                                             |  | 2002                      |        | 2003                          |  | 2004    |   | 
|    |                                                             |  |                           |        |                               |  |         |   |  |       
|    |                                                             |  | NIS                       |        | U.S.
  dollars                | 
|    |                                                             |  |                           |        |                               | 
|    |                                                             |  | Adjusted (2)              |        | Reported (1)                  |  |         |   | 
|    |                                                             |  |                           |        |                               |  |         |   | 
|    |                                                             |  | (In
  thousands)          |       
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|(b) | Newly consolidated jointly controlled
  company:            |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    | Net working capital (except for cash and
  cash equivalents |  |                           |       |                               |  | 38,745  |   |  |       |  |                                          |      | 
|    | Property, plant and equipment, net                          |  |                           |       |                               |  | (1,142  | ) |  |       |  |                                          |      | 
|    | Investment in limited partnerships                          |  |                           |       |                               |  | (2,057  | ) |  |       |  |                                          |      | 
|    | Rights to broadcast movies and programs                     |  |                           |       |                               |  | (34,927 | ) |  |       |  |                                          |      | 
|    | Long-term liabilities                                       |  |                           |       |                               |  | 737     |   |  |       |  |                                          |      | 
|    | Investment in affiliate (prior to
  consolidation)          |  |                           |       |                               |  | 624     |   |  |       |  |                                          |      | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    |                                                             |  |                           |       |                               |  | 1,980   |   |  |       |  |                                          |      | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|(c) | Supplementary cash flow information:                        |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    | Cash paid during the year for:                              |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    | Interest                                                    |  |                           | 50,894 |                               |  | 56,239  |   |  | 29,877 |  |                                          | 6,935 | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    | Taxes on income                                             |  |                           | 70,612 |                               |  | 80      |   |  |       |  |                                          |      | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|(d) | Non-cash activities:                                        |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 
|    | Purchase of property, plant and equipment
  on credit       |  |                           | 57,656 |                               |  | 35,512  |   |  | 16,833 |  |                                          | 3,907 | 
|    |                                                             |  |                           |        |                               |  |         |   |  |        |  |                                          |       | 

|    |                                        
|--- | ---------------------------------------
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F12 -

---

---



|                                      
|--------------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.      
|STATEMENTS OF CASH FLOWS - THE COMPANY
|                                      

|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | ----------------------------- |  | -------- | - |  | ------- | - | ---------------------------------------- | ------- | -
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   | Convenience
  translation
  (Note 2(b)3) |        
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |        
|                                                                                                        |  | Year ended
  December 31, |          | Year ended
  December 31,2004 | 
|                                                                                                        |  |                           |          |                              
|                                                                                                        |  | 2002                      |          | 2003                          |  | 2004     |   | 
|                                                                                                        |  |                           |          |                               |  |          |   |  |        
|                                                                                                        |  | NIS                       |          | U.S.
  dollars                | 
|                                                                                                        |  |                           |          |                               | 
|                                                                                                        |  | Adjusted (2)              |          | Reported(1)                   |  |          |   | 
|                                                                                                        |  |                           |          |                               |  |          |   | 
|                                                                                                        |  | (In
  thousands)          |         
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Cash flows from operating activities:                                                                   |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Net income (loss) for the year                                                                          |  |                           | 33,824   |                               |  | (5,450   | ) |  | (82,984 | ) |                                          | (19,263 | )
|Adjustments to reconcile net income (loss)
  to net cash provided by (used in) operating activities (a) |  |                           | (121,495 | )                             |  | 42,870   |   |  | 147,052 |   |                                          | 34,135  |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Net cash provided by (used in) operating
  activities                                                   |  |                           | (87,671  | )                             |  | 37,420   |   |  | 64,068  |   |                                          | 14,872  |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Cash flows from investing activities:                                                                   |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Investment in Hot Telecom                                                                               |  |                           |         |                               |  |         |   |  | (12,209 | ) |                                          | (2,834  | )
|Purchase of property, plant and equipment                                                               |  |                           | (32,324  | )                             |  | (12,311  | ) |  | (50,511 | ) |                                          | (11,725 | )
|Investment in subsidiaries and affiliate
  (long-term accounts and capital notes), net                  |  |                           | (67,287  | )                             |  |         |   |  |        |   |                                          |        |  
|Collection of long-term loans granted to
  subsidiaries, net                                            |  |                           |         |                               |  | 54,396   |   |  | 11,817  |   |                                          | 2,743   |  
|Investment in intangible assets                                                                         |  |                           | (186     | )                             |  |         |   |  |        |   |                                          |        |  
|Proceeds from sale of investment in
  affiliate, net                                                    |  |                           | 302,418  |                               |  | 113,709  |   |  |        |   |                                          |        |  
|Proceeds from sale of fixed assets                                                                      |  |                           | 1,036    |                               |  | 1,077    |   |  | 1,117   |   |                                          | 259     |  
|Grant of long-term loan for the purchase of
  property, plant and equipment                             |  |                           |         |                               |  | (1,394   | ) |  |        |   |                                          |        |  
|Collection of long-term loans granted for
  the purchase of property, plant and equipment               |  |                           |         |                               |  |         |   |  | 278     |   |                                          | 65      |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Net cash provided by (used in) investing
  activities                                                   |  |                           | 203,657  |                               |  | 155,477  |   |  | (49,508 | ) |                                          | (11,492 | )
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Cash flows from financing activities:                                                                   |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Exercise of stock options by employees                                                                  |  |                           |         |                               |  |         |   |  | 17      |   |                                          | 4       |  
|Receipt of long-term loans from banks and
  others                                                      |  |                           | 6,508    |                               |  | 31,676   |   |  | 3,759   |   |                                          | 873     |  
|Repayment of long-term loans from banks and
  others                                                    |  |                           | (120,974 | )                             |  | (73,522  | ) |  | (45,965 | ) |                                          | (10,670 | )
|Redemption of debentures                                                                                |  |                           | (33,637  | )                             |  | (33,701  | ) |  | (34,107 | ) |                                          | (7,917  | )
|Short-term bank credit, net                                                                             |  |                           | 36,718   |                               |  | (89,646  | ) |  | 47,459  |   |                                          | 11,016  |  
|Receipt of long-term loans from subsidiary                                                              |  |                           | 2,669    |                               |  | 731      |   |  |        |   |                                          |        |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Net cash used in financing activities                                                                   |  |                           | (108,716 | )                             |  | (164,462 | ) |  | (28,837 | ) |                                          | (6,694  | )
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Increase (decrease) in cash and cash
  equivalents                                                      |  |                           | 7,270    |                               |  | 28,435   |   |  | (14,277 | ) |                                          | (3,314  | )
|Cash and cash equivalents at beginning of
  year                                                        |  |                           | 174      |                               |  | 7,444    |   |  | 35,879  |   |                                          | 8,328   |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  
|Cash and cash equivalents at end of year                                                                |  |                           | 7,444    |                               |  | 35,879   |   |  | 21,602  |   |                                          | 5,014   |  
|                                                                                                        |  |                           |          |                               |  |          |   |  |         |   |                                          |         |  

|    |                                        
|--- | ---------------------------------------
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F13 -

---

---



|                                      
|--------------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.      
|                                      
|STATEMENTS OF CASH FLOWS - THE COMPANY
|                                      

|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|--- | ------------------------------------------------------------------------------------------------------------ |  | ------------------------- | -------- | -------------------------- |  | ------- | --- |  | ------- | - | ------------------------------------- | ------ | -
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   | Convenience
  translation(Note 2(b)3) |       
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |       
|    |                                                                                                              |  | Year ended
  December 31, |          | Year endedDecember 31,2004 | 
|    |                                                                                                              |  |                           |          |                           
|    |                                                                                                              |  | 2002                      |          | 2003                       |  | 2004    |     | 
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |        
|    |                                                                                                              |  | NIS                       |          | U.S.
  dollars             | 
|    |                                                                                                              |  |                           |          |                            | 
|    |                                                                                                              |  | Adjusted (2)              |          | Reported (1)               |  |         |     | 
|    |                                                                                                              |  |                           |          |                            |  |         |     | 
|    |                                                                                                              |  | (In
  thousands)          |         
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|(a) | Adjustments to reconcile net income (loss) to net cash
provided by
  (used in) operating activities:         |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Income and expenses not involving cash flows:                                                                |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Equity in losses (earnings) of affiliates and
subsidiaries, net                                              |  |                           | 42,573   |                            |  | (58,348 | )*) |  | (40,219 | ) |                                       | (9,336 | )
|    | Depreciation and amortization                                                                                |  |                           | 118,480  |                            |  | 126,350 |     |  | 102,098 |   |                                       | 23,700 |  
|    | Deferred income taxes, net                                                                                   |  |                           |         |                            |  | 15,630  | *)  |  | 8,351   |   |                                       | 1,938  |  
|    | Severance pay, net                                                                                           |  |                           | (126     | )                          |  | 1,109   |     |  | 319     |   |                                       | 74     |  
|    | Loss (gain) from:                                                                                            |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Changes in shareholding in subsidiary affiliates
(including proceeds
  from realization of affiliate shares) |  |                           | (302,418 | )                          |  | (97,876 | )   |  |        |   |                                       |       |  
|    | Write-off of investment in non-marketable equity
securities                                                  |  |                           | 8,830    |                            |  |        |     |  | 16,227  |   |                                       | 3,767  |  
|    | Sale of property, plant and equipment                                                                        |  |                           | 92       |                            |  | 938     |     |  | 81      |   |                                       | 19     |  
|    | Linkage differences on principal of
debentures                                                               |  |                           | 220      |                            |  | (116    | )   |  | 1,014   |   |                                       | 236    |  
|    | Linkage and exchange differences in respect of
long-term loans from
  banks and loans granted to others      |  |                           | (225     | )                          |  | (3,386  | )   |  | (1,097  | ) |                                       | (255   | )
|    | Purchasing power loss on long-term accounts and
capital note                                                 |  |                           | 294      |                            |  | 82      |     |  |        |   |                                       |       |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           | (132,280 | )                          |  | (15,617 | )*) |  | 86,774  |   |                                       | 20,143 |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Changes in operating assets and liabilities:                                                                 |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Decrease in trade receivables                                                                                |  |                           | 3,541    |                            |  | 2,235   |     |  | 8,002   |   |                                       | 1,857  |  
|    | Decrease (increase) in affiliate  current accounts                                                          |  |                           | (950     | )                          |  | 13,973  |     |  | 2,631   |   |                                       | 611    |  
|    | Decrease (increase) in other accounts receivable                                                             |  |                           | 1,917    |                            |  | (5,781  | )   |  | 4,110   |   |                                       | 954    |  
|    | Increase (decrease) in trade payables                                                                        |  |                           | (23,115  | )                          |  | (4,268  | )   |  | 14,160  |   |                                       | 3,287  |  
|    | Increase in other accounts payable                                                                           |  |                           | 25,436   |                            |  | 51,793  | *)  |  | 35,356  |   |                                       | 8,207  |  
|    | Increase (decrease) in customers deposits for converters,
net                                               |  |                           | 3,956    |                            |  | 535     |     |  | (3,981  | ) |                                       | (924   | )
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           | 10,785   |                            |  | 58,487  | *)  |  | 60,278  |   |                                       | 13,992 |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           | (121,495 | )                          |  | 42,870  |     |  | 147,052 |   |                                       | 34,135 |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|(b) | Supplementary cash flow information:                                                                         |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Cash paid during the year for:                                                                               |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Interest                                                                                                     |  |                           | 50,894   |                            |  | 56,239  |     |  | 29,769  |   |                                       | 6,446  |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Taxes on income                                                                                              |  |                           | 70,612   |                            |  |        |     |  |        |   |                                       |       |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|(c) | Non-cash activities:                                                                                         |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  
|    | Purchase of property, plant and equipment against credit from
  suppliers                                    |  |                           | 40,316   |                            |  | 28,602  |     |  | 6,798   |   |                                       | 1,578  |  
|    |                                                                                                              |  |                           |          |                            |  |         |     |  |         |   |                                       |        |  

|    |                                        
|--- | ---------------------------------------
|*)  | Reclassified.                          
|(1) | See Note 2.                            
|(2) | Adjusted to
  the NIS of December 2003.

The
accompanying notes are an integral part of the financial statements.

- F14 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |         |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|----------- | ------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1:    | GENERAL
|            |        
|            | a.      | Operations:
|            |         |            
|            |         | 1.          | The Licenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |         |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |         |             | Matav - Cable Systems Media Ltd. (the Company)
  and its wholly owned subsidiary, Cable Systems Media Haifa-Hadera Ltd. (Matav Haifa), operate in the field of
  cable television (CATV)
  broadcasting. As detailed below, in the past the Company and Matav Haifa
  operated pursuant to five exclusive franchises granted to them by the
  Ministry of Communications to provide cable television services in the
  franchises areas. The franchises covered the following operational areas as
  follows: Bat-Yam  Holon, Haifa, Netanya Hadera, and the Galilee. The Company
  commenced commercial broadcasts in March 1990.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |         |             | The franchises
  were granted to the Company and Matav Haifa under the Israeli
  Telecommunications Law, 1982, and the rules and regulations promulgated
  hereunder (the Telecommunications Law),
  which determine the regulatory framework in which the Company operates and
  the obligations imposed upon it. The Telecommunications Law determines, among
  other things, maximum subscription fees, milestones and restrictions on
  transfer and allotment of shares among the license holders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |         |             | On July 25,
  2001, the Knesset (the Israeli Parliament)
  approved an amendment (No. 25) to the Telecommunications Law (Amendment 25). Amendment 25 settled the
  licensing of CATV broadcasting by establishing a policy of general,
  long-term, non-exclusive licenses, as opposed to the exclusive regional CATV
  broadcasting franchises granted to the Company and Matav Haifa, for limited
  periods, prior to the said amendment. As a result of the approval of
  Amendment 25, licenses conferring exclusive rights in certain areas cannot be
  granted. Pursuant to Amendment 25, the CATV operators are entitled to apply
  for a license to provide non-exclusive cable broadcast licenses for CATV
  broadcasting (the Broadcast Licenses)
  and a non-exclusive special license to hold a broadcasting headend (the Headend License). Under the said
  amendment, all the CATV operators can also apply for an approval to operate
  jointly once they have received their licenses. On April 30, 2002, the
  Council for Cable and Broadcasting (the Council)
  granted the Company and Matav Haifa general, long-term non-exclusive
  Broadcast Licenses for the same areas that are mentioned above. In addition,
  on May 2, 2002, the Ministry of Communications granted the Company a Headend
  License. These licenses replaced the franchises pursuant to which, the
  Company operated prior to the above mentioned dates. The Broadcast
  Licenses are effective for a period of 15 years, however, they may be
  extended for additional periods of ten years each. The Headend License is
  valid for so long as the Broadcast Licenses remain in force, but in no event,
  no later than May 30, 2017, although it may be extended upon request to the
  Ministry of Communications.

- F15 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | --------------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 | 2. | The Broadcasts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |    | On May 10,
  2001, the Company received from the Council the approval to provide digital
  broadcasting services in a tiering system. The tiering technique enables the
  Company to provide to its digital services subscribers a basic broadcasting
  package in consideration of fixed subscription fees and additional single
  channels as well as packages of channels for additional payment. The Company
  began to market tiering broadcasting packages to its subscribers in July
  2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |    | According to
  the terms of the Broadcast Licenses, the Company shall air only the
  broadcasts that have been authorized by the Council, according to the terms
  of such approvals. Such broadcasts shall be both analog and digital or any
  other system authorized in advance by the Council. The Company may request permission to reduce the scope of the
  analog broadcasts and in such event, the Company may be instructed to charge
  lower subscription fees. As of today, the broadcast package, for which a
  maximum tariff was set in the licenses is the basic analog package. According
  to the Telecommunications Law, the Company has the right to determine the
  tariffs for the digital broadcasts. The Company is obliged to notify the
  Ministry of Communications in advance, of any intended change in fees. The
  Minister has the right to alter the fees, including inter alia, in the
  following cases: if he finds that such fees are discriminatory, misleading or
  harm the competition. In the approval of the Council to the merger of the
  Israeli cable companies, which will come into effect only after the
  consummation of the merger, it was determined that the Council is authorized
  to direct the Cable Companies a maximum subscription fee for the analog and
  digital basic packages.
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 | 3. | The Infrastructure License and Hot telecom                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |    | In addition to the aforesaid, on March 27, 2002 Matav Infrastructures
  2001 LP (Matav Infrastructures)
  a subsidiary of the Company was granted a Telecommunications
  Infrastructure License by the Minister of Communications for the provision of
  infrastructure services for the distribution of cable broadcasts and access
  to High Speed Internet providers (the Infrastructure
  License). Matav Infrastructures commenced
  providing services pursuant to the said license in April 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |    | In August
  2002, the Ministry of Communications granted the Company special licenses to
  provide additional Bezeq services on the cable network infrastructure to its
  subscribers in digital format including, inter alia, SMS services and T-mail
  services over the cable network among TV subscribers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |    | In November
  2002, the Minister of the Communication amended the Telecommunications
  Infrastructure License thereby allowing Matav Infrastructure to provide
  additional infrastructure services of data communication, digital
  transmission and optical transmission services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

- F16 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | --------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 |  | In July
  2002, the Company together with certain other Cable Companies (the Cable
  companies) submitted a request to receive a license to provide domestic
  fixed communications services. In
  October 2003, the Cable Companies entered into an agreement, as amended from
  time to time, for the establishment of a limited partnership -HOT Telecom
  L.P. (HOT Telecom) which would
  engage in the establishment and operation of a public telecommunications
  network by which it will supply domestic-fixed telecommunications services,
  including, fixed telephony services, access to High Speed Internet over
  cable, infrastructure services, messaging and data telecommunications
  services.. The partnership agreement includes, among other things, provisions
  relating to the management of HOT Telecom and its general partner, HOT Telecom
  Ltd., the distribution of its profits and income and limitations on the
  transfer of rights by the partners of HOT Telecom.
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |  | In the
  context of the said agreement, the Company (through its subsidiary), based on
  its proportionate share in the total number of subscribers of the Cable
  Companies (the subscribers of multi channel TV broadcast and the subscribers
  of access to High Speed internet services) as of October 31, 2003, owns,
  directly and indirectly, approximately 26.5% of the Partnership rights as
  well as approximately 26.5% of the general partner rights in the Hot Telecom.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |  | In November
  2003, the Ministry of Communications granted HOT Telecom a license covering
  the same services covered by the Infrastructure Licensees of the Cable Companies
  (to be supplied within the time frame set forth in the Infrastructure
  License) and also including the requirement to start to provide other
  domestic fixed communication services over cable network including basic
  telephony services to subscribers (Hot
  Telecom Infrastructure License). The said license canceled and
  terminated the Infrastructure License, which was granted to Matav
  Infrastructures in March 2002.                                                                                                                                                                                                                                                                                                                                                                                   
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |  | On March 16,
  2005, the Minister of the Communications amended Hot Telecom Infrastructure License thereby allowing Hot Telecom
  to provide access to High Speed Internet services, by the former
  infrastructure licensees of the Cable Companies, including inter alia, Matav Infrastructures, (whilst
  the said services shall be deemed to have been provided by Hot Telecom)
  during an interim period commencing on November 2003 until the consummation of the merger of
  the Cable Companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |  | Hot Telecom
  Infrastructure License is effective for a period of 20 years and it may be
  extended by the Minister of Communications for additional periods of 10 years
  each.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |  | Hot Telecom
  is obliged to offer its services to all applicants without discrimination,
  regardless of whether or not they may be a subscriber of another licensee
  (including a broadcast licensee).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |  | According to
  the approval of the Controller of Restrictive Business Practices (the Controller), in connection with the
  proposed merger of the Cable Companies (see section 7 below), Hot Telecom is
  required to make a comprehensive investment in telephony services in an
  amount of not less than NIS 350 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |  | The
  Companys portion of the said investment, pro rata to its proportionate share
  in Hot Telecom is estimated to be approximately NIS 93 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

- F17 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | --------------- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 |    | As of the
  date of the balance sheet, domestic-fixed telecommunications services to the
  business sector are provided by Hot Telecom and access to High Speed Internet
  services to the private sector are provided by the consolidated partnership
  Matav Infrastructure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                 |    | In view of
  the above, the consolidated financial statements of the Company as of
  December 31, 2004, include part of the access to High Speed Internet activity
  that is provided by Matav inftrastructure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                 |    | As of the
  end of November 2004, Hot Telecom has gradually commenced to provide
  commercial telephony services, where in the first stage, the service is
  rendered in the Tel Aviv, Hasharon and Beer Sheva Regions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                 | 4. | Ownership of the cable network                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                 |    | The Group
  must operate through separate entities, namely the broadcast entities, on the
  one hand, and an infrastructure entity, on the other hand, which must each
  hold a Cable Broadcast License or Telecommunications Infrastructure License,
  as appropriate. Pursuant to the
  Telecommunications Law, the licensee under the Telecommunications
  Infrastructure License, or the Telecommunications Infrastructure Licensee,
  must own the cable network infrastructure as a condition to the receipt of
  the license. However, according to
  the terms of the Telecommunications Infrastructure License, and subsequently,
  in the HOT Telecom Infrastructure License, the Cable Broadcast Licensees are
  allowed to continue to own the cable network infrastructure and to provide
  infrastructure services for an additional interim period of the earlier of
  two years following the date of the grant of the HOT Telecom Infrastructure
  License, which was November 25, 2003, or the date of the consummation of the
  merger of the Israeli cable television operators.


During such interim period, the necessary arrangements must be
  made regarding the transfer of the ownership of the cable network
  infrastructure to the Telecommunications Infrastructure Licensee. Accordingly, and as a condition for the
  receipt of the original Telecommunications Infrastructure License, the
  Groups Cable Broadcast Licensees and Matav Infrastructure Telecommunications
  Infrastructure Licensee entered into an agreement dated March 5, 2002,
  whereby the Groups Cable Broadcast Licensees granted an exclusive lease to
  the Telecommunications Infrastructure Licensee to operate the cable network
  infrastructure. In October 2002, the Groups Cable Broadcast Licensees and
  the Groups Telecommunications Infrastructure Licensee entered into an
  agreement, whereby Matav Infrastructure shall provide the Cable Broadcast
  Licensees infrastructure services for the broadcast of cable broadcasts in
  the areas covered by their respective license, including installment,
  maintenance and disconnection of terminal equipment. Since November 2003, HOT
  Telecom is the Groups Telecommunications Infrastructure Licensee and the
  prior agreements are no longer in effect. Agreements in this regard will be signed between HOT Telecom and the
  Company in the near future.

- F18 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | --------------- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 |    | The Cable
  Companies have not yet established a mechanism to charge Hot Telecom for
  usage and maintenance fees of the network. Therefore, Hot Telecoms
  management cannot assess at this stage the scope and date of the said charge.
  Hot Telecoms financial statements do not include usage fees costs and
  network maintenance fees. Since Hot Telecom will be charged with usage fees
  by the cable companies, the aforementioned will not affect the Companys net
  results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 | 5. | Structural Separation between broadcasts and infrastructure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 |    | The
  Broadcast Licenses, and HOT Telecom Infrastructure License all contain
  restrictions limiting the number and identity of directors that are permitted
  to serve in both the infrastructure entity (and its general partner), and the
  Cable Broadcast companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 |    | In the event
  that either another entity is granted a general license to broadcast through
  the cable network, or in the event that HOT Telecom reaches a number of
  subscribers to the service of access to High Speed Internet over cable equals
  to 450,000, or if the number of the telephony lines operated by HOT Telecom
  pursuant to the HOT Telecom Infrastructure License reaches 250,000, a much
  broader structural separation (as detailed in the said licenses) shall apply.
  Subject to the aforesaid, the Council with respect to the Broadcast Licensee,
  and the Minister with respect to HOT Telecom, also have the authority to
  impose additional conditions, regarding the relationship between the
  Broadcast Licensees or the Infrastructure Licensee and their connected
  companies, including the identity of the officers of each company, the
  transfer of information, the separation of entities between broadcast and
  infrastructure, the accounting systems, and technological, geographical or
  commercial restrictions regarding the laying down of infrastructure or
  regarding the provision of services or broadcasts. In the event that the
  Minister finds that special circumstances exist, after he is convinced that
  competition in the field of the Telecommunication broadcasting will not be
  harmed, he is entitled, upon a written request by Hot Telecom to amend the
  license to include exceptions to the separation obligation, subject to
  conditions that the Minister may impose.
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 |    | The licenses
  of the Group also include certain provisions relating to approvals required
  for change of means of control in the owners of such licenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 | 6. | D.B.S. Satellite Services (1998) Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 |    | On January
  5, 1999, the Knesset approved an amendment to the Telecommunications Law,
  according to which the Ministry of Communications may grant a license for
  direct broadcasting via satellite. On January 21, 1999, the Ministry of
  Communications granted D.B.S. Satellite Services (1998) Ltd. (known as: Yes) a license for providing television
  broadcasts to subscribers in Israel via satellite. YES commenced DBS
  broadcasting in July 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- F19 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | --------------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 |    | In September
  2001, the Minister of Communications issued administrative directives which
  were amended effective as of February 3, 2002, governing the reciprocal use
  of inside wiring between the Cable Companies and Yes (the Administrative Directives). The
  Administrative Directives stipulate, inter alia, that the Company would be
  obligated to allow Yes to utilize the inside wiring, which is a part of the
  public telecommunications network that is located in the premises of the
  subscribers and is designed to serve the premises of such subscribers (the Inside Wiring) of the subscribers of
the
  Company, and that Yes would be obligated to allow the Company to utilize the
  Inside Wiring of the subscribers of Yes.                                                                                                                                                                      
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 |    | The
  Administrative Directives establish instructions regarding the procedures of
  transition for cable television subscribers to become subscribers to Yes and
  vice versa. These directives also provide that Yes shall pay fees to the
  relevant cable television operators for the use of their Inside Wiring, and
  that the cable television operators shall pay fees to YES for the use of its
  Inside Wiring. The Administrative Directives stipulate what such amount
  should be. In addition, the Minister of Communications has the authority to
  issue directives regarding the common use of the Inside Wiring by both Yes
  and by the cable television operators, with regard to the provision of
  different services by each party. The Ministry of Communications conducted a
  hearing regarding the common use of Inside Wiring. To date, the Ministry has
  not issued directives regarding this matter.
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 | 7. | The proposed Merger between the Israeli Cable Companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 |    | In February
  2003 the company and the other Cable Companies agreed on a final version of
  an agreement outlining the structure and conditions of the merger of the
  Cable Companies. To date, the final merger agreement has not yet been signed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 |    | Prior to the
  merger, the Cable Companies shall need to reach an understanding with the
  major Israeli banks which are creditors of the parties to the merger. The merger must also receive approvals
  under applicable law, including the approvals of the Council, the Income Tax
  Commission, the Controller and by an Israeli court, after receiving the
  approvals of certain creditors and the relevant corporate bodies of the
  relevant parties. To date, approvals
  have been granted, subject to terms and conditions, from the Council, the
  Controller and the Income Tax Commission. Subject to the final terms of the merger, further approval of the
  Income Tax Commission to the merger may be required.                                                                                                                                                                                                  
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 |    | In March
  2002, the Council granted an approval for the merger of the Cable Companies.
  The said approval was amended in February 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 |    | The approval
  of the Controller to the merger was granted in April 2002. The said approval
  is subject to a number of terms and conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- F20 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | --------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 |  | The
  Controllers conditions to the merger (most of which already apply in light of
  the cooperation between the Cable Companies as described below and defined as
  the Operational Merger), include, inter alia, conditions concerning: (1) separation
  between the cable infrastructure and the broadcasting activity of the merged
  companies; (2) allowing access to and use of cable broadcasting
  infrastructure to owners of licenses to operate CATV systems; (3) the
  ownership structures of the merged companies; (4) restrictions as to the
  purchase of content and interest in the channels; (5) provisions concerning
  non prevention of competitive infrastructures development; (6) restrictions
  on parties that are related to the merged companies, including in connection
  with acting as officers in the merged company and the transfer of business
  information; (7) the commitment to supply fixed telephony services to the
  public in Israel over the cable infrastructure that compete with those of
  Bezeq as detailed in the approval; (8) the provision of a bank guarantee (by
  all the Cable Companies) in the amount of 15 million dollars for the fulfillment
  of the Controllers conditions.
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                 |  | On January
  30, 2005, the Controller has issued an amendment to its previous approval to
  the merger of the Cable Companies from April 2002, as amended from time to
  time. According to the amendment, the Controller extended the validity of the
  approval to the merger until the earlier of January 29, 2006 or the date of
  the consummation of the merger. As part of the amendment, the controller
  revised some of the conditions to the approval, including, allowing the
  merged entity to hold means of control in four additional channels and
  amending the schedule set for the investment of NIS 350 million required by
  the merged entity as follows: not less then NIS 190 million until June 30,
  2005, not less than NIS 160 million until June 30, 2006 and any other amount
  that shall be required for the fulfillment of the business plan for the
  provision of telephony services, which fully compete with the telephony
  services of Bezeq. In addition, according to the amendment, the Controller
  enlarged the minimum number of subscribers to whom the merged entity is
  obliged to provide telephony services by the end of the consecutive years
  2005, 2006 and 2007.                        
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                 |  | On January
  30, 2005, the Controller also granted the three Israeli Cable Companies an
  exemption from the requirement to receive an approval of a Restrictive
  Arrangement as such term is defined under section 14 of the Restrictive
  Business Practice Law, in relation to the ongoing cooperation between the
  Cable Companies. Pursuant to the exemption, the Cable Companies may continue
  their cooperation in the multi-channel TV broadcasting operations, including
  marketing, content acquisition and content production, and in building
  infrastructure and providing fix line telecommunication services including
  access to High Speed Internet and telephony. The exemption is granted for a
  period of one year, until January 30, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                 |  | The
  Supervisor of the Banks at the Bank of Israel (the Supervisor) has not yet approved the
  merger and has expressed reservations due to certain limitations under
  Israeli Banking Laws. According to the position of the Supervisor, the merger
  of the Cable Companies and the formation of a merged cable entity constitutes
  a deviation from the directives of the Bank of Israel and of Proper Bank Management
  Directives of the
  Supervisor of the Banks, regarding inter alia, the restriction on Group of
  Borrowers, as such term is defined in the Proper Bank Management
  Directives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

- F21 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | --------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 |  | The above
  position of the Supervisor has an impact as to the issue of giving loans by
  banking corporations and as to the issue of allocation of the merged company
  debts, inter alia, to the major shareholder (directly and indirectly) of the
  Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |  | Based on the
  aforesaid, and due to the difficulties arising from the position of the
  Supervisor of the Banks and the provisions of Proper Bank Management
  Directives there is no certainty whether the merger will be actually
  consummated and, if consummated, when it will actually occur and what will be
  its structure. The Companys management is examining any and all alternatives
  in order to continue to preserve the existing cooperation between the Cable
  Companies, including the exanimation of possible acquisition of Tevels
  subscribers and assets in the multi channel television and access to High
  Speed Internet as detailed below.                                                                                                                                                                   
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |  | The
  Operational Merger                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |  | Since April
  2002, and in accordance with the approval of the Controller to the proposed
  merger, the Cable Companies have strengthened cooperation between themselves
  and have gradually cooperated in most areas of their activities. Since
  October, 2003 the joint activity is carried out under the brand name HOT.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |  | In order to
  strengthen the cooperation of the Cable Companies, the Group, Tevel group and
  Golden Channels group agreed in June 2004 to perform an operational merger
  (the Operational Merger). To
  this effect, a joint management was appointed to oversee the Operational
  Merger of the marketing, sales, engineering, customer service, operations and
  information systems activities of the three Cable Companies (including those
  of Hot Telecom). The Companys activity in the ordinary course of business in
  areas of the joint activities is being held by the joint management of the
  Operational Merger although material decisions are subject to the approval of
  the Board of Directors of the Company. The Cable Companies have agreed upon
  the allocation of the expenses deriving from the joint activity.
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |  | The joint
  activity of the Operational Merger as detailed above, does not include
  transfer of assets from any of the Cable Companies to a merged entity or from
  any of the Cable Companies to another cable company and each of the Cable
  Companies, including the Company, remains the sole owner of its assets.
  Furthermore, the joint activity does not include transfer of liabilities
  towards third parties including, inter alia, banks and creditors.                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |  | Negotiations
  for the acquisition of the cable operations and assets of Tevel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 |  | In light of
  the above, the Companys management examined the options available in order
  to continue and maintain the existing cooperation among the Cable Companies,
  including the possibility of purchasing the cable operations and assets of
  Tevel Israel International Communications Ltd. (Tevel). On November
  11, 2004 and on November 23, 2004 the Company announced that it has concluded
  preliminary discussions regarding the acquisition by the Company of the
  assets of Tevel.                                                                                                                                                                                                                                                                                                                                       

- F22 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |    |                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | --------------- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 |    | As of the
  date of the approval of the financial statements the Company has not signed a
  binding agreement with Tevel, and cannot be certain that this transaction
  will be completed, or if completed, on what timeframe or on what terms and
  conditions, including price.
|            |                 |    |                                                                                                                                                                                                                                                                                  
|            |                 | 8. | Hot Vision Ltd. (Formerly: I.C.P - Israel Cable Programming Company
  Ltd. (Hot Vision))                                                                                                                                                                                       
|            |                 |    |                                                                                                                                                                                                                                                                                  
|            |                 |    | a)                                                                                                                                                                                                                                                                                | The Company
  owns, as of December 31, 2004 and December 31, 2003, 26.6% of Hot Vision
  ordinary shares (see section b. below). In addition, the Company owns 28.6%
  of Hot vision preferred shares. Since December 31, 2003, the Company
  consolidated the accounts of Hot Vision by the proportionate consolidation
  method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |    |                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                 |    | b)                                                                                                                                                                                                                                                                                | Hot Vision
  is owned by the three Cable Companies (including the Company). It was formed
  in order to jointly acquire rights to broadcast movies and television
  programs and to grant those rights to its shareholders for the purpose of
  television broadcast.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 |    |                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                 |    |                                                                                                                                                                                                                                                                                   | As of
  December 31, 2004, the Company holds, directly and indirectly, approximately
  26.6% of the issued ordinary share capital of Hot Vision and this is
  according to an agreement between the Cable Companies, the owners of
  interests in Hot Vision, according to which, each of them shall retain
  holding in ordinary share capital and in voting rights according to the
  relative share of the shareholders in the weighted number of active
  subscribers in each year. In addition, the Preferred shares confer upon their
  holders an exclusive right in the distribution of earnings upon liquidation
  up to the amount of approximately NIS 12 million. Other earnings will be
  distributed to the ordinary shareholders pro rata to their holdings. In
  addition, Hot Vision is jointly controlled by the Cable Companies.
|            |                 |    |                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                 |    |                                                                                                                                                                                                                                                                                   | According to
  the opinion of the Companys management, which is based on the opinion of its
  legal counsel, in light of the Controllers approval to the proposed merger
  of the Israeli cable television operators, and the exemption provided by the
  Controller from the requirement to receive approval of a restrictive
  arrangement in connection with joint activities of the cable television
  operators, there is no longer a need for the separate approval of the
  Restrictive Trade Practices Court for the said cooperation through Hot Vision.                                                                                                                                                                                                                                                                                
|            |                 |    |                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                 |    |                                                                                                                                                                                                                                                                                   | In the past,
  Hot Vision executed agreements with certain shareholders in connection with
  the provision of contents purchased by it from the owners of the said
  contents. The initial term of the agreements was until December 31,
  2000, and the shareholders are entitled to extend them for additional periods
  of 12 months each, on terms to be determined by the parties. The shareholders
  have not yet exercised the extension option for an additional year in 2005.                                                                                                                                                                                                                                                                                                                                                             

- F23 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|----------- | --------------- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 |     | The scope of
  investments made by the Company and Haifa Hadera with respect to purchase of
  contents for channels HOT 3 and HOT Movies during 2004 and 2003 was NIS
  68 million and NIS 66 million, respectively.                                                                                                                                                                                                                                                                 
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 | 9.  | As of
  December 31, 2004 and 2003, the Company through its wholly owned subsidiary 
  Matav Investments, holds approximately 5.25% (5.01% on a fully diluted basis)
  of the shares of the affiliate, Partner Communications Company Ltd. (Partner).
  Partner operates a mobile telecommunications network based upon the Global
  System for Mobile Communications (GSM) Standard in Israel, see also Notes
  5b(2).                                                             
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |     | Matav Group
  has significant influence over the financial and operating policies of Partner,
  as defined in Statement 68, by virtue of an agreement, entered into by and
  among the shareholders of Partner, according to which, Matav has the right to
  appoint two directors to serve on its behalf on Partners board of directors.                                                                                                                                               
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |     | In April
  2002, the Group sold approximately 7.7% of the Ordinary shares of Partner, in
  consideration for approximately adjusted NIS 306 million. The capital gain,
  net of taxes, from the above transaction amounted to adjusted NIS 197
  million. As a result of this sale, the interest held in Partner was reduced
  to 7.4%.                                                                                                                                                  
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |     | In November
  2003, the Group sold approximately 2.1% Ordinary shares of Partner in
  consideration for approximately adjusted NIS 114 million. The capital gain
  from the above sale, net of the taxes, totaled approximately adjusted NIS 62
  million. Subsequent to the above sale, the Company held approximately 5.25%
  of Partner shares.                                                                                                                                       
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |     | As for the
  sale of Partner shares held by the company during May 2005, see Note 24a.                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 | 10. | In addition,
  the Group invested in ventures relating to the Internet and interactive
  communications through the associated company Nonstop Ventures Ltd. (Nonstop
  Ventures) (see Note 5b(3)).                                                                                                                                                                                                                                                                                    
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 | 11. | The Company
  intended to delist voluntarily from the Nasdaq National Market and to
  terminate its American Depositary Recipt (ADR) program, both expected to take
  effect in a few months. Concurrently with delisting from Nasdaq, The Company
  intends to file a Form 15 with the U.S. Securities and Exchange Commission
  (SEC) to terminate the registration of its ADRs and Ordinary Shares, thereby
  suspending its obligation to file annual and other reports with the SEC.
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |     | In such
  case, the Companys shares will continue to trade in the TASE and the Company
  shall continue to make public reports in accordance with the Israeli
  securities laws and regulations.                                                                                                                                                                                                                                                                                        
|            |                 |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |     | See Note 24c
  for the delay in implementation of the aforementioned delisting.                                                                                                                                                                                                                                                                                                                                                                                                          

- F24 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                 |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | --------------- | ------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 | 12.                            | The Company
  has financed its operations using, inter alia, short-term bank borrowings due
  to the present credit market conditions and other circumstances.
  Consequently, the Company had a working capital deficit at December 31, 2004
  of approximately NIS 703 million. The Company believes that it will be
  able to repay or renew its obligations as they become due, including through
  receipt of long-term borrowings as the market conditions permit.
  Alternatively, the Company can liquidate its investment in Partner shares, if
  necessary, in order to repay the short-term obligations. See Note 24(a).
|            |                 |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | b.              | Definitions:                  
|            |                 |                               
|            |                 | In these financial statements:

| | Wholly owned and controlled
  companies |  | companies or limited partnerships in which
  more than 50% of the voting equity is owned or controlled by the Company (as
  defined in Opinion 57 of the Institute of Certified Public Accountants in
  Israel) and whose accounts are consolidated with those of the Company
| | --------------------------------------- | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Jointly controlled company              |  | a company owned by various entities that
  have a contractual consent for joint control, which is not of a temporary
  nature and whose accounts are consolidated with those of the Company using
  the proportionate consolidation method.                                  
|
| | Subsidiaries                            |  | Jointly controlled company and wholly owned
  and controlled companies.                                                                                                                                                                                                      
|
| | Affiliates                              |  | companies
  and partnership that are not subsidiaries, and over which the Company has
  significant influence. The Companys investment therein is included using the
  equity method of accounting                                                                          
|
| | The Group                               |  | the Company and its subsidiaries.                                                                                                                                                                                                                                            
|
| | Interested Parties                      |  | as defined
  in the Securities Regulations (Preparation of Annual Financial Statements) 
  1993.                                                                                                                                                                            
|
| | Related parties                         |  | as defined in the opinions of the Institute
  of Certified Public Accountants in Israel.                                                                                                                                                                                     
|
| | Cable Companies                         |  | Tevel International Communications Ltd.
  Group, Golden Channels and Co. and the Group.                                                                                                                                                                                      

- F25 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                
|            | The
  consolidated financial statements presented herein are prepared in accordance
  with generally accepted accounting principles (GAAP) in Israel, which
  differ in certain respects from those followed in the United States, as
  described in Note 26.
|            |                                                                                                                                                                                                                                                                
|            | The
  significant accounting policies applied in the preparation of the financial
  statements are as follows:                                                                                                                                                 
|            |                                                                                                                                                                                                                                                                
|            | a.                                                                                                                                                                                                                                                              | Use of
  estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                 | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the amounts reported in the financial statements and accompanying
  notes. Actual results could differ from those estimates.                                                                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | b.                                                                                                                                                                                                                                                              | Discontinuance
  of the adjustment of financial statements and financial reporting in
  Reported amounts as of December 31, 2004 and for the year then ended:                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                 | In 2001, the
  Israel Accounting Standards Board published Accounting Standard No. 12
  with respect to the discontinuance of the adjustment of financial statements.
  According to this Standard (as amended by Accounting Standard No. 17), the
  adjustment of financial statements for the effects of inflation should be
  discontinued beginning January 1, 2004. The Company applied the
  provisions of the Standard and, accordingly, the adjustment for the effects
  of inflation was discontinued as from January 1, 2004.
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                 | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Basis of
  presentation:
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                         
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | a)                       | In the past,
  the Company prepared its financial statements based on the historical cost
  convention, adjusted for the changes in the general purchasing power of the
  Israeli currency based on the changes in the Israeli Consumer Price Index
  (Israeli CPI). These adjusted amounts, as included in the financial
  statements as of December 31, 2003 (the transition date), served as a basis
  for nominal financial reporting beginning January 1, 2004. Additions
  made after the transition date are included at nominal values.
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | b)                       | The amounts
  for non-monetary assets do not necessarily represent realizable value or current
  economic value, but only the Reported amounts (see 2. below) for those
  assets.                                                                                                                                                                                                                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | c)                       | In the
  financial statements cost represents cost in the Reported amount (see 2
  below).                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | d)                       | All
  comparative data for previous periods are presented after adjustment for the
  Israeli CPI as of the transition date (the Israeli CPI for December 2003).                                                                                                                                                                                                                                                                                                                                                                                  

- F26 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                           |                                                                                                                                                                                         
|----------- | --------------------------------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | 2. | Financial
  statements in reported amounts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |    | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Definitions:                                                                                                                                                                                                             
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                          
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Adjusted amount  historical nominal amount
  adjusted for the Israeli CPI as of December 2003, according to the provisions
  of Opinions No. 23 and No. 36 of the Institute of Certified Public
  Accountants in Israel.
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                          
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Reported amount  adjusted amount as of the
  transition date (December 31, 2003), plus additions in nominal values after
  the transition date and less amounts deducted after the transition date.                     
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                          
|            |                                         |    | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Balance sheet:                                                                                                                                                                                                           
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                          
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 1)                                                                                                                                                                                                                        | Non-monetary
  items are presented in reported amounts.                                                                                                                                 
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                           |                                                                                                                                                                                         
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 2)                                                                                                                                                                                                                        | Monetary
  items are presented in nominal values as of the balance sheet date.                                                                                                          
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                           |                                                                                                                                                                                         
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 3)                                                                                                                                                                                                                        | The carrying
  value of investments accounted for under the equity method is determined
  based on the financial statements of these companies in reported amounts.                     
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                           |                                                                                                                                                                                         
|            |                                         |    | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Statement of
  operations:                                                                                                                                                                                               
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                          
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 1)                                                                                                                                                                                                                        | Income and
  expenses relating to non-monetary items are derived from the change in the
  reported amounts between the opening balance and the closing balance.                         
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                           |                                                                                                                                                                                         
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 2)                                                                                                                                                                                                                        | Other items
  in the statement of operations are presented in nominal values.                                                                                                           
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                           |                                                                                                                                                                                         
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 3)                                                                                                                                                                                                                        | The equity
  in the results of operations of investees accounted for under the equity
  method is determined based on the financial statements of these companies in
  reported amounts.
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                           |                                                                                                                                                                                         
|            |                                         | 3. | Convenience
  translation into U.S. dollars:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |    | The
  financial statements as of December 31, 2004 and for the year then ended,
  have been translated into U.S. dollars using the representative exchange rate
  of the U.S. dollars as of such date (U.S.$ 1 = NIS 4.308). The
  translation was made solely for the convenience of the readers. The U.S.
  dollar amounts presented in the financial statements should not be construed
  to represent amounts receivable or payable in dollars, or convertible into
  dollars, unless otherwise indicated in these statements.

- F27 -

---

---



|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|                              |                                 
|NOTES TO FINANCIAL STATEMENTS
|                             

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                      |                                                                                                                                                                                                              
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | c.                                      | Adjusted
  financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | General:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The
  financial statements as of December 31, 2003 and for reported periods through
  that date were presented on the basis of the historical cost convention
  adjusted for the changes in the general purchasing power of the Israeli
  currency (New Israeli Shekel or NIS). The Company and its subsidiaries
  maintain their accounts in nominal NIS. The nominal figures were adjusted to
  NIS of equivalent purchasing power (NIS of December 2003) in conformity with
  principles prescribed by Statements of the Institute of Certified Public
  Accountants in Israel, on the basis of changes in the Consumer Price Index
  (Israeli CPI).
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Balance
  sheet:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Nonmonetary
  items were adjusted in accordance with the changes in the Israeli CPI from
  the date of acquisition (transaction) to December 31, 2003 (as published on
  January 15, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Monetary
  items are presented in the adjusted balance sheet at their nominal value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Investments
  accounted for by the equity method are based on the adjusted financial
  statements of the investees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The adjusted
  values of nonmonetary items should not be construed as a presentation of
  realizable values or real economic values, but merely as the original values
  adjusted for the changes in the general purchasing power of the currency.                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Statement of
  income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Revenues
  were adjusted in accordance with the change in the Israeli CPI from
  transaction date to December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Expenses,
  other than financing expenses and those deriving from nonmonetary items, were
  adjusted for the changes in the index from transaction date to December 31,
  2003. Expenses deriving from nonmonetary items were adjusted in
  correspondence with the adjusted balance sheet item.                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Group equity
  in the results of investees accounted for under the equity method is based on
  their adjusted financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The balance
  of the inflationary adjustment, not attributed to revenues or expenses as
  referred to above, was included in net financing income or expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Data
  regarding Israeli CPI and exchange rates of foreign currency:
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 1.                                                                   | Assets and
  liabilities in or linked to foreign currency are included in the financial
  statements according to the representative exchange rate as published by the
  Bank of Israel on December 31, 2003.

- F28 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                         |  |                                                                                            |                                                                                                                                                           
|----------- | --------------------------------------- |  | ------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |  |                                                                                            |                                                                                                                                                           
|            |                                         |  | 2.                                                                                         | Assets and
  liabilities linked to the Israeli CPI are included in the financial
  statements according to the relevant index for each asset or liability.
|            |                                         |  |                                                                                            |                                                                                                                                                           
|            |                                         |  | The
  following are details of the Israeli CPI and the exchange rate of the U.S.
  dollar:

| |                  |  |               |  |                                   |  |  |  |  |       |  | 
| | ---------------- |  | ------------- |  | --------------------------------- |  |  |  |  | ----- |  | 
| |                  |  | Israeli
  CPI |  | Exchange
  rate 
  of U.S. dollar | 
| |                  |  |               |  |                                   | 
| | At December 31,: |  | points *)     |  | NIS                               | 
| |                  |  |               |  |                                   | 
| | 2004             |  |               |  | 180.7                             |  |  |  |  | 4.308 |  | 
| | 2003             |  |               |  | 178.6                             |  |  |  |  | 4.379 |  | 
| | 2002             |  |               |  | 182.0                             |  |  |  |  | 4.737 |  | 
| |                  |  |               |  |                                   |  |  |  |  |       |  | 

| |                          |  |   |  |      |   |  |  |  |      |   | 
| | ------------------------ |  | - |  | ---- | - |  |  |  | ---- | - | 
| | Changes during the year: |  | % |  | %    |  
| |                          |  |   |  |      |  
| | 2004                     |  |   |  | 1.2  |   |  |  |  | (1.6 | ) | 
| | 2003                     |  |   |  | (1.9 | ) |  |  |  | (7.6 | ) | 
| | 2002                     |  |   |  | 6.5  |   |  |  |  | 7.3  |   | 

| |    |                                |                                                                                                                                                       |                                                                                                                   
| | -- | ------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------
| |    |                                | *)                                                                                                                                                    | According to
  the Israeli CPI for the month ending on the balance sheet date on an average
  basis of 1993 = 100.
| |    |                                |                                                                                                                                                       |                                                                                                                   
| | d. | Principles
  of consolidation:
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    | 1.                             | The
  consolidated financial statements include the accounts of the Company and its
  subsidiaries.                                                  
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    | 2.                             | The
  significant consolidated subsidiaries are as follows:                                                                                          
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    |                                | Wholly-owned:                                                                                                                                        
| |    |                                |                                                                                                                                                      | Matav Haifa;                                                                                                      
| |    |                                |                                                                                                                                                      | Matav
  Investments;                                                                                              
| |    |                                |                                                                                                                                                      | Matav
  Infrastructure Ltd. (the general partner in Matav Infrastructure partnership)                             
| |    |                                |                                                                                                                                                      | Matav
  Infrastructure 2001  limited partnership (28% held by Matav Haifa)                                       
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    |                                | Wholly-owned
  subsidiaries of Matav Investments:                                                                                                    
| |    |                                |                                                                                                                                                      | Matav
  Properties Ltd;                                                                                           
| |    |                                |                                                                                                                                                      | Nonstop
  Internet 1999 Ltd. (ceased its operations in 2001)                                                      
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    |                                | Jointly
  controlled entity:                                                                                                                         
| |    |                                |                                                                                                                                                      | Hot Vision Ltd.                                                                                                   
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    | 3.                             | Intercompany
  balances and transactions have been eliminated in consolidation.                                                                      
| |    |                                |                                                                                                                                                       |                                                                                                                   
| | e. | Investments:                  
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    | 1.                             | Affiliates
  and subsidiaries:                                                                                                                       
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    |                                | The
  investment in affiliates and subsidiaries, as it relates to the Companys
  financial statements, is accounted for under the equity method.    
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    | 2.                             | Non-marketable
  equity securities:                                                                                                                  
| |    |                                |                                                                                                                                                       |                                                                                                                   
| |    |                                | The
  investment in non-marketable equity securities is stated at cost, net of
  impairment losses for decline in value that is other than temporary.

- F29 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            | f.                                      | Investments
  in limited partnerships:                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The
  investment in limited partnerships producing films, in which the Company is a
  limited partner, is presented at cost. The investment in the partnerships is
  written down when actual broadcast takes place.
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            | g.                                      | Rights to
  broadcast films and programs:                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The cost
  includes the cost to purchase rights to broadcast films and TV programs with
  the addition of direct costs in order to adjust the films and programs for
  broadcasting in Israel.                      
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The rights
  to use content by the jointly controlled entity which was made available by
  its shareholders, is also included as part of this asset.                                                                
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Cost of
  rights are amortized when actual broadcasting takes place, while giving a
  relatively greater weight to primary broadcasting.                                                                            
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            | h.                                      | Property,
  plan and equipment:                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | 1.                                                                                                                                                                                                                   | Property,
  plan and equipment is stated at cost.                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | 2.                                                                                                                                                                                                                   | The assets
  are depreciated by the straight-line method over their estimated useful lives
  (other than leasehold improvements, see below). The Company evaluates in each
  reporting period the necessity to record an impairment loss, in accordance
  with the provisions of Accounting Standard No. 15 (see k below). The annual
  depreciation rates are as follows:

| |                                                                                    |  |   |                     | 
| | ---------------------------------------------------------------------------------- |  | - | ------------------- | 
| |                                                                                    |  | % |                    
| |                                                                                    |  |   |                    
| |                                                                                    |  |   |                     | 
| | Buildings                                                                          |  |   | 2  4 (mainly 2)    | 
| | Cable network                                                                      |  |   | 8.33;10             | 
| | Equipment in the
  broadcasting center and studio (primarily electronic equipment) |  |   | 15  20 (mainly 15) | 
| | Converters and modems                                                              |  |   | 10                  | 
| | Computers and peripheral
  equipment                                               |  |   | 20  33             | 
| | Office furniture and
  equipment                                                   |  |   | 6  10              | 
| | Development costs of
  internet site                                               |  |   | 33                  | 
| | Vehicles                                                                           |  |   | 15                  | 

| |  |    |                                                                                                                                                                                                                                                    
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3. | Assets
  leased under a capital lease are presented in fixed assets based on the
  present value of the future lease payments. Lease payments due in the future,
  net of the implicit interest component, are included in long-term
  liabilities.
| |  |    |                                                                                                                                                                                                                                                    
| |  | 4. | Leasehold
  improvements are amortized by the straight-line method over the term of the
  lease or the estimated useful life of the improvements, whichever is shorter.                                                                            

- F30 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | --------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | i.                                      | Intangible
  assets, long-term receivables and deferred charges:
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         | 1.                                                               | Deferred
  charges in respect of issuance of debentures are amortized, using the
  interest method, over the life of the debentures, in proportion to the
  balance of debentures outstanding. The amortization is recorded under the
  financial expenses, net.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         | 2.                                                               | Intangible
  assets include payment made in respect of a non-exclusive license to provide
  stationary communications services within Israel. The license charges are
  amortized by the straight-line method over the period of the license (15
  years).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         | 3.                                                               | Assets
  leased by the Company in capital lease arrangements were derecognized and a
  long term receivable was recorded in respect of the lease arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | j.                                      | Revenue
  recognition:                                          
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         | 1.                                                               | Revenue from
  subscription fees is recognized on a monthly basis as the service is
  provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         | 2.                                                               | See also l
  below (amortization of customers deposits for converters).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         | 3.                                                               | Initial hook
  up revenues, obtained from connecting subscribers to the Companys cables
  infrastructure, are less than related direct selling costs as defined under
  SFAS 51 (Financial Reporting by Cable Television Companies). Therefore,
  such revenues, together with the selling costs, are recognized as the hook up
  is completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | k.                                      | Impairment
  of assets:                                         
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         | 1.                                                               | Impairment
  of fixed assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                  | On
  January 1, 2003, the Company adopted Accounting Standard No. 15,
  Impairment of Assets. This Standard prescribes the accounting treatment and
  disclosures required in the event of impairment of assets. The Standard
  applies to all assets recognized in the balance sheet other than inventories,
  assets generated by construction contracts, assets generated by employee
  benefits, deferred tax assets and financial assets (except investments in
  investees that are not subsidiaries). According to the new Standard, whenever
  there is an indication that an asset may be impaired, the Company should
  determine if there has been an impairment of the asset by comparing the
  carrying amount of the asset to its recoverable amount. The recoverable
  amount is the higher of an assets net selling price or value in use, which
  is determined based on the present value of estimated future cash flows
  expected to be generated by the continuing use of an asset and by its
  disposal at the end of its useful life. If the carrying amount of an asset
  exceeds its recoverable amount, the impairment to be recognized is measured
  by the amount by which the carrying amount of the asset exceeds its fair
  value. An impairment loss recognized should be reversed only if there have
  been changes in the estimates used to determine the assets recoverable
  amount since the impairment loss was recognized.
|            |                                         |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                  | The adoption
  of this Standard did not have a material effect on the Companys financial
  position and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

- F31 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                       | Impairment
  of investment in non-marketable equity securities:                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          | The Company
  generally evaluates the fair value of its investments in each reporting
  period and whenever changes in circumstances or occurrence of other events
  indicate a decline in value that is other than temporary.                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          | The
  evaluation of the fair value takes into consideration, among others,
  valuations of the investments, the conditions of the industry in which the
  investee company is operating, the investee companys business condition,
  prices of equity transactions in the investee company and additional
  information that the investee company presents to its board of directors (if
  the Company is represented on the board) or to its shareholders.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          | Based on the
  results of the above evaluation, the Company, if necessary, recognizes an
  impairment loss that is other than temporary in the statement of operations.                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | l.                                      | Customers
  deposits for converters:                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | The Company
  and Matav Haifa collect deposits from their subscribers in respect of
  converters installed by them, in an amount not exceeding their cost. The
  Company and Matav Haifa partially refund the deposit when the converter is
  returned. The refund amount (which is linked to the Israeli CPI) is reduced to
  reflect 10% amortization for each year or portion of a year in which the
  subscriber used the converter.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | In July
  2003, the financial committee of the Knesset approved amendment No. 5 of the
  Bezeq regulations (Licenses) that enables the Company to amortize deposits
  that were collected from the date of approval at an annual rate of 10% of
  their cost to the Company, rather than 10% of the deposit amount.                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | The
  amortization of the deposits is included in revenue.                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | m.                                      | Income
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                       | Deferred
  taxes are computed in respect of temporary differences between the amounts
  included in the financials statements and the tax basis of assets and
  liabilities and in respect of carryforward tax losses. As to the main factors
  in respect of which deferred taxes have been included  see Note 17c.                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          | Deferred tax
  balances are measured using the enacted tax rate expected to be in effect at
  time when the differences are expected to reverse, based on the applicable
  tax laws at balance sheet date. The amounts of deferred taxes presented in
  the statements of operations reflect changes in the above balances during the
  reported years.                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                       | Taxes which
  would apply in the event of disposal of the investments in the subsidiaries
  and the affiliates (except for Partner) have not been taken into account in
  computing the deferred taxes, as long as it is probable that the sale of the
  investment is not expected in the foreseeable future.                                                                                                                                              

- F32 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           | As to
  Partner: During 2003, the Companys management revised its plans as to the
  investment in the shares of Partner such that the realization of Partner
  shares in the foreseeable future is no more unlikely. In view of the change
  in Companys managements plans as to the realization of the investment in
  the shares of Partner, in accordance with the provisions of Opinion 68 of the
  Institute of Certified Public Accountants in Israel, the Company recorded a
  deferred tax liability (see also Note 5b(2)(d)).
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | 3.                                                                                                                                                                                                                                                                                                                                                                        | Due to the
  uncertainty whether or not the Company shall incur taxable income in the
  future and since the Company accumulated tax loss carryforwards, no deferred
  tax assets have been recorded in the financial statements.                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | 4.                                                                                                                                                                                                                                                                                                                                                                        | As to the
  effect of the adoption of Accounting Standard No. 19 with respect to taxes on
  income, see Note t. below.                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | n.                                      | Allowance
  for doubtful accounts:                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | The
  allowance is principally determined in respect of specific debts that are
  doubtful of collection, based on the age of the customers debt.                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | o.                                      | Cash
  equivalents:                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | The Group
  considers all highly liquid investments, which include unrestricted
  short-term bank deposits with original maturities of three months or less),
  to be cash equivalents.                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | p.                                      | Long term
  liabilities to banks in respect of borrowed debt securities                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | Debt to banks that represents borrowing of debt securities (i.e.
  short sale of debt securities), for which the Company has an intent and it is
  probable that the Company will repay
  only at maturity of these debt securities, is accreted to the redemption
  value based on the effective interest method.                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | q.                                      | Net earnings
  (loss) per Ordinary share and per American Depository Shares (ADS):                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | Basic
  earnings (loss) per share and per ADS are computed based on the weighted
  average number of shares outstanding during the year, assuming the conversion
  of convertible securities at the later of either the beginning of the year or
  the date of their issuance, if conversion is likely.                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | Diluted
  earnings (loss) per share and per ADS are computed as above, with the
  addition of the effect of shares deriving from the conversion of convertible
  securities which were not included in the computation of basic earnings per
  share. If the effect of the conversion of convertible securities is
  antidilutive, it is not included in the computation.

- F33 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            | r.                                      | Linkage
  basis:                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Balances
  whose contractual linkage terms stipulate linkage to the latest index
  published prior to the date of payment are stated on basis of the latest
  index published prior to balance sheet date.                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            | s.                                      | Advertising
  expenses:                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Advertising
  expenses are charged to income as incurred, see also Note 19b.                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            | t.                                      | Derivatives:                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The Company
  purchased options (call options combined in certain cases with put options)
  to offset the effect of possible fluctuation in the NIS/dollar exchange rate
  on the NIS amount of certain dollar cash outflows. The Company does not hold
  or issue derivative financial instruments for trading purposes.                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The options
  are stated at fair value. Gains and losses on the options are included in
  financial expenses.                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            | u.                                      | Implementation
  of new accounting standards and their impact on the financial statements:                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            |                                         | In July
  2004, Accounting Standard No. 19 - Taxes on Income (the Standard) was
  approved by the Israel Accounting Standards Board. The Standard prescribes
  the principles for recognition, measurement, presentation and disclosure of
  taxes on income in the financial statements.                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The
  principal change pursuant to the Standard in relation to the principles
  presently applied is the recognition of deferred taxes in respect of
  temporary differences relating to land.                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The Standard
  is effective in respect of financial statements relating to periods beginning
  on or after January 1, 2005. Changes resulting from adoption of the Standard
  should be recorded by including the cumulative effect in the statement of
  operations as of the beginning of the period in which the Standard is
  adopted.
|            |                                         |                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The Company
  estimates that, the effect of the new Standard on its financial statements is
  not expected to be material.                                                                                                                                                                                                                

- F34 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                          
|----------- | -------------------------
|NOTE 3:    | CASH AND CASH EQUIVALENTS

| |                            |  |                    |        |                |  |          |  |          |        |  |  |        | 
| | -------------------------- |  | ------------------ | ------ | -------------- |  | -------- |  | -------- | ------ |  |  | ------ | 
| |                            |  | Consolidated       |        | The Company    | 
| |                            |  |                    |        |                | 
| |                            |  | December
  31,     |        | December
  31, | 
| |                            |  |                    |        |                | 
| |                            |  | 2003               |        | 2004           |  | 2003     |  | 2004     |       
| |                            |  |                    |        |                |  |          |  |          |       
| |                            |  | NIS in
  thousands |       
| |                            |  |                    |       
| |                            |  | Adjusted           |        | Reported       |  | Adjusted |  | Reported |       
| |                            |  |                    |        |                |  |          |  |          |       
| |                            |  |                    |        |                |  |          |  |          |        |  |  |        | 
| | Cash                       |  |                    | 2,724  |                |  | 4,155    |  |          | 655    |  |  | 1,507  | 
| | Short-term
  bank deposits |  |                    | 35,224 |                |  | 20,095   |  |          | 35,224 |  |  | 20,095 | 
| |                            |  |                    |        |                |  |          |  |          |        |  |  |        | 
| |                            |  |                    |        |                |  |          |  |          |        |  |  |        | 
| |                            |  |                    | 37,948 |                |  | 24,250   |  |          | 35,879 |  |  | 21,602 | 
| |                            |  |                    |        |                |  |          |  |          |        |  |  |        | 

|            |                     |                     
|----------- | ------------------- | --------------------
|NOTE 4:    | ACCOUNTS RECEIVABLE
|            |                     |                     
|            | a.                  | Trade
  receivables:

| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |        | 
| | --------------------- | --------------------------------------------------- | ------------------ | ------ | -------------- |  | -------- | ------ | -------- | ------ | ------ |  | ------ | ------ | 
| |                       |                                                     | Consolidated       |        | The
  Company  | 
| |                       |                                                     |                    |        |                | 
| |                       |                                                     | December
  31,     |        | December
  31, | 
| |                       |                                                     |                    |        |                | 
| |                       |                                                     | 2003               |        | 2004           |  | 2003     |        | 2004     |       
| |                       |                                                     |                    |        |                |  |          |        |          |       
| |                       |                                                     | NIS in
  thousands |       
| |                       |                                                     |                    |       
| |                       |                                                     | Adjusted           |        | Reported       |  | Adjusted |        | Reported |       
| |                       |                                                     |                    |        |                |  |          |        |          |       
| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |       
| | Open accounts (1) (2) |                                                     |                    | 82,772 |                |  | 75,030   |        |          | 45,054 |        |  | 37,074 |       
| | Notes and checks      |                                                     |                    | 379    |                |  | 428      |        |          | 346    |        |  | 324    |       
| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |       
| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |       
| |                       |                                                     |                    | 83,151 |                |  | 75,458   |        |          | 45,400 |        |  | 37,398 |       
| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |       
| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |       
| | (1)                   | Net of allowance for
  doubtful accounts *)         |                    |        | 3,250          |  |          | 3,238  |          |        | 2,495  |  |        | 2,546  | 
| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |       
| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |       
| | (2)                   | Includes credit card
  receivables in the amount of |                    |        | 21,551         |  |          | 19,576 |          |        | 13,442 |  |        | 13,084 | 
| |                       |                                                     |                    |        |                |  |          |        |          |        |        |  |        |       

| |    |                                                                         
| | -- | ------------------------------------------------------------------------
| |    | (*) For
  changes in the allowance for doubtful accounts  See Note 19b.
| |    |                                                                         
| | b. | Other
  accounts receivable:                                            

| |                       |  |  |        |    |  |        |  |  |        |    |  |        | 
| | --------------------- |  |  | ------ | -- |  | ------ |  |  | ------ | -- |  | ------ | 
| | Cable Companies       |  |  | 1,203  | *) |  | 4,180  |  |  | 1,151  | *) |  | 2,999  | 
| | Prepaid expenses      |  |  | 10,851 |    |  | 6,424  |  |  | 12,422 |    |  | 7,010  | 
| | Income receivable     |  |  | 3,953  |    |  | 3,136  |  |  | 3,238  |    |  | 2,267  | 
| | Advances to suppliers |  |  | 692    | *) |  | 5,236  |  |  | 370    | *) |  | 2,473  | 
| | Other                 |  |  | 3,066  | *) |  | 1,034  |  |  | 2,250  | *) |  | 572    | 
| |                       |  |  |        |    |  |        |  |  |        |    |  |        | 
| |                       |  |  |        |    |  |        |  |  |        |    |  |        | 
| |                       |  |  | 19,765 |    |  | 20,010 |  |  | 19,431 |    |  | 15,321 | 
| |                       |  |  |        |    |  |        |  |  |        |    |  |        | 

| |  |    |              
| |  | -- | -------------
| |  | *) | Reclassified.

- F35 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                          |                                                                              |                                          
|----------- | -------------------------------------------------------- | ---------------------------------------------------------------------------- | -----------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIAIRES AFFILIATES AND OTHER COMPANY
|            |                                                          |                                                                              |                                          
|            | a.                                                       | Investments
  in subsidiaries (losses over the investments in subsidiaries):
|            |                                                          |                                                                             
|            |                                                          | 1.                                                                           | The
  investment is comprised as follows:

| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  
| | ----------------------------------- |  | ---------------- | -------- | -------------------------------------------------------- |  | --------------------------------- | - | ----- | ------- | - |  | -------- | -
| |                                     |  | The
  Company    |         
| |                                     |  |                  |         
| |                                     |  | December 31,     |         
| |                                     |  |                  |         
| |                                     |  | 2003             |          | 2004                                                     | 
| |                                     |  |                  |          |                                                          | 
| |                                     |  | Total            |          | Included in
  investments
  and long-
  term receivables |  | Included in long-term liabilities |   | Total |        
| |                                     |  |                  |          |                                                          |  |                                   |   |       |        
| |                                     |  | NIS in thousands |         
| |                                     |  |                  |         
| |                                     |  | Adjusted         |          | Reported                                                 | 
| |                                     |  |                  |          |                                                          | 
| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  
| | Cost of shares                      |  |                  | 8,362    |                                                          |  | 8,362                             |   |       |        |   |  | 8,362    |  
| | Equity in post acquisition
  losses |  |                  | (127,755 | )                                                        |  | (106,862                          | ) |       | (11,806 | ) |  | (118,668 | )
| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  
| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  
| | Equity value                        |  |                  | (119,393 | )                                                        |  | (98,500                           | ) |       | (11,806 | ) |  | (110,306 | )
| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  
| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  
| | Long-term loan (1)                  |  |                  | 36,903   |                                                          |  | 37,346                            |   |       |        |   |  | 37,346   |  
| | Long-term accounts (2)              |  |                  | 322,661  |                                                          |  | 315,254                           |   |       |        |   |  | 315,254  |  
| | Capital notes (3)                   |  |                  | (3,601   | )                                                        |  |                                  |   |       | (3,351  | ) |  | (3,351   | )
| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  
| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  
| |                                     |  |                  | 236,570  |                                                          |  | 254,100                           |   |       | (15,157 | ) |  | 238,943  |  
| |                                     |  |                  |          |                                                          |  |                                   |   |       |         |   |  |          |  

| |     |                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------
| | (1) | The CPI
  linked loan does not bear interest and its repayment date had not yet been
  determined.                  
| |     |                                                                                                                     
| | (2) | Long term
  accounts are linked to the CPI and their repayment date had not yet been
  determined.                  
| |     |                                                                                                                     
| | (3) | Capital
  notes are unlinked to the CPI and bear no interest and their repayment date
  had not yet been determined.

- F36 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                  |    |                                                                      
|----------- | ---------------------------------------------------------------- | -- | ---------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                  |    |                                                                      
|            |                                                                  | 2. | The changes
  in the investments during 2004 and 2003 are as follows:

| |                                                                                  |  |                  |         |          |  |         |  
| | -------------------------------------------------------------------------------- |  | ---------------- | ------- | -------- |  | ------- | -
| |                                                                                  |  | The
  Company    |        
| |                                                                                  |  |                  |        
| |                                                                                  |  | December
  31,   |        
| |                                                                                  |  |                  |        
| |                                                                                  |  | 2003             |         | 2004     | 
| |                                                                                  |  |                  |         |          | 
| |                                                                                  |  | NIS in thousands |        
| |                                                                                  |  |                  |        
| |                                                                                  |  | Adjusted         |         | Reported | 
| |                                                                                  |  |                  |         |          | 
| |                                                                                  |  |                  |         |          |  |         |  
| | Balance at the beginning of
  the year                                           |  |                  | 258,022 |          |  | 236,570 |  
| | Changes during the year:                                                         |  |                  |         |          |  |         |  
| | Equity in earnings (losses)                                                      |  |                  | (31,485 | )        |  | 14,258  |  
| | Liquidation of an
  investment in a subsidiary (MIS)                             |  |                  | (1,062  | )        |  |        |  
| | Sale of the Companys
  shares held by a subsidiary                              |  |                  | 64,917  |          |  |        |  
| | Newly consolidated jointly
  controlled company (by proportionate consolidation) |  |                  | 624     |          |  |        |  
| | Repayment of long term
  accounts                                                |  |                  | (54,396 | )        |  | (11,885 | )
| | Purchasing power loss of
  capital note                                          |  |                  | (50     | )        |  |        |  
| |                                                                                  |  |                  |         |          |  |         |  
| |                                                                                  |  |                  |         |          |  |         |  
| | Balance at the end of the
  year                                                 |  |                  | 236,570 |          |  | 238,943 |  
| |                                                                                  |  |                  |         |          |  |         |  

| |    |                              |                                          
| | -- | ---------------------------- | -----------------------------------------
| | b. | Investments
  in affiliates:
| |    |                              |                                          
| |    | 1.                           | The
  investment is comprised as follows:

| |                                   |  |                  |        |                |  |          |  |          |        |  |  |         | 
| | --------------------------------- |  | ---------------- | ------ | -------------- |  | -------- |  | -------- | ------ |  |  | ------- | 
| |                                   |  | Consolidated     |        | The
  Company  | 
| |                                   |  |                  |        |                | 
| |                                   |  | December
  31,   |        | December
  31, | 
| |                                   |  |                  |        |                | 
| |                                   |  | 2003             |        | 2004           |  | 2003     |  | 2004     |       
| |                                   |  |                  |        |                |  |          |  |          |       
| |                                   |  | NIS in thousands |       
| |                                   |  |                  |       
| |                                   |  | Adjusted         |        | Reported       |  | Adjusted |  | Reported |       
| |                                   |  |                  |        |                |  |          |  |          |       
| |                                   |  |                  |        |                |  |          |  |          |        |  |  |         | 
| | Partner, see (2) below            |  |                  | 65,373 |                |  | 91,334   |  |          | 62,369 |  |  | 88,330  | 
| | Nonstop Ventures, see (3)
  below |  |                  | 1,434  |                |  | 1,402    |  |          | 13,623 |  |  | 13,691  | 
| | Hot Telecom, see (4) below        |  |                  |       |                |  | 9,000    |  |          |       |  |  | 12,209  | 
| |                                   |  |                  |        |                |  |          |  |          |        |  |  |         | 
| |                                   |  |                  |        |                |  |          |  |          |        |  |  |         | 
| |                                   |  |                  | 66,807 |                |  | 101,736  |  |          | 75,992 |  |  | 114,230 | 
| |                                   |  |                  |        |                |  |          |  |          |        |  |  |         | 

- F37 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                  |                                                                      
|----------- | ---------------------------------------------------------------- | ---------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                 
|            |                                                                  | The changes
  in the investments during 2004 and 2003 are as follows:

| |                                                         |  |                  |         |                |  |          |  |          |         |   |  |         | 
| | ------------------------------------------------------- |  | ---------------- | ------- | -------------- |  | -------- |  | -------- | ------- | - |  | ------- | 
| |                                                         |  | Consolidated     |         | The Company    | 
| |                                                         |  |                  |         |                | 
| |                                                         |  | December
  31,   |         | December
  31, | 
| |                                                         |  |                  |         |                | 
| |                                                         |  | 2003             |         | 2004           |  | 2003     |  | 2004     |        
| |                                                         |  |                  |         |                |  |          |  |          |        
| |                                                         |  | NIS in thousands |        
| |                                                         |  |                  |        
| |                                                         |  | Adjusted         |         | Reported       |  | Adjusted |  | Reported |        
| |                                                         |  |                  |         |                |  |          |  |          |        
| |                                                         |  |                  |         |                |  |          |  |          |         |   |  |         | 
| | Balance at the beginning of
  the year                  |  |                  | 22,400  |                |  | 66,807   |  |          | 29,168  |   |  | 75,992  | 
| | Changes during the year:                                |  |                  |         |                |  |          |  |          |         |   |  |         | 
| | Investment in Hot Telecom                               |  |                  |        |                |  | 12,209   |  |          |        |   |  | 12,209  | 
| | Newly proportionately
  consolidated Company            |  |                  | (624    | )              |  |         |  |          | (624    | ) |  |        | 
| | Purchasing power loss on
  capital note (see Note 5(3)) |  |                  | (31     | )              |  |         |  |          | (31     | ) |  |        | 
| | Sale of investments                                     |  |                  | (17,508 | )              |  |         |  |          | (16,293 | ) |  |        | 
| | Equity in earnings                                      |  |                  | 62,840  |                |  | 22,616   |  |          | 64,042  |   |  | 25,925  | 
| | Grant of capital note                                   |  |                  |        |                |  | 68       |  |          |        |   |  | 68      | 
| | Provision for expected loss
  upon exercise of options  |  |                  | (270    | )              |  | 36       |  |          | (270    | ) |  | 36      | 
| |                                                         |  |                  |         |                |  |          |  |          |         |   |  |         | 
| |                                                         |  |                  |         |                |  |          |  |          |         |   |  |         | 
| | Balance at the end of the
  year                        |  |                  | 66,807  |                |  | 101,736  |  |          | 75,992  |   |  | 114,230 | 
| |                                                         |  |                  |         |                |  |          |  |          |         |   |  |         | 

| |  |    |          |                                                    
| |  | -- | -------- | ---------------------------------------------------
| |  | 2. | Partner: |                                                    
| |  |    |          |                                                    
| |  |    | a)       | The
  investment in Partner is composed as follows:

| |                                                        |  |  |        |   |  |        |   |  |        |   |  |        |  
| | ------------------------------------------------------ |  |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
| | Shares:                                                |  |  |        |   |  |        |   |  |        |   |  |        |  
| | Cost of shares                                         |  |  | 2,437  |   |  | 2,437  |   |  |       |   |  |       |  
| | Equity in accumulated earnings                         |  |  | 63,206 |   |  | 89,131 |   |  | 62,639 |   |  | 88,564 |  
| | Provision for expected loss upon exercise
  of options |  |  | (270   | ) |  | (234   | ) |  | (270   | ) |  | (234   | )
| |                                                        |  |  |        |   |  |        |   |  |        |   |  |        |  
| |                                                        |  |  |        |   |  |        |   |  |        |   |  |        |  
| |                                                        |  |  | 65,373 |   |  | 91,334 |   |  | 62,369 |   |  | 88,330 |  
| |                                                        |  |  |        |   |  |        |   |  |        |   |  |        |  

| |  |  |    |                                                                                                                                                                                                                                                                                                                                  
| |  |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | b) | Partner
  operates a mobile telecommunications networks based upon the Global System
  for mobile Communications (GSM) Standard in Israel.                                                                                                                                                                                     
| |  |  |    |                                                                                                                                                                                                                                                                                                                                  
| |  |  |    | On November
  1, 1999, Partner  in which the Group held by the Company and Matav
  Investments 20.326% of its issued capital  offered to the public abroad in
  an initial public offering (IPO) 38,888,999 ADS, each ADS representing one
  Ordinary share of NIS 0.01 par value of Partner, at a price of $13.50 per
  ADS.
| |  |  |    |                                                                                                                                                                                                                                                                                                                                  
| |  |  |    | Since the
  IPO, Partners ADS are listed on the NASDAQ National Market in the United
  States (NASDAQ) and on the London Stock Exchange. Since July 2001,
  Partners shares are also listed for trading on the Tel-Aviv Stock Exchange
  (TASE).                                                                           

- F38 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | ---------------------------------------------------------------- |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | The Group
  owns as of December 31, 2004 and 2003, 5.25% in Partner.                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | The market
  value of Partners shares owned by the Group is NIS 358 million and NIS 332
  million as of December 31, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                            
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | The market
  value of the shares at the date of approximating the issuances of the
  financial statements is NIS 393 million.                                                                                                                                                                                                                                                                                                                                 
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | Under the
  terms of Partners License, certain shareholders of Partner, among them the
  Company, are subjected to certain obligations such as compliance with the
  Required Israeli Percentage (minimum percentage of shares to be held by
  Israeli persons or entities as determined in the License) and the Required
  Founders Percentage (minimum holding of means of control by Founders Group
  as determined in the License) (see also Note 24a.).
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | As to
  collateral on Partners shares, see Note 15c(2).                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  | c) | Realizations
  of Partners shares:                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | In April
  2002, the Group entered into agreements according to which it sold to a
  subsidiary of Hutchison Whampoa Ltd. (Hutchiston) 13,778,668 shares of
  Partner, which constituted 7.7% of Partners issued and outstanding share
  capital. The proceeds from the sale amounted to adjusted NIS 306 million. The
  gain (net of taxes) resulting to the Group from the above transaction
  amounted to NIS 197 million.                              
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | On November
  3, 2003, the Group sold 3,826,169 Ordinary shares of Partner in consideration
  for approximately adjusted NIS 114.4 million. The gain resulting from the
  above sale, net of tax effect, amounted to approximately NIS 62 million.
  Subsequent to the sale, the interest held in Partner is 5.25%.                                                                                                                                           
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | As for the
  sale of the shares of Partner held by the Company during May 2005, see Note
  24a.                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  | d) | During 2003,
  the Companys management revised its plans as to the realization of the
  investment in Partner such that the realization of the Partners share in the
  foreseeable future is no more unlikely. The revision of the plans of
  Companys management, as aforesaid, included the sale of Partners
  unrestricted shares, as described above.                                                                                                 

- F39 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ---------------------------------------------------------------- |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                 
|            |                                                                  |  |    | Consequently,
  in accordance with the provisions of Opinion 68 of the Institute of Certified
  Public Accountants in Israel, the financial statements as of
  December 31, 2004 include a deferred tax liability of approximately NIS
  24 million for the difference between the tax base of the investment in
  Partner and the carrying value of the investment as of December 31, 2004. The
  tax expense in respect of the Partner investment amounted to NIS 8.3 million
  and NIS 15.6 million in 2004 and 2003, respectively. Such tax expense was
  included as an offset to equity in earnings of affiliates.
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  | e) | Partners
  contingent liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | On October
  28, 1999, an Israeli consumer organization lodged a claim against Partner,
  alleging a variety of consumer complaints and requested that this claim be
  approved as a class action.                                                                                                                                                                                                                                                                                                                           
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | On March 20,
  2002, the Haifa District Court decided to strike the claim, because the
  consumer organization lost, on December 31, 2001, a special status required
  under Israeli law for consumer organizations, to file class action claims.                                                                                                                                                                                                                                                                            
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Another
  claim, involving a substantial amount, which was filed by a private consumer
  who had previously requested to join the above class action, has been brought
  again before the court. The court had previously stayed the proceedings of
  the private consumers claim, until a decision was made in the case that was
  filed by the consumer organization.                                                                                                                                                     
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | On May 25,
  2003, the private consumer filed a request to amend his motion to file a
  class action claim and the proposed claim itself, and also a draft of the
  proposed amended motion and claim. The motion to amend was granted and on
  January 21, 2004, Partner has submitted its response to the motion.                                                                                                                                                                                                          
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | On November 24, 2004, the
  court decided to strike the motion to recognize the claim as a class action.                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | On April 8,
  2002, a claim was filed against Partner, together with a motion to approve this
  claim as a class action, alleging a variety of consumer complaints. The
  amount of the claim against Partner is estimated at approximately NIS 545
  million plus additional significant amounts relating to other alleged
  damages. Only preliminary hearings have taken place and the parties await a
  decision by the court with regard to a preliminary motion to dismiss the
  claim, which was submitted by partner.
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | At this
  stage, and until the claim is approved as a class action, Partner and its
  legal counsel are unable to evaluate the probability of success of such
  claim, and therefore no provision has been made in Partners accounts.                                                                                                                                                                                                                                                                                       

- F40 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | ---------------------------------------------------------------- |  |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  |    | In addition,
  Partner and its legal counsel are of the opinion that even if the request to
  approve this claim as a class action is granted, and even if the plaintiffs
  arguments are accepted, the outcome of the claim will be significantly lower
  than the abovementioned amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  | 3) | On April 13,
  2003 a claim was filed against Partner and other cellular telecommunication
  companies, together with a request to recognize this claim as a class action,
  for alleged violation of antitrust law, alleging that no fee should have been
  collected for incoming SMS messages or alternatively, that the fee collected
  is excessive and that it is a result of illegal co-operation between the
  defendants. The amount of the claim against all the defendants is estimated
  at approximately NIS 90 million. Partner has filed its response on October 1,
  2003.                                                                                                                                                                                                                                                              
|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  |    | At this
  stage, no hearings have taken place and unless and until the claim is
  approved as a class action, Partner and its legal counsel are unable to
  evaluate the probability of success of such claim, and therefore no provision
  has been made in Partners accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  | 4) | On September
  14, 2004, a claim was filed against Partner, together with a motion to
  recognize this claim as a class action, alleging errors in client accounts,
  including charges in respect of Internet access after the client requested to
  block the service, and in the recording of credit balances as charges. The
  plaintiff claims that Partner clients have suffered damages of approximately
  NIS 173 million over a period of two years and that Partner is in violation
  of the Consumer Protection Law. Partner has not yet filed a response. At this
  stage, no hearings have taken place and unless and until the claim is
  recognized as a class action, Partner and its legal counsel are unable to
  evaluate the probability of success of such claim, and therefore no provision
  has been made in Partners accounts.
|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  | 5) | Partner does
  not have building permits for many of its cell sites and as a result is
  involved in numerous legal actions (including criminal proceedings against
  officers and directors) relating to this issue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  |    | Most of
  these proceedings have been settled under plea bargain arrangements, whereby
  Partner has paid fines of insignificant amounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  |    | Management,
  based upon current experience and the opinion of legal counsel, does not
  believe that these legal actions will result in significant costs to Partner.
  The accounts of Partner do not include a provision in respect thereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |  | 6) | Partner is a
  party to various claims arising in the ordinary course of its operations.
  Management of Partner, based upon the opinion of its legal counsel, is of the
  opinion that the ultimate resolution of these claims will not have a material
  effect on the financial position of Partner. The accounts do not include a
  provision in respect thereof in Partners accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                             

- F41 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                  |    |                     |                                                                                                                                                                  
|----------- | ---------------------------------------------------------------- | -- | ------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                 
|            |                                                                  | 3. | Nonstop
  Ventures:
|            |                                                                  |    |                     |                                                                                                                                                                  
|            |                                                                  |    | a)                  | The Group
  owns, as of December 31, 2004 and 2003, 50% of Nonstop Ventures (see b)
  below). The Groups investment in Nonstop ventures is comprised as follows:

| |                                     |  |                  |         |                |  |          |   |          |        |  |  |        | 
| | ----------------------------------- |  | ---------------- | ------- | -------------- |  | -------- | - | -------- | ------ |  |  | ------ | 
| |                                     |  | Consolidated     |         | The
  Company  | 
| |                                     |  |                  |         |                | 
| |                                     |  | December
  31,   |         | December
  31, | 
| |                                     |  |                  |         |                | 
| |                                     |  | 2003             |         | 2004           |  | 2003     |   | 2004     |       
| |                                     |  |                  |         |                |  |          |   |          |       
| |                                     |  | NIS in thousands |        
| |                                     |  |                  |        
| |                                     |  | Adjusted         |         | Reported       |  | Adjusted |   | Reported |       
| |                                     |  |                  |         |                |  |          |   |          |       
| | Shares:                             |  |                  |         |                |  |          |   |          |        |  |  |        | 
| | Cost of shares                      |  |                  | 5       |                |  | 5        |   |          |       |  |  |       | 
| | Equity in accumulated losses        |  |                  | (12,194 | )              |  | (12,294  | ) |          |       |  |  |       | 
| | Long-term loans and capital note *) |  |                  | 13,623  |                |  | 13,691   |   |          | 13,623 |  |  | 13,691 | 
| |                                     |  |                  |         |                |  |          |   |          |        |  |  |        | 
|
| |                                     |  |                  | 1,434   |                |  | 1,402    |   |          | 13,623 |  |  | 13,691 | 
| |                                     |  |                  |         |                |  |          |   |          |        |  |  |        | 

| |  |    |              |                                                                                                                                                                     |                                                                                                                                                                                                                                                              
| |  | -- | ------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |              | *)                                                                                                                                                                  | Includes
  long-term loans bearing interest at the Prime rate and capital notes that
  bear no interest and are unlinked, effective from January 2002. The date of
  repayment of the above capital notes and long-term loans, has not yet been
  determined.
| |  |    |              |                                                                                                                                                                     |                                                                                                                                                                                                                                                              
| |  |    | b)           | Nonstop
  ventures is 50% owned by the Group and 50% by shareholders of the Company.                                                                               
| |  |    |              |                                                                                                                                                                     |                                                                                                                                                                                                                                                              
| |  |    |              | Nonstop
  Ventures is engaged in the investments in companies and entrepreneurs whose
  main activities are in the area of Internet, cable and data Communications.
| |  |    |              |                                                                                                                                                                     |                                                                                                                                                                                                                                                              
| |  | 4. | Hot Telecom:
| |  |    |              |                                                                                                                                                                     |                                                                                                                                                                                                                                                              
| |  |    | a)           | The Group
  owns, at December 31, 2004, 26.5% of Hot Telecom.                                                                                                      
| |  |    |              |                                                                                                                                                                     |                                                                                                                                                                                                                                                              
| |  |    |              | The
  Companys investment in Hot Telecom is comprised as follows:                                                                                                 

| |                                |  |                             |        |               |  |        | 
| | ------------------------------ |  | --------------------------- | ------ | ------------- |  | ------ | 
| |                                |  | Consolidated                |        | The
  Company | 
| |                                |  |                             |       
| |                                |  | December
  31, 2004 *)      |       
| |                                |  |                             |       
| |                                |  | Reported
  NIS in thousands |       
| |                                |  |                             |       
| |                                |  |                             |        |               |  |        | 
| | Equity in
  accumulated losses |  |                             | (3,209 | )             |  |       | 
| | Long-term
  debt (1)           |  |                             | 12,209 |               |  | 12,209 | 
| |                                |  |                             |        |               |  |        | 
|
| |                                |  |                             | 9,000  |               |  | 12,209 | 
| |                                |  |                             |        |               |  |        | 

| |     |                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------
| | *)  | Hot Telecom
  was established by the Cable Companies in November 2003. See Note 1a(4,5,6).                  
| |     |                                                                                                             
| | (1) | Long-term
  debt is unlinked to CPI and bears no interest. Its repayment date had not yet
  been determined.

- F42 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ---------------------------------------------------------------- |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  | b) | According to
  the license, which was granted to Hot Telecom, the Partnership has to pay
  royalties at a rate of 3.5% to the Government of Israel, based on the gross
  income from telecommunication services according to the license conditions.                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  | c) | Hot Telecom,
  together with the Cable Companies are obliged to make payments to the
  government, see Note 15(a)(1)(b).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  | d) | On July 9,
  2004, Hot Telecom, signed an agreement with an Israeli entity in the global
  Lucent Int. Group for the establishment of a telephony network based on the
  cable infrastructure. The agreement is a framework agreement for 100,000
  subscribers and, in the first stage, orders will be issued for the
  establishment of a network for 24,000 telephony subscribers in consideration
  for an estimated amount of $16 million. To secure the payments to Lucent, the
  partnership provided a guarantee in amount of $4 million through its partners
  including the company (see also Note 15c(9)).
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  | e) | On July 29,
  2004, Bezeq, the Israel Telecommunication Corp. Ltd. (Bezeq) submitted a
  petition for the granting of orders nisi and for the granting of an interim
  order, against the Government of Israel, the Minister of Communications and
  the Minister of Finance (the Respondents) and against Hot Telecom as a
  formal respondent.                                                                                                                                                                                                                                                                 
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  |    | The petition
  was based on an amendment to the Communications Regulations (Bezeq and
  Broadcasting) (Payments for Interconnection), 2000 (the Interconnection
  Regulations), specifically on interim Regulation No. 10. This regulation
  sets a Bill and Keep arrangement which applies between Bezeq and Hot
  Telecom as follows:                                                                                                                                                                                                                                                                          
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  |    | In regulation
  10 to the interconnection regulations, Bezeq and the internal operator
  (except for a unique internal operator and Bezeq) will not make payments to
  each other for reciprocal communication links as stated in the aforesaid
  regulation, and each of them will bear their costs in this respect, all of
  which is if the following cumulative conditions are met:                                                                                                                                                                                                                              
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Two years
  have not yet elapsed from the date on which the internal operator commenced
  providing telephony services on a commercial basis, as the Minister of
  Communications informed the concerned license holders (November 25, 2004).                                                                                                                                                         
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                                  |  |    | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | The
  difference between the total minutes of traffic originating in the internal
  operators aforesaid network and their destination being the internal
  operator network of Bezeq and the total minutes of traffic originating in the
  internal operators network of Bezeq and their destination being internal
  operators aforesaid network does not exceed 1,050,000,000 minutes of traffic.

- F43 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | ---------------------------------------------------------------- |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | The
  petitioner requested interim orders to delay the effective date of the
  arrangement until compensation to the
  petitioner is ensured in respect of loss of income, through amendment of the
  Bezeq (Royalties) Regulations, 2001, to enable the petitioner to set off the
  loss of income incurred and to cancel Regulation 10 that was enacted without
  authority and with discrimination against the petitioner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | In addition,
  an interim order was requested to maintain the current status until a
  decision is rendered with respect to the petition or until the petitioners
  right to receive compensation for loss of income is determined fully and
  completely.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | On August
  11, 2004, the request for an interim order was rejected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | Subsequent
  to a preliminary hearing of the petition, and after the Bezeq (Royalties)
  Regulations, 2001 was amended in a way that ensured that Bezeq may set off
  the loss of income, the petitioner filed an amended petition. A hearing for
  the amended petition was scheduled on April 14, 2005. The date set for
  submission of a response on behalf of Hot Telecom to the amended petition is
  no later than 5 days before the date set for the hearing (see also Note 24e
  in respect of the withdrawal of the petition).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  | f) | On November
  30, 2004, the Ministry of Communications issued policy principles to license
  the provision of telephony services by broadband access (VoB) (The policy
  principles). Pursuant to the policy principles, the provision of stationary
  domestic VoB services shall be organized in the context of a unique domestic
  operator license, according to which the provision of telephony services is
  to be performed by VoIP technology while using the broadband access of a
  domestic operator (currently Bezeq or Hot Telecom). The policy principles
  determine that licenses to provide VoB services shall be granted in 2005 in a
  manner that the commencement of operations by virtue of the licenses shall be
  feasible on May 1, 2005. It was further determined that for the time being,
  an owner of VoB license shall not be charged to pay the domestic operator for
  using the domestic operators network. The ministry, in its policy
  principles, noted that it intends to complete soon the policy on the
  provision of VoB services by broadband access network of cellular operator.
  In addition, pursuant to the policy principles, Bezeq shall be entitled to
  provide VoB services at the earlier of May 1, 2007 or after its customer
  segment in the area of the stationary telephony (business or private
  segments) shall decrease below 85%, and a subsidiary of Bezeq shall be able
  to provide VoB services subject to restrictions stipulated in the unique
  domestic operators regulations. The ministry indicated that a hearing
  proceeding regarding the same matter with the relevant parties shall be
  conducted in the coming weeks.
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                  |  |    | Concurrently
  with promulgating the policy principles, the ministry commenced to grant
  licenses for marketing experiment for a payment to provide VoB services to
  several internet suppliers, among which are 012 Golden Lines, Barak, Bezeq
  International and Gold internet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

- F44 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ---------------------------------------------------------------- |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    | As a result
  of applications by Bezeq and Hot Telecom the Ministry of Communications, on
  December 29, 2004, sent a letter to various parties including Bezeq and Hot
  Telecom thereby enabling them to present their position with respect to the
  ramifications of the policy principles on them. In a reply to the Ministry of
  Communications, Hot Telecom filed a detailed status paper in which it
  demanded to revoke the policy principles alleging that they constitute a
  deviation from the policy having a basis to organize the communications
  market in Israel on a facilities based competition and that the resolution of
  the Ministry of Communications to enable the provision of VoB services while
  using the domestic operator infrastructures constitutes an illegal impairment
  of the proprietary right of the infrastructures owner. In addition, it was alleged
  that the resolution pursuant to which the VoB operator shall not be charged
  with a payment for using the internal operators infrastructure lacks
  authority and is devoid of reasonableness and results in economic distortions
  and the ministry is required to enable the payment of access fees to the
  internal operator for using its infrastructures for proving the VoB service.
  Alternatively, Hot Telecom requested to adjourn the date for granting the VoB
  licenses until after Hot Telecom shall reach a market segment of 5% of the
  stationary telephony industry. In addition, Hot Telecom claims that the
  resolution of the Ministry of Communications to enable the use in the
  domestic operators infrastructures to provide cellular VoB service without,
  at the same time, enabling Hot telecom to provide VoB service over the
  cellular infrastructures, is unreasonable and creates discrimination between
  the operators.
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    | As to the
  matter of providing VoB services by Bezeq, Hot Telecom demands that Bezeq
  shall not be entitled to provide directly and/or by its subsidiary, VoB
  services as long as it is a monopoly in the stationary telephony industry, to
  wit, as long as it holds in 50% of stationary telephony market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  |    | As of the
  date of filing the report, a new resolution of the ministry of communications
  has not yet been issued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                  |  | g) | On March 31,
  2004, the Ministry of Communications issued policy principles on Bezeq
  license-discounts for size and marketing bundled services according to
  which: (a) Bezeq may offer discounts for size at a rate of up to 10%,
  effective with the commencement date of providing commercial telephony
  services by a domestic operator, and (b) Bezeq may request to amend its
  license in a manner that it will be able to market bundled services including
  telephony services and multi-channel TV that are provided by a subsidiary
  when its market segment of the stationary telephony industry (private or
  business sectors) shall decrease below 85% and this is in relation to the
  same customers segment. In addition, it was determined that if it is found
  that even before the market segment of Bezeq decreased below 85%, as above,
  that the competitive status of Bezeqs subsidiary deteriorated significantly
  resulting, among others, from marketing service bundles that include
  telephony by a competitor, the minister shall consider to amend Bezeqs
  license according to the above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

- F45 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                  |                                     |  |                                                                                                                                                                                                                                                                                                         
|----------- | ---------------------------------------------------------------- | ----------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                  |                                     |  |                                                                                                                                                                                                                                                                                                         
|            |                                                                  |                                     |  | As to this
  matter, the ministry determined that in relation to Yes  a determination of
  a significant deterioration in the competitive status shall be a situation in
  which its market segment in the industry of multi channel-broadcast to
  subscribers decreased below 25% of all subscribers.
|            |                                                                  |                                     |  |                                                                                                                                                                                                                                                                                                         
|            |                                                                  |                                     |  | Following
  additional hearing procedures held by the Ministry of Communications in this
  matter, the ministry resolved on January 9, 2005, to raise the significant
  deterioration threshold in the competitive status of Yes from 25% to 29%.                                                       
|            |                                                                  |                                     |  |                                                                                                                                                                                                                                                                                                         
|            | c.                                                               | Non-marketable
  equity securities:

| |                                                                                                             |  |                    |        |                |  |          |  |          |        |  |  |   | 
| | ----------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | -------------- |  | -------- |  | -------- | ------ |  |  | - | 
| |                                                                                                             |  | Consolidated       |        | The
  Company  | 
| |                                                                                                             |  |                    |        |                | 
| |                                                                                                             |  | December
  31,     |        | December
  31, | 
| |                                                                                                             |  |                    |        |                | 
| |                                                                                                             |  | 2003               |        | 2004           |  | 2003     |  | 2004     |       
| |                                                                                                             |  |                    |        |                |  |          |  |          |       
| |                                                                                                             |  | NIS in
  thousands |       
| |                                                                                                             |  |                    |       
| |                                                                                                             |  | Adjusted           |        | Reported       |  | Adjusted |  | Reported |       
| |                                                                                                             |  |                    |        |                |  |          |  |          |       
| | Cost of shares of Barak I.T.C. (1995) 
  International Telecommunications Services Corp. Ltd. (Barak) *) |  |                    | 16,241 |                |  |         |  |          | 16,227 |  |  |  | 
| |                                                                                                             |  |                    |        |                |  |          |  |          |        |  |  |   | 

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | *) | Barak, 10%
  held by the Group, won a tender of the Israeli Ministry of Communications for
  the provision of international telephony services. The operating license was
  granted to Barak in February 1997 for a period of ten years and the provision
  of services commenced in July 1997.                                                                                                                                                                                                                                                                     
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 1. | During 2002,
  the Company wrote-off a part of its investment in Barak, which amounted to
  NIS 8.8 million, based on a valuation of Barak. This amount was presented in
  other expenses, net.                                                                                                                                                                                                                                                                                                                                                                     
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 2. | As of
  December 31, 2004 Barak had shareholders deficiency of NIS 527 million and a
  working capital deficiency of NIS 704 million, derived mainly from
  classification of long-term bank liabilities as current liabilities as a
  result of Baraks noncompliance with part of its financial covenants.                                                                                                                                                                                                                                                       
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |    | In the
  opinion of Baraks management, in light of its positive cash flows from
  operating activities and the advanced negotiations with banks in connection
  with refinancing of Baraks debt, Barak will continue to operate as a going
  concern in the foreseeable future. Nonetheless, management of Barak is in the
  opinion that absent a financing arrangement with the banks, Barak will
  encounter difficulties in paying interest to debentures holders and the
  principal of the loan to banks that are repayable in November and December
  2005.

- F46 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                  |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVESTMENTS IN SUBSIDIARIES AFFILIATES AND OTHER COMPANY (Cont.)
|            |                                                                  |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                  |                                                                                                                                                                                            | In light of
  the deterioration in Baraks financial position, as stated above, and in
  light of the opening of the international communications segment to new
  competitors, and the granting of licenses to three additional operators, the
  Companys management decided to reexamine the value of its investment in
  shares of Barak.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                  |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                  |                                                                                                                                                                                            | The value of
  the investment in Barak was determined by the work of a valuation expert,
  based on the discounted cash flows method, discounted at a capitalization
  rate of 12.5% per annum. The valuation was performed under the assumption
  that Barak will arrange the abovementioned refinancing for purposes of
  repayment of the debentures issued and, accordingly, will continue to operate
  as a going concern. According to the valuation implemented by the appraiser,
  the estimated fair value of the interest in Barak is between zero and $1
  million only. Management of the Company chose to present the investment
  according to the low range of the valuation and, therefore wrote down the
  entire amount of the investment in Barak, in the amount of approximately NIS
  16 million (see also Note 24d). The loss amounting from the aforementioned
  write-down was included as part of other expenses.
|            |                                                                  |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | d.                                                               | Companys
  share of assets, liabilities, revenues and expenses and cash flows of a
  jointly controlled company that is consolidated by the proportionate
  consolidation method (26.6%):

| |                           |  |                    |        |          |  |        | 
| | ------------------------- |  | ------------------ | ------ | -------- |  | ------ | 
| |                           |  | December
  31      |       
| |                           |  |                    |       
| |                           |  | 2003               |        | 2004     | 
| |                           |  |                    |        |          | 
| |                           |  | NIS in
  thousands |       
| |                           |  |                    |       
| |                           |  | Adjusted           |        | Reported | 
| |                           |  |                    |        |          | 
| | Current assets            |  |                    | 20,520 |          |  | 24,044 | 
| |                           |  |                    |        |          |  |        | 
| | Non-current
  assets      |  |                    | 38,125 |          |  | 29,202 | 
| |                           |  |                    |        |          |  |        | 
| | Current
  liabilities     |  |                    | 61,913 |          |  | 57,594 | 
| |                           |  |                    |        |          |  |        | 
| | Non-current
  liabilities |  |                    | 737    |          |  | 605    | 
| |                           |  |                    |        |          |  |        | 

| |                                                |  |                                  |       |  
| | ---------------------------------------------- |  | -------------------------------- | ----- | -
| |                                                |  | Year ended
  December 31,
  2004 |      
| |                                                |  |                                  |      
| |                                                |  | NIS in
  thousands               |      
| |                                                |  |                                  |      
| |                                                |  | Reported                         |      
| |                                                |  |                                  |      
| | Net revenues                                   |  |                                  | 5,852 |  
| |                                                |  |                                  |       |  
| | Expenses                                       |  |                                  | 1,291 |  
| |                                                |  |                                  |       |  
| | Gross profit                                   |  |                                  | 4,119 |  
| |                                                |  |                                  |       |  
| | Loss from
  continuing operations and net loss |  |                                  |      |  
| |                                                |  |                                  |       |  
| | Cash flows
  from operating activities         |  |                                  | 1,104 |  
| |                                                |  |                                  |       |  
| | Cash flows
  from investing activities         |  |                                  | (493  | )
| |                                                |  |                                  |       |  
| | Cash flows
  from financing activities         |  |                                  | (195  | )
| |                                                |  |                                  |       |  

- F47 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                                                                                                                                                                                                                                                                                                                           
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 6:    | INVESTMENT IN LIMITED PARTNERSHIPS                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                                                           
|            | The jointly
  controlled entity invests in limited partnerships that are engaged in the
  production of films in Israel. The limited partnerships received an approval
  from a committee at the Ministry of Industry and Trade which deals with
  withholding tax of films under the Income Tax Regulations (Withholding of
  Investors Income from Israeli Films), 1990.
|            |                                                                                                                                                                                                                                                                                                                                                                           
|            | The jointly
  controlled entity is a limited partner in these partnerships.                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                                                           
|            | As of
  December 31, 2004 Hot Vision has an obligation to perform additional investments
  in these partnerships of NIS 190 thousand.                                                                                                                                                                                                                                     
|            |                                                                                                                                                                                                                                                                                                                                                                           
|NOTE 7:    | RIGHTS TO BROADCAST MOVIES AND PROGRAMS FILM COSTS                                                                                                                                                                                                                                                                                                                        

| |                                           |  |                       |         |  
| | ----------------------------------------- |  | --------------------- | ------- | -
| |                                           |  | December
  31,
  2004 |        
| |                                           |  |                       |        
| |                                           |  | NIS in
  thousands    |        
| |                                           |  |                       |        
| |                                           |  | Reported              |        
| |                                           |  |                       |        
| |                                           |  |                       |         |  
| | Balance at
  the beginning of the year *) |  |                       | 34,927  |  
| |                                           |  |                       |         |  
| | Additions
  during the year               |  |                       | 26,936  |  
| | Amortization
  during the year            |  |                       | (35,354 | )
| |                                           |  |                       |         |  
| | Balance at
  the end of the year          |  |                       | 26,509  |  
| |                                           |  |                       |         |  

| |    |                                                                                        
| | -- | ---------------------------------------------------------------------------------------
| | *) | The accounts
  of Hot Vision were consolidated for the first time on December 31, 2003.

- F48 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                                                                                                    
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8:    | PROPERTY, PLANT AND EQUIPMENT                                                                                                                      
|            |                                                                                                                                                    
|            | Composition
  of assets and accumulated depreciation and amortization, grouped by major
  classifications, and changes during 2004, are as follows:

|                                                       |  |                                      |           |                            |  |                       |  |                                |       |                                      |  |           |  |                |           |                                |  |         |  |      |       |  |  |           |  |  |         |  |  |         | 
|------------------------------------------------------ |  | ------------------------------------ | --------- | -------------------------- |  | --------------------- |  | ------------------------------ | ----- | ------------------------------------ |  | --------- |  | -------------- | --------- | ------------------------------ |  | ------- |  | ---- | ----- |  |  | --------- |  |  | ------- |  |  | ------- | 
|                                                       |  | Consolidated                         |          
|                                                       |  |                                      |          
|                                                       |  | Cost                                 |           | Accumulated
  depreciation |  | Depreciated
  balance | 
|                                                       |  |                                      |           |                            |  |                       | 
|                                                       |  |                                      |           | Changes
  during the year  |  |                       |  |                                |       | Changes
  during the year            |  |           |  | December
  31, |          
|                                                       |  |                                      |           |                            |  |                       |  |                                |       |                                      |  |           |  |                |          
|                                                       |  | Balance at
  
  beginning 
  of year |           | Additions                  |  | Disposals             |  | Balance at
  
  end 
  of year |       | Balance at
  
  beginning 
  of year |  | Additions |  | Disposals      |           | Balance at
  
  end 
  of year |  | 2003    |  | 2004 |      
|                                                       |  |                                      |          
|                                                       |  | NIS in
  thousands                   |          
|                                                       |  |                                      |          
|                                                       |  | Adjusted                             |           | Reported                   |  | Adjusted              |  | Reported                       |       | Adjusted                             |  | Reported  | 
|                                                       |  |                                      |           |                            |  |                       |  |                                |       |                                      |  |           | 
|                                                       |  |                                      |           |                            |  |                       |  |                                |       |                                      |  |           |  |                |           |                                |  |         |  |      |       |  |  |           |  |  |         |  |  |         | 
|Leasehold land
  (including construction plans) (1)    |  |                                      | 4,319     |                            |  |                      |  |                                |      |                                      |  | 4,319     |  |                |          |                                |  |        |  |      |      |  |  |          |  |  | 4,319   |  |  | 4,319   | 
|Buildings
  (including land) (2)                       |  |                                      | 53,699    |                            |  | 1,163                 |  |                                |       |                                      |  | 54,862    |  |                | 11,660    |                                |  | 1,046   |  |      |      |  |  | 12,706    |  |  | 42,039  |  |  | 42,156  | 
|Cable network                                          |  |                                      | 1,342,613 |                            |  | 24,138                |  |                                |      |                                      |  | 1,366,751 |  |                | 820,540   |                                |  | 89,941  |  |      |      |  |  | 910,481   |  |  | 522,073 |  |  | 456,270 | 
|Broadcasting
  center (primarily electronic equipment) |  |                                      | 136,940   |                            |  | 18,488                |  |                                |      |                                      |  | 155,428   |  |                | 101,478   |                                |  | 12,314  |  |      |      |  |  | 113,792   |  |  | 35,462  |  |  | 41,636  | 
|Studio
  equipment                                     |  |                                      | 12,294    |                            |  | 3,037                 |  |                                |      |                                      |  | 15,331    |  |                | 12,294    |                                |  | 653     |  |      |      |  |  | 12,947    |  |  |        |  |  | 2,384   | 
|Converters and
  modems                                |  |                                      | 390,242   |                            |  | 45,245                |  |                                | 1,326 |                                      |  | 434,161   |  |                | 136,105   |                                |  | 34,113  |  |      | 530   |  |  | 169,688   |  |  | 254,137 |  |  | 264,473 | 
|Computers and
  peripheral equipment                   |  |                                      | 62,049    |                            |  | 2,885                 |  |                                |      |                                      |  | 64,934    |  |                | 51,147    |                                |  | 5,704   |  |      |      |  |  | 56,851    |  |  | 10,902  |  |  | 8,083   | 
|Office
  furniture and equipment                       |  |                                      | 14,507    |                            |  | 308                   |  |                                |      |                                      |  | 14,815    |  |                | 9,934     |                                |  | 656     |  |      |      |  |  | 10,590    |  |  | 4,573   |  |  | 4,225   | 
|Leasehold
  improvements                               |  |                                      | 6,364     |                            |  | 30                    |  |                                |      |                                      |  | 6,394     |  |                | 4,620     |                                |  | 287     |  |      |      |  |  | 4,907     |  |  | 1,744   |  |  | 1,487   | 
|Development
  costs of internet site                   |  |                                      | 1,099     |                            |  |                       |  |                                |      |                                      |  | 1,099     |  |                | 972       |                                |  | 31      |  |      |      |  |  | 1,003     |  |  | 127     |  |  | 96      | 
|Vehicle                                                |  |                                      | 4,282     |                            |  |                      |  |                                | 3,489 |                                      |  | 793       |  |                | 2,872     |                                |  | 406     |  |      | 2,695 |  |  | 583       |  |  | 1,410   |  |  | 210     | 
|Telephone
  equipment                                  |  |                                      | 39        |                            |  | 134                   |  |                                |      |                                      |  | 173       |  |                |          |                                |  | 1       |  |      |      |  |  | 1         |  |  | 39      |  |  | 172     | 
|                                                       |  |                                      |           |                            |  |                       |  |                                |       |                                      |  |           |  |                |           |                                |  |         |  |      |       |  |  |           |  |  |         |  |  |         | 
|                                                       |  |                                      |           |                            |  |                       |  |                                |       |                                      |  |           |  |                |           |                                |  |         |  |      |       |  |  |           |  |  |         |  |  |         | 
|                                                       |  |                                      | 2,028,447 |                            |  | 95,428                |  |                                | 4,815 |                                      |  | 2,119,060 |  |                | 1,151,622 |                                |  | 145,152 |  |      | 3,225 |  |  | 1,293,549 |  |  | 876,825 |  |  | 825,511 | 
|                                                       |  |                                      |           |                            |  |                       |  |                                |       |                                      |  |           |  |                |           |                                |  |         |  |      |       |  |  |           |  |  |         |  |  |         | 

|    |                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The land is
  leased for a 49 year period ending in 2038. The lease fees have been
  capitalized. Registration of the lease with the Land Registry has not yet
  been completed.                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                        
|(2) | The cost of
  the buildings includes an amount of NIS 21,907 thousand at December 31, 2004
  and 2003 representing cost of buildings on leased land. The lease in respect
  of most of the land is for a 49 year period ending in 2040, with an option to
  renew the lease for an additional 49 years. Registration of the leases with
  the Land Registry has not yet been completed.

- F49 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                      
|----------- | -------------------------------------
|NOTE 8:    | PROPERTY, PLANT AND EQUIPMENT (Cont.)

|                                                       |  |                                     |           |                           |  |                     |  |                               |       |                                     |  |           |  |           |         |                               |  |         |  |      |       |  |  |         |  |  |         |  |  |         | 
|------------------------------------------------------ |  | ----------------------------------- | --------- | ------------------------- |  | ------------------- |  | ----------------------------- | ----- | ----------------------------------- |  | --------- |  | --------- | ------- | ----------------------------- |  | ------- |  | ---- | ----- |  |  | ------- |  |  | ------- |  |  | ------- | 
|                                                       |  | The Company                         |          
|                                                       |  |                                     |          
|                                                       |  | Cost                                |           | Accumulated depreciation  |  | Depreciated balance | 
|                                                       |  |                                     |           |                           |  |                     | 
|                                                       |  |                                     |           | Changes
  during the year |  |                     |  | Changes
  during the year     |       | December
  31,                      | 
|                                                       |  |                                     |           |                           |  |                     |  |                               |       |                                     | 
|                                                       |  | Balance at
  
  beginning
  of year |           | Additions                 |  | Disposals           |  | Balance at
  
  end
  of year |       | Balance at
  
  beginning
  of year |  | Additions |  | Disposals |         | Balance at
  
  end
  of year |  | 2003    |  | 2004 |      
|                                                       |  |                                     |           |                           |  |                     |  |                               |       |                                     |  |           |  |           |         |                               |  |         |  |      |      
|                                                       |  | NIS in
  thousands                  |          
|                                                       |  |                                     |          
|                                                       |  | Adjusted                            |           | Reported                  |  | Adjusted            |  | Reported                      |       | Adjusted                            |  | Reported  | 
|                                                       |  |                                     |           |                           |  |                     |  |                               |       |                                     |  |           | 
|                                                       |  |                                     |           |                           |  |                     |  |                               |       |                                     |  |           |  |           |         |                               |  |         |  |      |       |  |  |         |  |  |         |  |  |         | 
|Leasehold land (including construction
  plans) (1)    |  |                                     | 4,319     |                           |  |                    |  |                               |      |                                     |  | 4,319     |  |           |        |                               |  |         |  |      |       |  |  |         |  |  | 4,319   |  |  | 4,319   | 
|Buildings (including land) (2)                         |  |                                     | 18,875    |                           |  | 1,141               |  |                               |      |                                     |  | 20,016    |  |           | 5,532   |                               |  | 389     |  |      |      |  |  | 5,921   |  |  | 13,343  |  |  | 14,095  | 
|Cable network                                          |  |                                     | 990,398   |                           |  | 65                  |  |                               |      |                                     |  | 990,463   |  |           | 596,222 |                               |  | 67,894  |  |      |      |  |  | 664,116 |  |  | 394,176 |  |  | 326,347 | 
|Broadcasting center (primarily electronic
  equipment) |  |                                     | 65,085    |                           |  | 8,632               |  |                               |      |                                     |  | 73,717    |  |           | 55,700  |                               |  | 3,387   |  |      |       |  |  | 59,087  |  |  | 9,385   |  |  | 14,630  | 
|Studio equipment                                       |  |                                     | 3,561     |                           |  |                    |  |                               |      |                                     |  | 3,561     |  |           | 3,561   |                               |  |        |  |      |      |  |  | 3,561   |  |  |        |  |  |        | 
|Converters and modems                                  |  |                                     | 272,762   |                           |  | 35,122              |  |                               | 915   |                                     |  | 306,969   |  |           | 97,259  |                               |  | 23,915  |  |      | 389   |  |  | 120,785 |  |  | 175,503 |  |  | 186,184 | 
|Computers and peripheral equipment                     |  |                                     | 55,160    |                           |  | 2,784               |  |                               |      |                                     |  | 57,944    |  |           | 45,530  |                               |  | 4,852   |  |      |       |  |  | 50,382  |  |  | 9,630   |  |  | 7,562   | 
|Office furniture and equipment                         |  |                                     | 8,704     |                           |  | 80                  |  |                               |      |                                     |  | 8,784     |  |           | 5,706   |                               |  | 342     |  |      |      |  |  | 6,048   |  |  | 2,998   |  |  | 2,736   | 
|Leasehold improvements                                 |  |                                     | 5,921     |                           |  | 8                   |  |                               |      |                                     |  | 5,929     |  |           | 4,267   |                               |  | 271     |  |      |      |  |  | 4,538   |  |  | 1,654   |  |  | 1,391   | 
|Development costs of internet site                     |  |                                     | 1,095     |                           |  |                    |  |                               |      |                                     |  | 1,095     |  |           | 994     |                               |  | 31      |  |      |      |  |  | 1,025   |  |  | 101     |  |  | 70      | 
|Vehicle                                                |  |                                     | 3,303     |                           |  |                    |  |                               | 2,883 |                                     |  | 420       |  |           | 2,177   |                               |  | 301     |  |      | 2,211 |  |  | 267     |  |  | 1,126   |  |  | 153     | 
|                                                       |  |                                     |           |                           |  |                     |  |                               |       |                                     |  |           |  |           |         |                               |  |         |  |      |       |  |  |         |  |  |         |  |  |         | 
|                                                       |  |                                     |           |                           |  |                     |  |                               |       |                                     |  |           |  |           |         |                               |  |         |  |      |       |  |  |         |  |  |         |  |  |         | 
|                                                       |  |                                     | 1,429,183 |                           |  | 47,832              |  |                               | 3,798 |                                     |  | 1,473,217 |  |           | 816,948 |                               |  | 101,382 |  |      | 2,600 |  |  | 915,730 |  |  | 612,235 |  |  | 557,487 | 
|                                                       |  |                                     |           |                           |  |                     |  |                               |       |                                     |  |           |  |           |         |                               |  |         |  |      |       |  |  |         |  |  |         |  |  |         | 

|    |                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The land is
  leased for a 49 year period ending in 2038. The lease fees have been
  capitalized. Registration of the lease with the Land Registry has not yet
  been completed.                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                               
|(2) | The cost of
  the buildings, includes mostly an amount which represents cost of buildings
  on leased land. The lease in respect of most of the land is for a 49 year
  period ending in 2040, with an option to renew the lease for an additional 49
  years. Registration of the leases with the Land Registry has not yet been
  completed.

As to the
pledges on property, plant and equipment  see Note 15c(1).

- F50 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                           
|----------- | ------------------------------------------
|NOTE 9:    | INTANGIBLE ASSETS AND DEFERED CHARGES, NET

| |                                             |  |                  |        |                     |  |                     |  |          |       |          |  |          |  |  |       |  |  |     | 
| | ------------------------------------------- |  | ---------------- | ------ | ------------------- |  | ------------------- |  | -------- | ----- | -------- |  | -------- |  |  | ----- |  |  | --- | 
| |                                             |  | Consolidated     |        | The Company         | 
| |                                             |  |                  |        |                     | 
| |                                             |  | Original amount  |        | Unamortized balance |  | Unamortized balance | 
| |                                             |  |                  |        |                     |  |                     | 
| |                                             |  | December 31,     |        | December 31,        | 
| |                                             |  |                  |        |                     | 
| |                                             |  | 2003             |        | 2004                |  | 2003                |  | 2004     |       | 2003     |  | 2004     | 
| |                                             |  |                  |        |                     |  |                     |  |          |       |          |  |          | 
| |                                             |  | NIS in thousands |       
| |                                             |  |                  |       
| |                                             |  | Adjusted         |        | Reported            |  | Adjusted            |  | Reported |       | Adjusted |  | Reported | 
| |                                             |  |                  |        |                     |  |                     |  |          |       |          |  |          | 
| |                                             |  |                  |        |                     |  |                     |  |          |       |          |  |          |  |  |       |  |  |     | 
| | Debentures
  issuance expenses, see Note 14 |  |                  | 11,393 |                     |  | 11,393              |  |          | 1,330 |          |  | 616      |  |  | 1,330 |  |  | 616 | 
| | Non-exclusive
  license, see Note 2(i)      |  |                  | 3,972  |                     |  | 3,972               |  |          | 2,616 |          |  | 2,485    |  |  |      |  |  |    | 
| |                                             |  |                  |        |                     |  |                     |  |          |       |          |  |          |  |  |       |  |  |     | 
| |                                             |  |                  |        |                     |  |                     |  |          |       |          |  |          |  |  |       |  |  |     | 
| |                                             |  |                  | 15,365 |                     |  | 15,365              |  |          | 3,946 |          |  | 3,101    |  |  | 1,330 |  |  | 616 | 
| |                                             |  |                  |        |                     |  |                     |  |          |       |          |  |          |  |  |       |  |  |     | 

|            |            
|----------- | -----------
|NOTE 10:   | BANK CREDIT

| |                                                      |  |                                 |     |                             |  |                           |  |          |         |          |  |         |  |  |         | 
| | ---------------------------------------------------- |  | ------------------------------- | --- | --------------------------- |  | ------------------------- |  | -------- | ------- | -------- |  | ------- |  |  | ------- | 
| |                                                      |  | Weighted 
  averageinterestrate |     | Consolidated
  December 31, |  | The
  CompanyDecember 31, | 
| |                                                      |  |                                 |     |                             |  |                           | 
| |                                                      |  | December 31, 
  2004            |     | 2003                        |  | 2004                      |  | 2003     |         | 2004     | 
| |                                                      |  |                                 |     |                             |  |                           |  |          |         |          | 
| |                                                      |  | %                               |     | NIS in
  thousands          | 
| |                                                      |  |                                 |     |                             | 
| |                                                      |  |                                 |     | Adjusted                    |  | Reported                  |  | Adjusted |         | Reported | 
| |                                                      |  |                                 |     |                             |  |                           |  |          |         |          |  |        
| |                                                      |  |                                 |     |                             |  |                           |  |          |         |          |  |         |  |  |         | 
| | Short-term
  credit, see Note 19                     |  |                                 | 5.3 |                             |  | 389,730                   |  |          | 437,029 |          |  | 349,223 |  |  | 396,682 | 
| | Current
  maturities of long-term loans, see Note 13 |  |                                 |     |                             |  | 45,673                    |  |          | 28,310  |          |  | 45,673  |  |  | 28,310  | 
| |                                                      |  |                                 |     |                             |  |                           |  |          |         |          |  |         |  |  |         | 
| |                                                      |  |                                 |     |                             |  |                           |  |          |         |          |  |         |  |  |         | 
| |                                                      |  |                                 |     |                             |  | 435,403                   |  |          | 465,339 |          |  | 394,896 |  |  | 424,992 | 
| |                                                      |  |                                 |     |                             |  |                           |  |          |         |          |  |         |  |  |         | 

| |                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                       
| | ---------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------
| | The total
  unused credit lines out of the authorized credit lines as of December 31,
  2004, amounted to approximately NIS 157 million.
| |                                                                                                                                         
| | Financial
  covenants and arrangements:                                                                                                 
| |                                                                                                                                         
| | a.                                                                                                                                       | According to
  a credit arrangement from September 2003, the Company received a credit line
  from a bank in the amount of approximately NIS 87 million (of which
  approximately NIS 47 millions have been used as of December 31, 2004). The use of credit, which is collateralized by a
floating
  charge, proportionately with other banks, is conditional upon the Companys
  fulfillment of certain financial and non-financial covenants determined under
  the aforesaid agreement.
| |                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                          | As of December 31, 2004,
  the company did not comply with two covenants to maintain the financial
  ratios, as defined in the agreement, as follows:                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                          | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | The number of broadcast
  subscribers.
| |                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                       
| |                                                                                                                                          | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Operating surplus.                    
| |                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                       
| |                                                                                                                                          | During March 2005, the
  company received a letter from the bank according to which the bank does not
  deem the non-compliance, as above, a violation of the company to maintain the
  financial ratios for a period of one year from the date of the letter (the
  waiver period).                                                                                                                                                                                                        

- F51 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                     |                                                                                                                                                                                                                                                              
|----------- | ------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | BANK CREDIT (Cont.)
|            |                     |                                                                                                                                                                                                                                                              
|            |                     | In view of
  the dictated increase in the required operating surplus, as defined in the
  covenants agreement, in 2005, the Companys management anticipates that
  additional negotiations shall take place with the bank at the end of the
  waiver period.
|            |                     |                                                                                                                                                                                                                                                              
|            | b.                  | An amount of
  approximately NIS 31 million was classified as long-term liabilities since
  the bank committed to renew such debt at its repayment date (which is less
  than 12 months from balance sheet date) for a period longer than a year.            
|            |                     |                                                                                                                                                                                                                                                              
|            | c.                  | Bank
  Hapoalim Ltd. demands that Hot Vision repays its outstanding borrowings
  amounting to NIS 71 million. Hot Vision had some discussions with the bank to
  extend the credit period.                                                                   
|            |                     |                                                                                                                                                                                                                                                              
|NOTE 11:   | ACCOUNTS PAYABLE   

| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| | -- | ---------------------------------------------- |  | ---------------- | ------- | ------------ |  | -------- |  | -------- | ------- |  |  | ------- | 
| |    |                                                |  | Consolidated     |         | The Company  | 
| |    |                                                |  |                  |         |              | 
| |    |                                                |  | December 31,     |         | December 31, | 
| |    |                                                |  |                  |         |              | 
| |    |                                                |  | 2003             |         | 2004         |  | 2003     |  | 2004     |        
| |    |                                                |  |                  |         |              |  |          |  |          |        
| |    |                                                |  | NIS in thousands |        
| |    |                                                |  |                  |        
| |    |                                                |  | Adjusted         |         | Reported     |  | Adjusted |  | Reported |        
| |    |                                                |  |                  |         |              |  |          |  |          |        
| | a. | Trade
  payables:                              |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    | Open
  accounts                                |  |                  | 63,499  |              |  | 66,255   |  |          | 43,983  |  |  | 45,681  | 
| |    | Checks
  payable                               |  |                  | 31,200  |              |  | 38,027   |  |          | 19,634  |  |  | 29,236  | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    |                                                |  |                  | 94,699  |              |  | 104,282  |  |          | 63,617  |  |  | 74,917  | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| | b. | Other
  accounts payable:                      |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    | Payroll
  and related expenses                 |  |                  | 6,912   |              |  | 6,754    |  |          | 4,757   |  |  | 4,710   | 
| |    | Provision
  for vacation pay                   |  |                  | 4,473   |              |  | 5,114    |  |          | 3,438   |  |  | 3,761   | 
| |    | Government
  authorities (1)                   |  |                  | 96,416  |              |  | 103,779  |  |          | 89,391  |  |  | 97,448  | 
| |    | Advances
  from Cable Companies                |  |                  | 5,004   |              |  | 2,738    |  |          |        |  |  |        | 
| |    | Royalties
  to the Government of Israel        |  |                  | 11,225  |              |  | 11,069   |  |          | 11,225  |  |  | 11,069  | 
| |    | Accrued
  interest                             |  |                  | 1,846   |              |  | 1,381    |  |          | 1,846   |  |  | 1,381   | 
| |    | Accrued
  expenses (2)(3)                      |  |                  | 16,623  |              |  | 22,695   |  |          | 13,844  |  |  | 18,153  | 
| |    | Provision
  due to lawsuit (see Note 15(b)(3)) |  |                  |        |              |  | 23,400   |  |          |        |  |  | 23,400  | 
| |    | Deferred
  taxes                               |  |                  | 15,630  |              |  | 23,981   |  |          | 15,630  |  |  | 23,981  | 
| |    | Others                                         |  |                  | 853     |              |  | 1,032    |  |          | 477     |  |  | 595     | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 
| |    |                                                |  |                  | 158,982 |              |  | 201,943  |  |          | 140,608 |  |  | 184,498 | 
| |    |                                                |  |                  |         |              |  |          |  |          |         |  |  |         | 

| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | Mainly
  includes a provision for taxes in respect of the sale of Partner shares
  during 2002 and 2003 (see Note 5b(2)(c)).                                                                                                                                                                                                                                                                                                                             
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |     | The Company
  paid an amount of NIS 71 million as an advance on account of capital gains
  tax in respect of the sale of Partner shares in 2002. As of December 31, 2004
  and 2003, the accumulated tax accrual in respect of the above sale and the
  sale in 2003 amounted to a total consideration of NIS 83 million (not
  including interest and CPI linkage). This amount was not yet paid due to a
  continuing dispute with the tax authorities.

- F52 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |     |                                                                                                                                                                            
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:   | ACCOUNTS PAYABLE (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |     | The
  financial statements contain a provision for the full tax liability
  (including interest and CPI linkage) relating to the sale of Partner shares
  in 2003 and 2002.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |     |                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | (2) | Consolidated
  and the Company includes balance with former related party in an amount of
  adjusted NIS 128 thousand as of December 31, 2003.                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |     |                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | (3) | Includes, as
  of December 31, 2004, a provision relating to expenses to be paid to an
  interested party in the amount of NIS 1,300 thousand.                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |     |                                                                                                                                                                            
|NOTE 12:   | ACCRUED SEVERANCE PAY (SEVERANCE PAY FUND)                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | Labor laws
  and agreements require the Group companies to pay severance pay to employees
  dismissed or leaving their employment under certain other circumstances.                                                                                                                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |     |                                                                                                                                                                            
|            | The
  companies severance pay liability to their employees, is computed based on
  the number of years of employment multiplied by the most recent salary and,
  is covered primarily by purchase of insurance policies and by an accrual. The
  companies records the obligation as if it was payable at each balance sheet
  date on an undiscounted basis. The balance of the severance pay liability and
  the amounts funded for such liability as above are as follows:

| |                                     |  |                  |         |              |  |          |   |          |         |   |  |         |  
| | ----------------------------------- |  | ---------------- | ------- | ------------ |  | -------- | - | -------- | ------- | - |  | ------- | -
| |                                     |  | Consolidated     |         | The Company  | 
| |                                     |  |                  |         |              | 
| |                                     |  | December 31,     |         | December 31, | 
| |                                     |  |                  |         |              | 
| |                                     |  | 2003             |         | 2004         |  | 2003     |   | 2004     |        
| |                                     |  |                  |         |              |  |          |   |          |        
| |                                     |  | NIS in thousands |        
| |                                     |  |                  |        
| |                                     |  | Adjusted         |         | Reported     |  | Adjusted |   | Reported |        
| |                                     |  |                  |         |              |  |          |   |          |        
| |                                     |  |                  |         |              |  |          |   |          |         |   |  |         |  
| | Amount
  of severance pay liability |  |                  | 17,272  |              |  | 19,477   |   |          | 12,878  |   |  | 14,368  |  
| | Amount funded                       |  |                  | (15,166 | )            |  | (16,994  | ) |          | (12,174 | ) |  | (13,345 | )
| |                                     |  |                  |         |              |  |          |   |          |         |   |  |         |  
| |                                     |  |                  |         |              |  |          |   |          |         |   |  |         |  
| | Unfunded balance, net               |  |                  | 2,106   |              |  | 2,483    |   |          | 704     |   |  | 1,023   |  
| |                                     |  |                  |         |              |  |          |   |          |         |   |  |         |  

| |                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The companies
  may make withdrawals from the funds only for the purpose of disbursement of
  severance pay.                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                               
| | The amounts
  accumulated in insurance companies in connection with deposits made by a
  jointly controlled entity in order to cover its liabilities for severance pay
  are not under its control and management and, therefore, neither these
  amounts nor the corresponding accrual for severance pay are included in the
  balance sheet.
| |                                                                                                                                                                                                                                                                                                                                               
| | Severance
  pay expense totaled NIS 5,278 thousand, adjusted NIS 5,748 thousand and
  adjusted NIS 4,470 thousand in 2004, 2003 and 2003, respectively.                                                                                                                                                                                       

- F53 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                       |                        
|----------- | ------------------------------------- | -----------------------
|NOTE 13:   | LONG-TERM LOANS FROM BANKS AND OTHERS
|            |                                      
|            | a.                                    | Comprised as
  follows:

| |                                          |  |                                     |            |                  |          |         |          |  |         | 
| | ---------------------------------------- |  | ----------------------------------- | ---------- | ---------------- | -------- | ------- | -------- |  | ------- | 
| |                                          |  | Consolidated
  and The Company      |           
| |                                          |  |                                     |           
| |                                          |  | Weighted 
  average
  interest rate |            | December 31,     |         
| |                                          |  |                                     |            |                  |         
| |                                          |  | 31.12.2004                          |            | 2003             |          | 2004    |         
| |                                          |  |                                     |            |                  |          |         |         
| |                                          |  | %                                   |            | NIS in thousands |         
| |                                          |  |                                     |            |                  |         
| |                                          |  |                                     |            |                  | Adjusted |         | Reported | 
| |                                          |  |                                     |            |                  |          |         |          | 
| |                                          |  |                                     |            |                  |          |         |          |  |         | 
| | From banks  linked to the dollar        |  |                                     | Libor+1.5  |                  |          | 3,678   |          |  | 1,206   | 
| | From
  banks  linked to the Israeli CPI |  |                                     | 5.65       |                  |          | 147,862 |          |  | 125,937 | 
| | From others  linked to the
  dollar     |  |                                     | Libor+1.75 |                  |          | 21,536  |          |  | 1,140   | 
| | From others  unlinked (*)               |  |                                     |            |                  |          |        |          |  | 1,484   | 
| |                                          |  |                                     |            |                  |          |         |          |  |         | 
| |                                          |  |                                     |            |                  |          |         |          |  |         | 
| |                                          |  |                                     |            |                  |          | 173,076 |          |  | 129,767 | 
| | Less  current maturities                |  |                                     |            |                  |          | 45,673  |          |  | 28,310  | 
| |                                          |  |                                     |            |                  |          |         |          |  |         | 
| |                                          |  |                                     |            |                  |          |         |          |  |         | 
| |                                          |  |                                     |            |                  |          | 127,403 |          |  | 101,457 | 
| |                                          |  |                                     |            |                  |          |         |          |  |         | 

| |    |                                                                                                                       |                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------
| |    | (*)                                                                                                                   | Amounts
  received from sale of credit card receivables with recourse.
| |    |                                                                                                                       |                                                                       
| |    | The Libor
  rate as of December 31, 2004 was 3.10%.                                                                  
| |    |                                                                                                                      
| | b. | The loans
  (net of current maturities) are repayable in the following years subsequent
  to the balance sheet dates:

| |             |  |                                |         |          |  |         | 
| | ----------- |  | ------------------------------ | ------- | -------- |  | ------- | 
| |             |  | Consolidated
  and The Company |        
| |             |  |                                |        
| |             |  | December
  31,                 |        
| |             |  |                                |        
| |             |  | 2003                           |         | 2004     | 
| |             |  |                                |         |          | 
| |             |  | NIS in
  thousands             |        
| |             |  |                                |        
| |             |  | Adjusted                       |         | Reported | 
| |             |  |                                |         |          | 
| |             |  |                                |         |          |  |         | 
| | Second year |  |                                | 28,310  | *)       |  | 27,922  | 
| | Third year  |  |                                | 26,698  |          |  | 58,847  | 
| | Forth year  |  |                                | 57,832  | *)       |  | 14,688  | 
| | Fifth year  |  |                                | 14,563  |          |  |        | 
| |             |  |                                |         |          |  |         | 
| |             |  |                                |         |          |  |         | 
| |             |  |                                | 127,403 |          |  | 101,457 | 
| |             |  |                                |         |          |  |         | 

| |  |                                                      |              
| |  | ---------------------------------------------------- | -------------
| |  | As to
  collateral to secure the loans see Note 15c.
| |  |                                                     
| |  | *)                                                   | Reclassified.

- F54 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:   | DEBENTURES
|            |           
|            | a.         | According to
  a prospectus dated August 28, 1997, the Company issued NIS 200 million par
  value of registered debentures (series A), for redemption in seven equal
  annual installments on August 20 in each of the years 2000 to 2006, and
  2,850,000 warrants (series 1), see Note 16c. The debentures (principal
  and interest) are linked to the Israeli CPI and bear annual interest at the
  rate of 3.7% (as determined in the tender). Debentures with a par value of
  NIS 30,700 thousand were purchased by a wholly-owned subsidiary, upon
  issuance. In August 2001, the subsidiary sold the remaining debentures held
  by it at that date for NIS 23,268 thousand. The debentures are traded on the
  TASE. Debenture issuance expenses are presented in the balance sheets as
  deferred charges. See Notes 2i and 9.
|            |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | b.         | The
  debentures are presented in the balance sheets as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                                  |  |                  |         |              |  |          |  |          |         |  |  |        | 
| | ---------------------------------------------------------------- |  | ---------------- | ------- | ------------ |  | -------- |  | -------- | ------- |  |  | ------ | 
| |                                                                  |  | Consolidated     |         | The Company  | 
| |                                                                  |  |                  |         |              | 
| |                                                                  |  | December 31,     |         | December 31, | 
| |                                                                  |  |                  |         |              | 
| |                                                                  |  | 2003             |         | 2004         |  | 2003     |  | 2004     |        
| |                                                                  |  |                  |         |              |  |          |  |          |        
| |                                                                  |  | NIS in thousands |        
| |                                                                  |  |                  |        
| |                                                                  |  | Adjusted         |         | Reported     |  | Adjusted |  | Reported |        
| |                                                                  |  |                  |         |              |  |          |  |          |        
| |                                                                  |  |                  |         |              |  |          |  |          |         |  |  |        | 
| | Debentures outstanding                                           |  |                  | 101,103 |              |  | 68,010   |  |          | 101,103 |  |  | 68,010 | 
| | Less  discount
  in respect of sale of debentures by subsidiary |  |                  | 1,257   |              |  | 804      |  |          |        |  |  |       | 
| |                                                                  |  |                  |         |              |  |          |  |          |         |  |  |        | 
| |                                                                  |  |                  |         |              |  |          |  |          |         |  |  |        | 
| |                                                                  |  |                  | 99,846  |              |  | 67,206   |  |          | 101,103 |  |  | 68,010 | 
| | Less  current maturities                                        |  |                  | 33,701  |              |  | 34,005   |  |          | 33,701  |  |  | 34,005 | 
| |                                                                  |  |                  |         |              |  |          |  |          |         |  |  |        | 
| |                                                                  |  |                  |         |              |  |          |  |          |         |  |  |        | 
| |                                                                  |  |                  | 66,145  |              |  | 33,201   |  |          | 67,402  |  |  | 34,005 | 
| |                                                                  |  |                  |         |              |  |          |  |          |         |  |  |        | 

- F55 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                               |              |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | --------------------------------------------- | ------------ | ------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS
|            |                                              
|            | a.                                            | Commitments:
|            |                                               |             
|            |                                               | 1.           | Royalties
  and other payments to the Government:
|            |                                               |              |                                                  
|            |                                               |              | a)                                                | The Company
  and Matav Haifa were required to pay royalties at the rate of 5% to the
  Government of Israel, based on the gross income from operating CATV
  broadcasts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                               |              |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                               |              |                                                   | On June 16,
  2003, the finance committee of the Knesset approved amendment No. 2 of the
  Bezeq Regulations (Franchises  1987) which retroactively reduces the
  royalties payable by the holder of a license to operate CATV systems from 5%
  of gross annual revenues from providing broadcasting services to 4% in 2002
  and 2003 and to 3.5% in 2004 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                               |              |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                               |              |                                                   | As to the
  revenues from the Internet activities, the Company is obligated to a payment
  at a rate of 4% in 2002 and 2003 and at a rate of 3.5% in 2004 and thereafter
  to the Government of Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                               |              |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                               |              | b)                                                | In light of
  the contention of the Ministry of Finance according to which, following the
  expiration of the cable television operators franchises, the cable
  television operators should pay the State of Israel appropriate consideration
  for the grant of a right to continue to provide multi-channel television
  services to subscribers, as well as other telecommunications services over
  the cable network, the cable television operators, including the Company,
  came to an agreement with the State of Israel dated July 2001 according to
  which the Company undertook, among other things, to make certain payments to
  the government over a 12 year period, and in consideration, each cable
  television operator received recognition by the government of its ownership
  of its respective cable television network infrastructure. Subsequent
  amendments to the Telecommunications Law adopted that agreement. The material
  terms of the agreement provide that:
|            |                                               |              |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                               |              |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Each cable
  television operator shall make payments to the government over a period of 12
  years commencing on January 1, 2003, equal to its pro rata portion of a sum
  determined by multiplying certain accumulated income of all the cable
  television operators, including certain income derived from the use of cable
  infrastructure, by a percentage which is between 0% and 4%, increasing
  gradually according to the amount of such income. In the July 2001 agreement,
  it was agreed that the Companys pro rata portion would be 24.1%, until
  agreed differently by all of the cable television operators; and
|            |                                               |              |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                               |              |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Each cable
  television operator shall pay the State of Israel in the 12-year period up to
  12% of its income from the sale of any activity related to the cable
  infrastructure or a right related to such activity, and the sale of certain
  assets as set forth in the agreement.                                                                                                                                                                                                                                                                                                                                              

- F56 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |                                                                                                                                                                                                  
|----------- | ----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  | The Israeli
  government (subject to payment of payments by the cable television operators)
  undertook not to assert any rights or claims regarding the ownership of the
  cable infrastructure.
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |                                                                                                                                                                                                  
|            |                                                       | As a result,
  each cable television operator is deemed to own all the rights to the cable
  network infrastructure in its license areas, and the right to operate it is
  subject to applicable law, following the expiration of the previous franchises.
  The July 2001 agreement, and its codification into law by way of amendments
  made to the Telecommunications Law, will continue to be in effect if the
  cable television operators consummate their proposed merger. As to Royalties
  and other payments to the Government, see Note 19a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 2.                                                    | Royalties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                       | The Company
  and Matav Haifa have undertaken to pay royalties to various entities in
  respect of copyrights on programs transmitted or broadcasted on cable
  television, as stipulated in the agreements with the said entities. The
  annual amounts of royalties in 2004, 2003 and 2002 were approximately
  adjusted NIS 3.6 million, NIS 2.7 million and adjusted NIS 2.9 million,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 3.                                                    | As to
  commitments to purchase rights, liabilities and licenses relating to the
  productions of certain channels, see Note 1a(8).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 4.                                                    | Under the
  Telecommunications Law and in accordance with the Councils resolution of
  June 2002 as amended in September 2002 and in May 2003, each Cable Broadcast
  Licensee is required to invest or allocate in production or purchase of
  locally produced programs, a percentage of its annual income derived from
  subscriber fees for the year preceding the year of the investment, as
  follows: (i) commencing April 30, 2002 (the date of the grant of the
  Broadcast License) and until the end of 2005, at least 8% of such income; and
  commencing 2006 and thereafter, as to be determined by the Council prior to
  the end of June 2005; and (ii) in the event a Cable Broadcast License is
  granted to the merged entity of the Israeli cable television operators, the
  Council shall determine, prior to the end of June 2005, the rate of the
  amounts that shall be allocated to locally produced programs by the Broadcast
  Licensee as of 2006 and thereafter. For this latter purpose, the Council
  shall consider, among other things, the financial condition of the Licensees
  in connection with their broadcast activities and the contribution of the
  said merger to the improvement of the financial condition of the Licensees.
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                       | According to
  the evaluation of the Companys management, the amounts that were invested by
  the Company in respect of locally produced programs in 2002, 2003 and 2004 is
  higher than 8% of its annual revenues from the subscription fees for these
  years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

- F57 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |                                                                                                                                                                                 
|----------- | ----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            | 5.                                                    | Lease
  commitments:                                                                                                                                                            
|            |                                                       |                                                                                                                                                                                 
|            |                                                       | The Company
  and its subsidiaries lease offices and motor vehicles under various operating
  lease agreements, which expire on various dates, the latest of which is in
  2008.
|            |                                                       |                                                                                                                                                                                 
|            |                                                       | Future
  minimum lease payments under non-cancelable lease agreements as of
  December 31, are as follows:                                                                      

| |      |  |                  |        | 
| | ---- |  | ---------------- | ------ | 
| |      |  | NIS in thousands |       
| |      |  |                  |       
| |      |  |                  |        | 
| | 2005 |  |                  | 6,736  | 
| | 2006 |  |                  | 5,478  | 
| | 2007 |  |                  | 2,372  | 
| | 2008 |  |                  | 634    | 
| |      |  |                  |        | 
| |      |  |                  |        | 
| |      |  |                  | 15,220 | 
| |      |  |                  |        | 

| |    |                           |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------- | ----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Contingent
  liabilities:
| |    |                          
| |    | 1.                        | Claims and
  petitions for approval of class actions:
| |    |                           |                                                      
| |    |                           | a)                                                    | On April 22,
  1999, a lawsuit and motion to approve the claim as a class action were filed
  against the Company with the Tel-Aviv-Jaffa District Court pursuant to
  Article 46a of the Restrictive Business Practices Law, 1988 by a subscriber
  of the Company who seeks approval as class action, thereby representing all
  of the members of the class allegedly included in such action.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                           |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                           |                                                       | In the
  claim, it is alleged that the Company constitutes a monopoly, and that it
  adversely exploits its position in the market, in a manner which is, or may
  be, damaging to the general public, inter alia, by setting and collecting
  unreasonable and unfair prices for the services it provides.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                           |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                           |                                                       | If the class
  action is approved, the court will be requested to require the Company to
  reduce the subscriber fees that it collects and to pay its subscribers
  compensation in connection with the subscriber fees collected from May 10,
  1996 to April 1, 1999. In this context, the petitioner claims that he has
  sustained damages in a sum of reported NIS 1,387 and further claims that the
  sum of compensation due to all of the members of the class included in the
  class action, if approved, amounts to reported NIS 360 million. In addition,
  the subscriber is also claiming compensation with respect to the damages
  caused to all of the members included in the class action, if approved, from
  the date of filing the lawsuit to the date judgment is rendered. In addition,
  the petitioner is claiming for a mandatory injunction according to which the
  Company will be obliged to reduce the service fee, which it charges from its
  subscribers.

- F58 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | ----------------------------------------------------- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |  | The Company
  filed an objection to the motion to approve the claim as a class action inter
  alia, on the grounds that the claim and the motion lack any merits, because
  of the fact that the petitioner has disregarded the high investments made in
  infrastructure and equipment, because of the fact that the franchise granted
  to the Company for CATV broadcasts, is limited in time, because of the fact
  that the comparisons made by the petitioner between the Company and foreign
  companies dealing in CATV broadcasts in countries where the situation is very
  different, are not relevant to the Companys modus operandi, and because of
  the fact that the subscriber fees are subject to supervision and are highly
  regulated.     
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                       |  |  | At the
  beginning of the hearing on the request, it was stated that the hearing of
  the request will be joined with similar requests that were filed against the
  Cable Companies Tevel, Golden Channels and Idan (however, in the meantime,
  this condition changed, as detailed below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                       |  |  | After the
  unification of proceedings and pursuant to the arrangement reached by the
  parties and which was validated by the court, it was agreed that the Court
  will preliminarily decide with respect to the legal threshold claims that
  were raised by the Company (and other Cable Companies).                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                       |  |  | On August
  21, 2003, the Court rendered its decision thereby rejecting the arguments of
  the Company (and of the other Cable Companies) and determined that the
  expenses with respect to the proceedings will be taken into account at the
  end of the proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                       |  |  | In that decision
  the Court has determined, among other things, that the immunity stated in
  article 6 to Torts Ordinance is not granted to the Cable Companies and that
  the decision of the Restrictive Trade Practices Court that was granted in the
  past does not constitute a binding precedent or Courts ruling toward the
  petitioners in the said procedure. Nevertheless, according to a procedural
  settlement reached by the parties, the Court will have to rule on other
  issues and parties arguments which were detailed in the request to approve
  the claim as a class action and the responses of the Cable Companies in that
  issue.                                                                                               
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                       |  |  | In a
  pre-trial hearing held on November 26, 2003, it was determined that the
  hearing of the proceedings against the various Cable Companies will be
  separated and that the first to be heard is the request to approve a class
  action which was filed against the Company. The parties reached a procedural
  arrangement concerning the hearing according to which no examinations shall
  be conducted and each party shall submit its summations. According to the
  said agreement, the summations on behalf of the petitioner were submitted on
  April 1, 2005 and the summations on behalf of the Company shall be submitted
  by June 22, 2005. The petitioner is entitled to submit a response to the
  Companys summations by August 14, 2005.

- F59 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ----------------------------------------------------- |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |    | According to
  the opinion of the Companys management, based on the opinion of its legal
  counsels, since the claim and the motion to approve it as a class action, and
  the Companys response to the claim and the motion, raise complex, factual
  and legal questions that have not yet been resolved in Israeli case law, and
  for which there are no precedents that are based on similar facts, it is not
  possible to estimate the outcome of the claim. Therefore, no provision was
  recorded in respect to the aforesaid claim in the Companys financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                       |  | b) | On
  August 28, 2002, a lawsuit and motion to approve the claim as a class
  action were filed against the Cable Companies on behalf of the residents of
  peripheral settlements. The claim is for indemnification in respect to these
  settlements not being connected to the cable networks with the elapse of six
  years from the date on which the franchises were granted. The compensation
  requested from the Company amounts to about NIS 139 million, as of the
  date the claim was filed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                       |  |    | In view of a
  rejection of a claim identical in substance to this claim, the Company and
  Golden Channels have presented a request to dismiss the claim without
  prejudice. The petitioners presented a reply to the request to dismiss the
  claim without prejudice and the Company and Golden Channels presented their
  reply to the petitioners reply. In addition, the Company and Golden Channels
  presented a reply to the request to approve the Claim as a Class Action. The
  petitioners request to join the hearing as creditors of Tevel was dismissed
  by the court. No date was scheduled for a hearing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                       |  |    | According to
  the opinion of the Companys management, based on the opinion of its legal
  counsels, it is not possible to estimate the chances of the claim. Therefore,
  no provision was recorded in respect to the aforesaid claim in the Companys
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                       |  | c) | On December
  3, 2002 a lawsuit and motion to approve the claim as a class action were
  filed by seven Israeli residents, who requested recognition of their action
  as representing 1,050,000 subscribers of the Cable Companies. According to
  the claim, the Cable Companies violated the terms of the approval given to
  them by the Council for the transmission of the pay sport channel, since they
  did not maintain certain programs in the original sport channel, which is
  part of the basic package, offered to subscribers. The petitioners requested
  the Court to instruct all three Cable Companies to compensate the subscribers
  by a total sum of NIS 302 million as of the date of the motion and by an
  additional sum of NIS 25 million for each month from the date the claim was
  filed up to the date judgment is rendered by the Court. The Companys
  proportionate share based on the subscribers ratio as of the balance sheet date,
  is NIS 80 million, in addition to a monthly amount of NIS 6.7 million
  accumulating from the date the claim was filed until a ruling is rendered
  (the Original Lawsuit).

- F60 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | ----------------------------------------------------- |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |    | On May 27,
  2004, the Court denied the motion to approve the claim as a class action. On
  July 5, 2004, the petitioners submitted an appeal to the Supreme Court. The
  parties submitted their summations. The date for a hearing of the appeal in
  the Supreme Court of the appeal in the Supreme Court is set to January 9,
  2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |    | According to
  the opinion of the Companys management, based on the opinion of its legal
  counsels, it is not possible to estimate the chances of the claim. Therefore,
  no provision was recorded in respect to the aforesaid claim in the Companys
  financial statements. The amount of the Original Lawsuit was calculated by
  the petitioners based on the number of subscribers of each of the Cable
  Companies at the date the claim was filed.                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  | d) | On February
  8, 2005, the Company received notice of a lawsuit and motion to approve the
  claim as a class action (the lawsuit and the motion accordingly). The
  lawsuit and the motion were filed against the Company by an Israeli resident
  in the Tel Aviv-Jaffa District Court. The motion alleges, among other things,
  that the Company has misled consumers within the framework of a certain sales
  promotion campaign in 2001, thereby violating the Israeli Consumers
  Protection Law. According to the motion, the damages owed to the petitioner
  are in the amount of NIS 1,574 (equates to approximately $357) and the
  aggregate damages to the class are indeterminable at this stage, because the
  number of other potential petitioners is not known to the petitioner.
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |    | The Company noted that the motion relates to the same
  subject matter of an indictment that was filed in March 2003 in the
  Netanya Magistrate Court against the Company and certain of its officers for
  violation of the Israeli Consumers
  Protection Law. The officers were dropped from the indictment and in
  November 2003, the court approved a plea bargain, pursuant to which the
  Company admitted the facts in an amended indictment and paid an insignificant
  fine.                                                                                                                                                                                                                                                                                                               
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |    | The Company
  has to submit its response until April 22, 2005. According to the opinion of
  the Companys management, based on the opinion of its legal counsels and in
  view of the preliminary stage of the motion, it is not possible, at this
  stage, to estimate the chances of the claim and therefore no provision was
  recorded in respect of the aforesaid claim in the Companys financial
  statements. See also Note 24(e).                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  | 2. | Other claims:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |    | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

- F61 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ----------------------------------------------------- |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |  |  | AGICOA is an
  organization that represents numerous producers in a claim against the Cable
  Companies for the alleged breach of copyrights of the represented producers
  due to the re-transmission of programs by the cable television operators.
  AGICOA is also claiming unjust enrichment on the part of the cable television
  operators and that they be ordered to submit their accounts.                                                                                                                                                                                                                                                                                                                      
|            |                                                       |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  |  | In the
  opinion of the Companies management, as was expressed in the statement of
  defense filed with the court on July 9, 2000, the claimant has no right
  to file a claim in Israel, which is in light of the Anti-Trust Laws in
  Israel. In addition, the period of time on which the claim relies exceeds, at
  least partially, what is prescribed by law, due to the fact that the claimant
  did not properly prove the legitimacy of its rights claimed in the works and
  that the amount of the claim appears to be apparently groundless and
  exaggerated.                                                                                                                                               
|            |                                                       |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  |  | At a
  preliminary hearing held on June 18, 2002, the Court ruled to delay its
  decision in this matter pending resolution of the Israeli Supreme Court in a
  further hearing in another matter, the Tele Event case, which the Court
  believes will have material implication on all or part of this dispute. The
  further hearing referred to by the Court was filed with respect to the ruling
  of the Supreme Court (presiding as an appellate court), which determined that
  the re-transmission of broadcasts as secondary broadcasts may also constitute
  an infringement of copyrights, if such broadcasts include copyrights owned by
  third parties who have not consented to their broadcast in Israel.
|            |                                                       |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  |  | In January
  2005, the parties completed the discovery proceedings and therefore in the
  context of the preliminary proceedings, disclosing additional information and
  questionnaires remain to be completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                       |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  |  | According to
  the opinion of the Companys management, based on the opinion of its legal
  counsels it is impossible, at this stage, to estimate the chances of the
  claim. Therefore no provision was recorded in respect of the aforesaid claim
  in the Companys financial statements. In addition, in the opinion of the
  Companys management based on the opinion of its legal counsel and despite
  the ruling in the matter of Tele Event, the Company has additional solid and
  well founded defense arguments.                                                                                                                                                                                             

- F62 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | ----------------------------------------------------- |  |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |  | b) | In December 31, 2003,
  Eshkolot  The Israeli Artists Society for Performers Rights Ltd., or
  Eshkolot, filed a lawsuit in the District Court of Tel Aviv-Jaffa against the
  Company and the other Cable Companies for certain payments, for temporary and
  permanent injunctions, and to give instructions to Tevels trustee. Eshkolot
  claims that, since January 1, 2003, the cable television operators broadcast
  programs in violation of the rights of Israeli performers held by Eshkolot
  since such broadcasts were made without Eshkolots consent and without
  payment of royalties. In the context of the claim, the Court was requested to
  instruct and affirm that Eshkolot is entitled to receive a usage payment of
  NIS 8.5 million as compensation for 2003 royalties (net of payments already
  transferred to Eshkolot), and that, from now on in each year the cable
  companies will have to pay this amount including linkage differentials and to
  update such royalties relative to increases in the number of broadcasting
  minutes of protected performances. Additionally, Eshkolot requested to oblige
  the Cable Companies to pay the maximum statutory compensation, as set in the
  Copyrights Law, in the total amount of NIS 24.3 million. Eshkolot also requested
  a permanent injunction order against the cable companies that will prohibit
  the broadcast of protected performances employing performers rights held by
  Eshkolot, unless expressly authorized by Eshkolot.
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |  |    | Further, the
  Court was requested to give a temporary injunction to prohibit the Cable
  Companies from broadcasting performances employing performers rights held by
  Eshkolot, unless an advance express written authorization from Eshkolot is
  received, until the hearing and the decision in Eshkolots primary claim for
  compensation for violating performers rights and in the request for the
  permanent injunction against the Cable Companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |  |    | On May 13,
  2004, the court approved the parties notice of arbitration and the case was
  forwarded to arbitration with instructions to strike the lawsuit with no
  order for expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |  |  |    | The
  statement of complaint on behalf of Eshkolot, in the arbitration, was filed
  on June 25, 2004. The amount of the claim, which significantly exceeds the
  amounts that were paid previously to Eshkolot by the Cable Companies pursuant
  to the agreement that was valid until 2002, is NIS 8.5 million for 2003 and a
  similar amount plus 10% for each of the years 2004-2006. Eshkolot argues that
  this is the appropriate royalty as implied in the Performers and
  Broadcasters Rights Law  1984, which is to be paid each year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

- F63 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | ----------------------------------------------------- |  |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |  |    | The
  statement of defense on behalf of the Cable Companies was filed on August 3,
  2004. In the statement of defense, the Cable Companies refute Eshkolots
  arguments, inter alia, concerning the scope of the use of its repertoire and
  claim that in view of the various developments in the communications market
  in Israel, and particularly in view of entering of competitors to the market
  such as Yes  the amount of the royalties paid to Eshkolot should be
  decreased. It is further argued that Eshkolot is not the owner of rights in
  certain musical works, which it refers to within its claim, since the
  performing artists exclusively assigned their rights to production companies.
  The Company also claims that Eshkolot misused its monopolistic powers in the
  market, in order to impose unreasonable prices on its consumers.
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                       |  |  |    | On January
  30, 2005 Eshkolot requested the Cable Companies to pay an interim payment in
  the amount of NIS 11.5 million for the years 2003  2005 (in addition to the
  payment in the amount of NIS 3.5 million). On February 15, 2005 the Cable
  companies replied Eshkolot and declined the said request. On February 25,
  2005 the parties submitted a request to delay the arbitration proceedings
  including, inter alia, the decision regarding the said request, in order to
  enable them to conduct negotiations. The negotiations between the parties
  have not yet been concluded.                                                                                                                                                                                                                                                                   
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                       |  |  |    | According to
  the opinion of the Companys management, based on the opinion of its legal
  counsels and in view of the preliminary stage of the proceedings, it is
  impossible, at this stage, to estimate the chances of the claim.
  Nevertheless, the Companys management included in the financial statements a
  provision, which in its opinion reflects adequately the Companys exposure in
  respect of this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                       |  |  | c) | The license
  agreement between the Cable Companies and the Israel Records and Cassette
  Federation (the Record Federation) (the Agreement) terminated in
  the end of 2002. Upon the termination of the Agreement, the parties
  negotiated in order to renew or extend the Agreement for an additional
  period. Under these negotiations, the parties agreed, inter alia, that as an
  interim arrangement, the Cable Companies shall pay the Records Federation for
  the year 2003 75% of the amount which was paid to the Federation in the year
  2002. This amount was to be paid until the execution of a new agreement
  between the parties. It was further agreed that the Cable Companies shall be
  granted a license to broadcast the repertoire of the Record Federation until
  the execution of a new agreement.                                 
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                       |  |  |    | In 2004, the
  parties conducted mediation proceedings in an effort to reach a new
  agreement, hence such agreement was not reached.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

- F64 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ----------------------------------------------------- |  |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |  |    | On December
  13, 2004, the Records Federation informed the Cable Companies that since an
  agreement was not yet executed, it regards the usage of its repertoire as a
  violation of its rights and hence announced that it contemplates to pursue
  legal actions in order to avoid such alleged violation and receive a monetary
  compensation.                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  |    | On December
  27, 2004, the Records Federation sent a letter demanding from the Cable
  Companies a payment of NIS 24 million (plus VAT) (for the years 20032005).
  The relative part of the company is NIS 6.2 million (plus VAT).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  |    | On January
  23, 2005, the Cable Companies sent a response to the abovementioned demand.
  The Cable Companies stated that the demand is unreasonable. Without
  derogating from any allegation or right, the Cable Companies proposed to pay
  the Record Federation the entire amount that was paid in 2002 until a ruling
  is rendered in respect of the amount of the royalties to be paid. On January
  30, 2005, the Records Federation dismissed the above payment proposal.                                                                                                                                                                                                                                                                      
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  |    | According to
  the opinion of the Companys management, based on the opinion of its legal
  counsels, it is very likely that the Records Federation shall take legal or
  quasi legal proceeding against the Cable Companies in the coming few months.
  However, since a lawsuit has not yet been filed, it is impossible, at this
  stage, to estimate the prospects of the abovementioned payment demand (see
  also Note 24(e)).                                                                                                                                                                                                                                                                                                                      
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  |    | According to
  the opinion of the Companys management, based on the opinion of its legal
  counsels, it is not possible, at this stage, to estimate the chances of the
  claim. Nevertheless, the Companys management included in the financial
  statements a provision, which in its opinion reflects adequately the
  Companys exposure in respect of this claim.                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  | d) | The Company
  is involved in several additional claims that are not included in this section
  and which do not exceed the aggregate of NIS 5 million. The Companys
  management estimation, based on the opinion of its legal counsel, is that no
  provision should be included in the financial statements in respect of such
  claims.                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                       |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                       |  |  | e) | In light of
  disagreement with the Tax Authorities, the Company and its subsidiary, Matav
  Haifa, received in 2002 and 2004, tax orders for tax years 1997  2001. Under
  these orders, the Company and Matav Haifa are required to pay an additional
  aggregate amount of NIS 52 million (not including interest and CPI
  linkage) and to decrease their carry forward losses for the years 20002001
  by NIS 96 million. The Company and Matav Haifa disagree with the
  aforementioned Tax orders. Managements opinion, based on the opinion of its
  tax advisers, is that the Company has well founded arguments against all the
  claims included in these tax orders and therefore the Company intends to
  appeal against these tax orders.

- F65 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                 
|----------- | ----------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           | In light of
  previously non-concluded discussions and unwritten understandings with the
  Tax Authorities, the Company recorded in the financial statements as of
  December 31, 2004, a provision of approximately NIS 6.5 million with respect
  to the aforementioned tax orders.                                                                           
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | f)                                                                                                                                                                                                                                                                                                                                                                                                        | In May 2004,
  a subsidiary of the company, Matav Investments, received assessments for tax
  years 19982001 and a tax order for 2002.                                                                                                                                                                                                                         
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           | The tax
  order for 2002 included a requirement to pay a tax amount of NIS 114
  million (due to a dispute with the tax authorities  see also Note 11b(1))
  which was fully provided for in the financial statement.                                                                                                                                          
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           | In addition,
  with respect to a 2002 tax order a deficit penalty was imposed on the Company
  in the amount of NIS 18 million (including interest and CPI linkage), which
  was delayed until the date of approval of the financial statements. See also
  Note 24e.                                                                                           
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           | According to the opinion
  of the Companys management, based on the opinion of its tax advisers, the
  Company has well founded arguments against the assessments and the mentioned
  penalty and therefore no provision has been made in the Companys accounts
  for the above-mentioned deficit penalty claim and the assessments for tax
  years 19982001.
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       | 3. | Hot Visions
  contingent liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |    | In July   September 1999, Tevel and Golden Channels and Co. (Golden Channels)
  entered into license agreements with the major studios (Columbia, Fox and
  Warner Bros. International Television Distribution (Warner) to purchase contents (the
Agreements). The contents were
  broadcast, inter alia, in channels HOT 3 and HOT Movies, which are
  produced by Hot Vision for the Cable Companies, and for the for pay channels-
  HOT Drama, Hot Action, Hot Fun and Cinema Prime, which are produced
  by Avdar Silver Industries Ltd. (Avdar)
  for the Cable Companies.
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |    | Agreements
  were entered into by and between Tevel, Golden Channels and Hot Vision,
  according to which, broadcasting rights for the above contents, were provided
  to Hot Vision. In addition, agreements were entered between Avdar and the
  Cable Companies, pursuant to which the broadcast rights for the above pay
  channels were placed with Avdar.                                                                                                                                                                                                                                      
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | On November
  27, 2002, Warner filed a lawsuit against Tevel in the District Court in
  California seeking, inter alia, a monetary compensation of $17 million (Warner Lawsuit).
  Warner contends that the agreement between Warner and Tevel dated July 13,
  1999, pursuant to which Tevel acquired from Warner the rights to broadcast
  films, was breached and consequently terminated by Warner.

- F66 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | ----------------------------------------------------- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |  | Following
  the Warner Lawsuit and other actions taken by Warner, on December 5, 2002,
  the trustee for Tevel group filed with the District Court in Tel Aviv (the Court) a motion to instruct Warner,
  inter alia, to take any measure necessary to discontinue the Warner Lawsuit
  (in view, among others, of the stay of proceedings order that was granted
  with respect to Tevel, which prohibits the institution of new proceedings
  against Tevel without the approval of the Court and based on the proof of
  debt submitted by Warner to the trustee under the same cause of action (the Trustees Motion)).                                                                                                                                                                                                                                                                                                                 
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       |  |  | On February
  10, 2003, the Court rendered its ruling in favor of the Trustees motion and
  dismissed Warners position (although a Blocking Order as this term is
  defined in the Civil Procedure Regulations 1984, was not granted). The Court
  determined, inter alia, that Warner instituted unlawful proceeding in the
  United States under circumstances substantiating doubts as to its good faith,
  and such a proceeding cannot be materialized or enforced in the boundaries of
  the state of Israel. On March 25, 2003, the trustee rendered its
  decision of Warners proof of debt, according to which, it rejected the
  majority of the said proof. On April 24, 2003, Warner appealed to the
  district court on the issue of proof of debt and following decisions rendered
  on the appeal, on June 24, 2003, Warner filed an amended appeal on the
  trustees decision relating to the matter of the proof of debt.
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       |  |  | On October
  21, 2003, the Supreme Court dismissed Warners appeal with respect to the
  Courts ruling dated February 10, 2003, subject to the rights of Warner and
  the Trustee to raise arguments as to the issue of the applicable law with
  respect to the proceeding of the proof of debt within Warners appeal on the
  trustees decision. In addition, the Court instructed Warner to file an
  amended appeal in order to include the argument with respect to the applicable
  law.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       |  |  | The amended
  appeal was filed, in the context of which, Warner seeks the reversal of the
  trustees decision on the proof of debt (which proved the debt for Warner in
  the amount of $182 thousand only) and proved Warner a debt in the aggregate
  of $17 million and alternatively $12 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                       |  |  | On September
  1, 2004, the Court dismissed the amended appeal with respect to the proof of
  debt determining that the Warners appeal contradicts the law and its entire
  substance is nothing but an attempt to generate high profit in an unjust and
  extraordinary manner at the expense of the ordinary creditors of Tevel. In
  view of the extraordinary circumstances and the scope of litigation, the
  Court ruled that Warner shall pay Tevel expenses and legal fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                            

- F67 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | ----------------------------------------------------- |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |    | On October
  5, 2004, Warner filed an appeal with the Supreme Court. Simultaneously, Warner
  filed, on that very day a motion for stay of performance with respect to the
  ruling dated September 1, 2004, with the Court and an urgent motion for
  hearing the said motion. On October 5, 2004, the Court rendered a ruling
  according to which, the facts referred to in the motion for stay of
  performance were not supported by an affidavit and it was further determined
  that the motion is inappropriate to be heard ex parte and the case shall be
  scheduled for hearing. In addition, the court, instructed that the trustee
  shall take into consideration the fact that a motion for the stay of
  performance proceeding was filed. On November 24, 2004, a reply to the motion
  for stay of performance was filed on behalf of the Trustee and on January 17,
  2005 a reply on behalf of the Official Receiver was filed.                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                       |  |    | On February
  9, 2005, the Court rendered its ruling in the matter of the motion for stay
  of performance. The court indicated that it is in the opinion that the
  prospects of Warners appeal to prevail are remote, however, due to the
  concern that if the stay of performance is not granted the factual situation
  shall be irreversible (in the event that a decision in the appeal shall be
  rendered in favor of Warner) and in order not to completely nullify the
  appeal, the court instructed that until a ruling in the appeal is rendered
  the trustee shall hold up an amount of $4 million, which is necessary for
  dividend distribution to Warner, if the Court shall render a judgment in
  favor of Warner in the appeal. The stay of performance is contingent upon a
  deposit of a bank guarantee by Warner in the amount of NIS 2 million to
  secure the creditors damages. The said amount was imposed in addition to the
  guarantees that may be determined by the Supreme Court as a prerequisite for
  hearing the appeal.                                                                                                                                                                                                                                                                
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                       |  |    | The hearing
  of the appeal in the Supreme Court is scheduled to September 19, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                       |  |    | In the
  opinion of Tevels management, based on the opinion of its legal advisors,
  the prospects of Warners appeal on the ruling of the district court, are
  remote.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                       |  | 2) | On December
  9, 2002, Warner filed a lawsuit against Golden Channels with the district
  court in Los Angeles, California in the U.S. The lawsuit is seeking, inter
  alia, a monetary compensation on the grounds of breach of contract with
  Golden Channels dated July 13, 1999 and a lawsuit for declaratory remedies,
  as detailed in the complaint. On January 17, 2003, an amended complaint was
  filed in context of which, Warner was seeking, inter alia, to compel Golden Channels
  to pay compensation of at least $16 million in addition to expenses. In
  addition, among others, declaratory remedies and an injunction were
  requested. On February 14, 2003, Golden Channels filed its answer and a
  counterclaim. In the context of the lawsuit, the parties also filed motions
  for preliminary injunctions. A hearing for the preliminary injunctions was
  held in March 2003. The court rejected all of the motions for preliminary
  injunctions. The evidential hearing for the complaint and the counterclaim
  was held during January 2004 and in February 2004 the parties filed their
  summaries. In Warners post trial brief it requested compensation in the
  amount of approximately $25 million. Golden channels requested compensation
  in the amount of approximately $3.8 million.

- F68 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ----------------------------------------------------- |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |    | On September 29, 2004, the district court in Los Angeles, California,
  ruled in favour of Warner. The district court awarded Warner damages in the
  amount of approximately $19.3 million (excluding attorney fees) and rejected
  Golden Channels counterclaims in the matter. The Court
  originally entered judgment for Warner in the amount of $19 million. It
  subsequently granted Goldens motion to amend the judgment to deduct $0.6
  million in tax certificate damages, and Warners motion to add $0.65 million
  in prejudgment interest. Following amendment, the judgment awarded Warner
  damages of $19.4 million, $0.2 million in costs, and $2.3 million in
  attorneys fees and other costs, for a total judgment amount of $21.7 million
  (the Final Amended Judgment).
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |    | On March 7,
  2005, Golden Channels filed a notice of appeal, pursuant to which, it appeals
  to the Unites States Court of Appeals for the Ninth Circuit from the Final
  Amended Judgment, including other prior orders and decisions granted by the
  Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |    | On March 21,
  2005 Warner filed a notice of cross appeal pursuant to which, it appeals to
  the United States Court of Appeals for the Ninth Circuit from the order of
  the District Court denying Warners motion to amend the judgment to add
  prejudgment interest, as reflected in the Final Amended Judgment, including
  all orders and decisions pertaining thereto that are or may be merged into
  the Final Amended Judgment.                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |    | Pursuant to an agreement among the Israeli cable television operators
  (including Golden Channels, Tevel and the Company) and Hot Vision (see below),
  the Company is required to indemnify Golden Channels (through Hot Vision) for
  approximately 26.5% of the damages awarded to Warner, which will
  actually be paid by Golden Channels amounting at the maximum to approximately $5.755 million.                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |    | In light of the abovementioned and taking into consideration the
  additional interest and legal costs that may be incurred by Golden channels,
  the financial statements of Hot Vision as of December 31, 2004, include a
  provision of NIS 92.8 million (see below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  | 3) | On or about
  the filing date of the lawsuits detailed in sections 1 and 2 above, Warner
  forfeited letters of credit it was granted by Golden Channels and Tevel in
  the amount of $5 million each.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                       |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |    | Further to
  the above lawsuits and a demand made by Tevel and Golden Channels, Hot
  Visions board of directors resolved that, in principle, Hot Vision shall
  bear the amounts borne or to be borne by Tevel and Golden Channels with
  respect of the forfeiture of letters of credit, as detailed above, and in
  respect of the aforesaid agreements with the major studios, including their
  termination and related expenses and/or in respect of legal proceedings
  taken, subject to indemnification by its shareholders to cover these amounts.                                                                                                                                                                                                                                         

- F69 -

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---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ----------------------------------------------------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |  |  | On June 30,
  2003, Hot Vision and the Cable Companies signed an agreement for the
  indemnification of Hot Vision relating to all of the amounts that it shall
  bear in connection with the debt to the major studios and expenses associated
  with the management of the above legal procedures (the Indemnification Agreement). According to
  the Indemnification Agreement, the Cable Companies are committed, one towards
  the other, to jointly finance through Hot Vision the debt to the major
  studios and expenses associated with the management of these legal procedures
  which were implemented until the date of the financial statements against
  certain of the Cable Companies as well as any other procedure between Tevel
  and/or Golden Channels and the major studios in connection with agreements
  which were signed and/or terminated with the major studios - regarding
  content which was provided to channels HOT 3 and HOT Movies. As for the
  pay channels (Hot Drama, HOT Action, Hot Fun and Cinema Prime), it
  was agreed that the amounts shall be paid directly to Tevel.
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |  | According to
  the Indemnification Agreement, the debt to the major studios contains amounts
  that Tevel and/or Golden Channels have to pay, as the case may be, to the
  major studios in connection with the legal proceedings associated with these
  agreements, including the amounts of new guarantees provided to the major
  studios, if so provided, and which the major studios will forfeit and legal
  fees that Tevel and/or Golden Channels will have to pay to the major studios,
  all by virtue of a judgment or a decree rendered in the context of the legal
  proceedings. The Indemnification Agreement stipulates, inter alia, that each
  of the Cable Companies shall pay Hot Vision sums, according to its relative
  share in the market, of the amounts that shall be actually paid by Tevel
  and/or Golden Channels with respect to their debt to the major studios and
  expenses associated with the management of the legal procedures in connection
  to Hot Movies and/or HOT 3.                                                                                                               
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |  | The
  indemnification does not include amounts that are payable by the Cable
  Companies to Tevel and/or Golden Channels through Hot Vision and Avdar for
  purchase of content to channels HOT 3 and HOT Movies and to the pay
  channels (Hot Drama, HOT Action, Hot Fun and Cinema Prime).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |  |  | The
  indemnification Agreement further stipulates that the commitments of the
  Cable Companies shall be revoked in the following cases: (1) if the Cable
  Companies release Hot Vision in writing from its obligations under this
  agreement (2) if Tevel, Golden Channel and the Company merge into another
  cable company (the Merged Company)
  and the Merged Company assumes, in writing and without any condition, the
  commitments of all of the Cable Companies towards Hot Vision under this
  agreement even if Hot Vision is not released from all of its said obligations
  given that the Merged Company holds all of the issued share capital of Hot
  Vision and that its commitments cover all of Hot Visions obligations under
  the Indemnification Agreement.                                                                                                                                                                                                                                                                                                                                             

- F70 -

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|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |                           |                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                               
|----------- | ----------------------------------------------------- | ------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                           | In light of
  the abovementioned, the Company included in the financial statements as of
  December 31, 2004 its relative share in the provision recorded by Hot Vision
  in the amount of NIS 24.7 million (including additional amounts as mentioned
  above).                                              
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                               
|            |                                                       | 4.                        | There is no
  mechanism of the Cable Companies to charge the partnership for usage and
  maintenance fees of the network. See Note 1(a)(4).                                                                                                                                                              
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                               
|            | c.                                                    | Guarantees
  and charges:
|            |                                                       |                          
|            |                                                       | 1.                        | In order to
  secure its liabilities to banks and holders of debentures, the Company placed
  a first ranking floating charge on its assets and rights in favor of the
  banks and the debenture holders. The total secured liabilities at December
  31, 2004 amounted to approximately NIS 634 million.
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                          
|            |                                                       | 2.                        | Under some
  credit facility agreements of Partner, its principal shareholders were
  required to pledge, in favor of the participating banks in the aforesaid
  agreements, a part of their shares in Partner.                                                                                          
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                          
|            |                                                       |                           | The Company,
  as one of Partners principal shareholders, registered a pledge, unlimited in
  amount, on its shares in Partner (5.25%) and all the rights attached thereto
  as security for the balance of Partners bank loans.                                                                       
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                          
|            |                                                       |                           | See Note
  24(a) with respect to the removal of the pledge (as described above) as a
  result of the buy back transaction of Partner shares subsequent to the
  balance sheet.                                                                                                                           
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                          
|            |                                                       | 3.                        | In order to
  ensure compliance with the obligations pursuant to the Licenses, applicable
  law and regulatory bodies, and to ensure payment of fines that may be imposed
  by the Council and the Ministry of Communications the following guarantees
  have been provided:                             
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                          
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                          | Bank
  guarantees by the three Cable Companies in the aggregate amount of $14
  million to the Ministry of Communications pursuant to Hot Telecom
  Infrastructure License, of which the Company provided a bank guarantee in the
  amount of NIS 16.3 million (valid until December 2025 (see note 1(a)(8))).
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                               
|            |                                                       |                           |                                                                                                                                                                                                                                                                                                          | A guarantee
  of NIS 9.3 million to the Council pursuant to the Broadcast Licenses (valid
  until April 2005).                                                                                                                                                                                                

- F71 -

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|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | ----------------------------------------------------- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            |                                                       |    | Each of the
  Minister and the Council has the authority to exercise the applicable
  guarantees in the event that the Company or HOT Telecom, as the case may be,
  do not fulfill their obligations, and to cover any damage, loss or cost that
  the Council, the Minister, or the government may incur as a result of any
  breach of the Companys obligations under the licenses, and to ensure all
  payments by the licensee, including royalty payments and payments of fines
  imposed by the Council or the Minister. The exercise of the guarantee does
  not derogate from the authority of the Council or the Minister to cancel the
  licenses, to amend the terms and conditions of the licenses or to impose
  other sanctions including fines for certain stipulated breaches or actions.
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       | 4. | The Company
  provided Hot Vision with unlimited guarantees on amounts due to a bank at a
  rate of approximately 25% of the total bank debt. In accordance with the
  resolution of Hot Visions board of directors, it was determined that the
  total credit to be extended to Hot Vision by the bank shall not exceed the
  amount of $35 million. Any excess amount shall be approved in writing by the
  Companys board of directors. This resolution was forwarded to the bank that
  provides the credit. As of December 31, 2004, the Companys share in those
  guarantees amounted
  to $4.6 million.                                                                                                                                                                                          
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       |    | In addition, the Company
  is a guarantor to another bank to secure Hot Visions liabilities in the
  amount, which varies between $4.4  $7 million (the Companys share).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       | 5. | The Company
  recorded a charge on equipment purchased from a supplier to secure its
  liabilities toward the supplier in a total amount of NIS 0.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       | 6. | The Company
  guarantees an amount of $200 thousand to Barak (non-marketable equitable
  securities).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       | 7. | The Company
  provided a bank guarantee of NIS 16.5 million to the Controller, which is
  valid through December 2007, to ensure compliance with the terms of the
  approval of the Controller to the merger. In the event that the Controller
  decides, in his discretion, that there has been a breach of the terms of the
  approval, he may fully exercise the guarantee. (see Note 1(a)(4)).                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       | 8. | The Company
  provided a bank guarantee in the amount of NIS 4.7 million to secure the
  payments of the affiliate partnership Hot Telecom to Lucent (see Note
  5(b)(4)(c)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                       |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       | 9. | The Company
  and Tevel guarantee jointly and severally in a total aggregate amount of $4.5
  million to secure the payments of Hot Telecom to Cisco. The Cable Companies
  signed an indemnification agreement in respect of the mentioned guarantee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

- F72 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                
|----------- | ----------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------
|NOTE 15:   | COMMITMENTS, CONTINGENT LIABILITIES AND LIENS (Cont.)
|            |                                                      
|            | d.                                                    | In 2000, the
  Company was granted a call option for the purchase of 50% of the shares in
  the company which produces the Hop channel Hop Ltd. (Hop) from its
  shareholders in consideration for $50 thousand. Due to the terms of the
  Controllers approval to the merger of the Cable Companies, the Company was
  required to transfer the option to the full and exclusive ownership of a
  third party so that the Company does not have any interest in Hop. In the
  context of the agreement with the third party, it was determined that, in
  consideration for the transfer of the rights in the option to a third party,
  the third party shall pay the Company an amount equivalent to 95% of the
  amount actually received upon the exercise of the option and the actual
  purchase of ownership in 50% of the shares in Hop. In August 2003, the third
  party entered into an agreement with United King (1999) Ltd. (United King) for the sale of the option
  in consideration for the total amount of approximately $1.8 million. The
  Companys share amounts to approximately $1.7 million.
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                       | As of
  December 31, 2004, the Company did not recognize as income the expected gain,
  which amounts to $1.1 million, net of tax effect, from the sale of the
  option, since the material conditions, as stipulated in the sale agreement,
  were not fulfilled. The Company notes that a legal proceeding in this respect
  is currently pending in the Tel- Aviv - Jaffa District Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|NOTE 16:   | SHAREHOLDERS EQUITY                                 
|            |                                                      
|            | a.                                                    | Share
  capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                       | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Composition
  of share capital:

| |                                      |  |                     |             |                          |  |            |  |                          |             |  |  |            | 
| | ------------------------------------ |  | ------------------- | ----------- | ------------------------ |  | ---------- |  | ------------------------ | ----------- |  |  | ---------- | 
| |                                      |  | December
  31, 2003 |             | December
  31, 2004      | 
| |                                      |  |                     |             |                          | 
| |                                      |  | Authorized          |             | Issued and
  outstanding |  | Authorized |  | Issued and
  outstanding |            
| |                                      |  |                     |             |                          |  |            |  |                          |            
| |                                      |  | Number of
  shares  |            
| |                                      |  |                     |            
| |                                      |  |                     |             |                          |  |            |  |                          |             |  |  |            | 
| | Ordinary shares 1 NIS par value each |  |                     | 100,000,000 |                          |  | 30,203,918 |  |                          | 100,000,000 |  |  | 30,220,477 | 
| |                                      |  |                     |             |                          |  |            |  |                          |             |  |  |            | 

| |    |                                     |                                                                                                                                                                                                                                                                                                                          
| | -- | ----------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 2.                                  | The
  Companys shares are traded on the Tel-Aviv Stock Exchange (TASE).                                                                                                                                                                                                                                               
| |    |                                     |                                                                                                                                                                                                                                                                                                                          
| |    |                                     | The
  Companys ADS are listed on the NASDAQ under the symbol MATV. Each ADS
  represents two of the Companys Ordinary shares of NIS 1 par value.                                                                                                                                                                     
| |    |                                     |                                                                                                                                                                                                                                                                                                                          
| | b. | Option plan
  for senior employees:
| |    |                                    
| |    | 1.                                  | On January
  30, 2001, the Companys Board of Directors approved an option plan for the
  Companys senior employees (the 2001 Plan). Under the 2001 plan, senior
  employees are to be allotted, without consideration, up to 864,000 options to
  purchase 864,000 Ordinary shares of NIS 1 par value of the company.

- F73 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ---------------------------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:   | SHAREHOLDERS EQUITY (Cont.)
|            |                             
|            |                              |    | Notwithstanding
  the above, employees who exercise options will not be allotted shares in the
  full amount of the options exercised, but instead the employees will be
  allotted shares in consideration for their par value only, in the amount
  which fair value reflects the element of the benefit embodied in the options
  as calculated at the time of exercise.                                                               
|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              |    | Under the
  plan, options become exercisable from the following dates: 1/3 of the options
    12 months after the decision was taken to make the allotment; 1/3 of the
  options  24 months after the allotment; and, 1/3 of the options  36 months
  after the allotment. These options are exercisable (in whole or in part) for
  a period of 24 months from the end each of the above periods (the exercise
  period).           
|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              |    | Options not
  exercised will expire after the exercise period. The exercise price of the
  options is NIS 49 per share, linked to the Israeli CPI for December 2000
  (based on 85% of the price of the Companys Ordinary shares on the date of
  the decision of the Board of Directors) (NIS 52 as of December 31, 2004).                                                                                                              
|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              |    | The Ordinary
  shares under the 2001 plan were issued in accordance with the provisions of
  Section 102 of the Israeli Income Tax Ordinance which stipulate, inter-alia,
  that the Company shall be able to claim as a tax deduction the amounts credited
  to senior employees as benefit in respect of sale of the shares so issued at
  a price in excess of the exercise price, when such benefit is considered as
  taxable income.
|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              |    | On August
  28, 2001, the Companys Board of Directors approved to reprice the exercise
  price of the first allotted portion to NIS 39.60 (based on 90% of the price
  of the Companys Ordinary shares on August 15, 2001) (NIS 41 as of December
  31, 2004) and the earliest date on which the first portion of the options may
  be exercised was postponed for three months from the original date.                                 
|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              |    | As of
  December 31, 2004, under the 2001 Plan, 770,500 options were issued to 45
  employees, out of which 608,300 options were cancelled, 90,732 options were
  forfeited, 37,235 options were exercised and 34,233 options expired. See also
  2 below.                                                                                                                                                                                
|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              | 2. | In November
  and December 2003, the Companys Board approved a stock option plan for 50 of
  the Companys employees (the 2003 Plan), according to which such employees
  will be granted a total of 770,500 options that are exercisable into 770,500
  Ordinary shares of NIS 1 par value of the Company (including 85,000
  options granted to an interested party).                                                                
|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              |    | Notwithstanding
  the above, employees who exercise options will not be allotted shares in the
  full amount of the options exercised, but instead the employees will be
  allotted shares in consideration for their par value only, in the amount
  which fair value reflects the element of the benefit embodied in the options
  as calculated at the time of exercise.                                                               
|            |                              |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              |    | The options
  become exercisable from the following dates: 1/3 of the options  
  January 31, 2004; 1/3 of the options  January 31, 2005; and 1/3 of the
  options  January 31, 2006 (the vesting period). The options are
  exercisable for a period of 36 months from the end of each of the above
  periods (the exercise period).                                                                                              

- F74 -

---

---



|                                  
|----------------------------------
|MATAV - CABLE
  SYSTEMS MEDIA LTD.
|                                  
|NOTES TO FINANCIAL STATEMENTS     
|                                  

|            |                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ---------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:   | SHAREHOLDERS EQUITY (Cont.)
|            |                             
|            |                              |  | Any option
  that is not exercised during the exercise period expires. In the first
  tranche, the exercise price of the options is NIS 26.816 per share (on the
  basis of 85% of the average price of the Companys share during 30 trading
  days on the Tel Aviv Stock Exchange before the date of the Boards decision  November 17, 2003).
  In the second and third tranches, the exercise price of the options is
  determined as 90% of the average price of the Companys share during 30
  trading days on the Tel Aviv Stock Exchange before the end of vesting period
  of each of the tranches. Accordingly, the exercise price of the second
  tranche of the options is NIS 30.43 per share.
|            |                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |  | According to
  the 2003 plan, options may be issued provided that the employee waives his
  rights to options, which matured in the first and second tranches of the 2001
  plan and that the Companys Board of Directors approved the cancellation of
  the third tranche of the 2001 Plan, subject to the employees agreement (see
  1 above).                                                                                                                                                                                                                                                                                                                                                           
|            |                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |  | The issuance
  of options is managed under the principles which were determined for that
  purpose in section 102 of the Income Tax Ordinance which stipulate,
  inter-alia, that the Company shall not be able to claim as a tax deduction
  the amounts credited to senior employees as benefit (in respect of sale of
  the issued shares at a price in excess of the exercise price), if that
  benefit is subject to capital gains tax in a reduced tax rate and will be
  able to claim as a tax deduction the amounts credited, as mentioned if that
  benefit is considered as regular taxable income.                                                                                               
|            |                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |  | On November
  29, 2004, a special meeting of the Companys shareholders approved the grant
  of 302,205 additional stock options under the 2003 plan at no consideration
  to the chairman of the Companys board of directors. The exercise price of
  the options is NIS 38 per share.                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |  | As of
  December 31, 2004, under the 2003 plan, all 1,072,205 options were issued to
  46 employees, out of which 36,483 options were exercised and 11,000 options
  were forfeited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- F75 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | --------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 17:   | TAXES ON INCOME
|            |                
|            | a.              | Tax laws
  applicable to the companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 | The
  provisions of the Income Tax (Inflationary Adjustments) Law, 1985 apply to
  the Company and its Israeli investees. According to the law, the results for
  tax purposes are measured based on the changes in the Israeli CPI.                                                                                                                                                                                                                                                                                                                                         
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | b.              | Tax rates
  applicable to the income of the Group companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 | Until
  December 31, 2003, the regular tax rate applicable to income of companies was
  36%. In July 2004, an amendment to the Income Tax Ordinance (No. 140 and
  Temporary Provision), 2004 was approved by the Knesset (Israeli
  parliament), which determines, among other things, that the corporate tax
  rate is to be gradually reduced to the following tax rates: 2004  35%, 2005
   34%, 2006  32% and 2007 and thereafter  30%. The effect of the
  aforementioned change in tax rate on the results of operations in 2004
  amounted to NIS 868 thousand.
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | c.              | Deferred
  income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                 | The
  composition of the deferred tax assets and liabilities, related valuation
  allowance and the changes therein during the reported years and the related
  valuation allowance as of December 31, 2004 and 2003, are as follows:                                                                                                                                                                                                                                                                                                                                        

| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| | ----------------------------------------- |  | -------------------------------------------------------------------- | ------------------------- | -------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - | ---------------------- | ------- | ----- |  | -------- | - |  | ------- | -
| |                                           |  | Consolidated                                                         |                          
| |                                           |  |                                                                      |                          
| |                                           |  | Temporary 
  differences 
  related to 
  investment 
  in affiliate |                           | Provisions for

  employees 
  rights 
  (severance pay 
  and vacation 
  pay) and for 
  allowance for 
  doubtful 
  accounts |  | Carryforward
tax losses |   | Valuation 
  allowance |         | Total | 
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       | 
| |                                           |  | Adjusted NIS in
thousands                                            |                          
| |                                           |  |                                                                      |                          
| | Balance at January 1, 2003                |  |                                                                      |                          |                                                                                                                                  |  | 1,656                   |   |                        | 153,360 |       |  | (155,016 | ) |  |        |  
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| | Change during 2003 
recorded in net loss |  |                                                                      | (15,630                   | )                                                                                                                                |  | 712                     |   |                        | 36,685  |       |  | (37,397  | ) |  | (15,630 | )
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| | Balance at December 31, 2003              |  |                                                                      | (15,630                   | )                                                                                                                                |  | 2,368                   |   |                        | 190,045 |       |  | (192,413 | ) |  | (15,630 | )
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| |                                           |  |                                                                      |                           |                                                                                                                                 
| |                                           |  |                                                                      | Reported NIS in
thousands |                                                                                                                                 
| |                                           |  |                                                                      |                           |                                                                                                                                 
| | Balance at January 1, 2004                |  |                                                                      | (15,630                   | )                                                                                                                                |  | 2,368                   |   |                        | 190,045 |       |  | (192,413 | ) |  | (15,630 | )
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| | Adjustment due to tax
rate change         |  |                                                                      | 868                       |                                                                                                                                  |  | (171                    | ) |                        | (34,935 | )     |  | 35,106   |   |  | 868     |  
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| | Change
during 2004  recorded in net loss |  |                                                                      | (9,219                    | )                                                                                                                                |  | 356                     |   |                        | 24,759  |       |  | (25,115  | ) |  | (9,219  | )
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  
| | Balance at December 31,
2004              |  |                                                                      | (23,981                   | )                                                                                                                                |  | 2,553                   |   |                        | 179,869 |       |  | (182,422 | ) |  | (23,981 | )
| |                                           |  |                                                                      |                           |                                                                                                                                  |  |                         |   |                        |         |       |  |          |   |  |         |  

- F76 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                        
|----------- | -----------------------
|NOTE 17:   | TAXES ON INCOME (Cont.)

| |                                           |  | The
Company                                                        |        
| | ----------------------------------------- |  | ------------------------------------------------------------------ | -------
| |                                           |  |                                                                    |        
| |                                           |  | Temporary
  differences 
  of 
  investment
in affiliate
  company |        
| |                                           |  |                                                                    |        
| |                                           |  | Adjusted NIS in
thousands                                          |        
| |                                           |  |                                                                    |        
| | Balance at January 1, 2003                |  |                                                                    |       
| |                                           |  |                                                                    |        
| | Change during 2003 
recorded in net loss |  |                                                                    | (15,630
| |                                           |  |                                                                    |        
| |                                           |  |                                                                    |        
| | Balance at December 31, 2003              |  |                                                                    | (15,630
| |                                           |  |                                                                    |        
| |                                           |  |                                                                    |        
| |                                           |  | Reported NIS in
thousands                                          |        
| |                                           |  |                                                                    |        
| | Balance at January 1, 2004                |  |                                                                    | (15,630
| |                                           |  |                                                                    |        
| | Adjustment due to tax
rate change         |  |                                                                    | 868    
| | Change
during 2004  recorded in net loss |  |                                                                    | (9,219 
| |                                           |  |                                                                    |        
| |                                           |  |                                                                    |        
| | Balance at December 31,
2004              |  |                                                                    | (23,981
| |                                           |  |                                                                    |        

| |    |                                                             |             
| | -- | ----------------------------------------------------------- | ------------
| |    |                                                            
| |    | Deferred taxes are calculated using a 34% tax rate.        
| |    |                                                            
| | d. | Taxes on
  income included in the statements of operations:
| |    |                                                            
| |    | 1.                                                          | Composition:

| |                    |  |                           |         |          |  |        |   |  |       | 
| | ------------------ |  | ------------------------- | ------- | -------- |  | ------ | - |  | ----- | 
| |                    |  | Consolidated              |        
| |                    |  |                           |        
| |                    |  | Year ended
  December 31, |        
| |                    |  |                           |        
| |                    |  | 2002                      |         | 2003     |  | 2004   |  
| |                    |  |                           |         |          |  |        |  
| |                    |  | NIS in
  thousands        |        
| |                    |  |                           |        
| |                    |  | Adjusted                  |         | Reported | 
| |                    |  |                           |         |          | 
| |                    |  |                           |         |          |  |        |   |  |       | 
| | Current            |  |                           | 108,851 |          |  | 41,799 |   |  |      | 
| | Deferred taxes     |  |                           |        |          |  | (6,303 | ) |  |      | 
| | For previous years |  |                           |        |          |  |       |   |  | 7,281 | 
| |                    |  |                           |         |          |  |        |   |  |       | 
| |                    |  |                           |         |          |  |        |   |  |       | 
| |                    |  |                           | 108,851 |          |  | 35,576 |   |  | 7,281 | 
| |                    |  |                           |         |          |  |        |   |  |       | 

| |                    |  |                           |         |          |  |        |   |  |       | 
| | ------------------ |  | ------------------------- | ------- | -------- |  | ------ | - |  | ----- | 
| |                    |  | The
  Company             |        
| |                    |  |                           |        
| |                    |  | Year ended
  December 31, |        
| |                    |  |                           |        
| |                    |  | 2002                      |         | 2003     |  | 2004   |  
| |                    |  |                           |         |          |  |        |  
| |                    |  | NIS in
  thousands        |        
| |                    |  |                           |        
| |                    |  | Adjusted                  |         | Reported | 
| |                    |  |                           |         |          | 
| |                    |  |                           |         |          |  |        |   |  |       | 
| | Current            |  |                           | 108,851 |          |  | 41,799 |   |  |      | 
| | Deferred taxes     |  |                           |        |          |  | (6,303 | ) |  |      | 
| | For previous years |  |                           |        |          |  |       |   |  | 4,516 | 
| |                    |  |                           |         |          |  |        |   |  |       | 
| |                    |  |                           |         |          |  |        |   |  |       | 
| |                    |  |                           | 108,851 |          |  | 35,496 |   |  | 4,516 | 
| |                    |  |                           |         |          |  |        |   |  |       | 

| |  |  |                                                                            
| |  |  | ---------------------------------------------------------------------------
| |  |  | Current
  taxes are computed at the tax rate of 35% (previous years  36%).

- F77 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                         |                                                                                                                                                                                                                                                                                 
|----------- | ----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 17:   | TAXES ON INCOME (Cont.)
|            |                        
|            | 2.                      | Below is a
  reconciliation between the theoretical tax expense (benefit), assuming all of
  the Groups income is taxed at the regular tax rates applicable to companies
  in Israel (see (1) above), and the actual tax expense as reported in the
  statements of operations.

| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| | ---------------------------------------------------------------------------------- |  | ------------------------- | ------- | -------- |  | ------- | -- |  | ------- | -
| |                                                                                    |  | Consolidated              |        
| |                                                                                    |  |                           |        
| |                                                                                    |  | Year ended
  December 31, |        
| |                                                                                    |  |                           |        
| |                                                                                    |  | 2002                      |         | 2003     |  | 2004    |   
| |                                                                                    |  |                           |         |          |  |         |   
| |                                                                                    |  | NIS in
  thousands        |        
| |                                                                                    |  |                           |        
| |                                                                                    |  | Adjusted                  |         | Reported | 
| |                                                                                    |  |                           |         |          | 
| | Income
(loss) before taxes on income, as
  reported in the statement of operations |  |                           | 131,765 |          |  | (10,781 | )  |  | (90,004 | )
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| | Theoretical tax
rate                                                               |  |                           | 36      | %        |  | 36      | %  |  | 35      | %
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| | Theoretical tax expenses (benefit)                                                 |  |                           | 47,435  |          |  | (3,881  | )  |  | (31,501 | )
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| | Increase (decrease) in
taxes resulting from:                                       |  |                           |         |          |  |         |    |  |         |  
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| | Non-deductible expenses                                                            |  |                           | 4,115   |          |  | 1,980   |    |  | 6,386   |  
| | Tax losses for which
deferred taxes were not
  provided                            |  |                           | 55,424  | *)       |  | 36,685  | *) |  | 24,759  |  
| | Temporary differences for which deferred
  taxes were not provided                 |  |                           | (242    | )*)      |  | 712     | *) |  | 356     |  
| | Difference in definition
of capital and
  assets for tax purposes                  |  |                           | 2,059   |          |  |        |    |  |        |  
| | Taxes
in respect of prior years                                                    |  |                           |        |          |  | 80      |    |  | 7,281   |  
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  
| |                                                                                    |  |                           | 108,851 |          |  | 35,576  |    |  | 7,281   |  
| |                                                                                    |  |                           |         |          |  |         |    |  |         |  

| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| | ---------------------------------------------------------------------------------- |  | ------------------------- | ------- | -------- |  | ------ | -- |  | -------- | -
| |                                                                                    |  | The
  Company             |        
| |                                                                                    |  |                           |        
| |                                                                                    |  | Year ended
  December 31, |        
| |                                                                                    |  |                           |        
| |                                                                                    |  | 2002                      |         | 2003     |  | 2004   |   
| |                                                                                    |  |                           |         |          |  |        |   
| |                                                                                    |  | NIS in
  thousands        |        
| |                                                                                    |  |                           |        
| |                                                                                    |  | Adjusted                  |         | Reported | 
| |                                                                                    |  |                           |         |          | 
| | Income
(loss) before taxes on income, as
  reported in the statement of operations |  |                           | 185,248 |          |  | (6,369 | )  |  | (105,163 | )
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| | Theoretical tax
rate                                                               |  |                           | 36      | %        |  | 36     | %  |  | 35       | %
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| | Theoretical tax expenses (benefit)                                                 |  |                           | 66,689  |          |  | (2,293 | )  |  | (36,807  | )
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| | Increase (decrease) in
taxes resulting from:                                       |  |                           |         |          |  |        |    |  |          |  
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| | Non-deductible expenses                                                            |  |                           | 3,639   |          |  | 1,372  |    |  | 6,272    |  
| | Tax losses for which
deferred taxes were not
  provided                            |  |                           | 38,723  | *)       |  | 33,805 | *) |  | 23,407   |  
| | Taxes
in respect of equity earnings of
  partnership                               |  |                           |        |          |  | 2,370  | *) |  | 6,919    |  
| | Temporary differences
for which deferred
  taxes were not provided                 |  |                           | (200    | )*)      |  | 242    | *) |  | 209      |  
| | Taxes
in respect of prior years                                                    |  |                           |        |          |  |       |    |  | 4,516    |  
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  
| |                                                                                    |  |                           | 108,851 |          |  | 35,496 |    |  | 4,516    |  
| |                                                                                    |  |                           |         |          |  |        |    |  |          |  

| |                    |  | 
| | ------------------ |  | 
| | *)
  Reclassified.

- F78 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | ----------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 17:   | TAXES ON INCOME (Cont.)
|            |                        
|            | e.                      | Carryforward
  tax losses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                         | At December
  31, 2004 and 2003, the Group had carryforward tax losses (include capital
  losses) of adjusted NIS 600 million and NIS 527 million, respectively. As of
  December 31, 2004 and 2003, the Company had carryforward of tax losses
  (including capital losses) of adjusted NIS 528 million and NIS 441 million,
  respectively. The amounts of carryforward tax losses are linked to the
  Israeli CPI and can be utilized indefinitely. The amounts of carryforward tax
  losses is subject to adjustments depending on the results of the dispute with
  the tax authorities (Note 11b(1)) and the tax assessments and orders received
  (Note 15b(e) and 15b(f)).
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | f.                      | Tax
  assessments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                         | The Company
  has received final assessments through 1996, and the other Group companies
  have received final assessments and orders through 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                         | Regarding
  tax assessments which were received by the Company and its subsidiaries for
  years 1997 - 2002 (see Note 15b(e) and 15b(f)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- F79 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                 | 
|----------- | ------------------------------- | 
|NOTE 18:   | LINKAGE TERMS OF MONETARY ITEMS

|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|--------------------------------------------------------------------- |  | ------------------------------------- | ------ | ----------------------------- |  | -------- |  | ----- | ------- | ------------------------------------- |  | ---------------------------- |  | -------- | ------ | ----- |  | ------- |  |  | ------- |  |  | ------- | 
|                                                                      |  | Consolidated                          |       
|                                                                      |  |                                       |       
|                                                                      |  | December 31, 2003                     |        | December 31, 2004             | 
|                                                                      |  |                                       |        |                               | 
|                                                                      |  | In or linkedto foreign 
  currency *) |        | Linked to
  the Israeli
  CPI |  | Unlinked |  | Total |         | In or linkedto foreign 
  currency *) |  | Linked to the Israeli 
  CPI |  | Unlinked |        | Total | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       | 
|                                                                      |  | NIS in thousands                      |       
|                                                                      |  |                                       |       
|                                                                      |  | Adjusted                              |        | Reported                      | 
|                                                                      |  |                                       |        |                               | 
|Assets:                                                               |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|Cash and cash equivalents                                             |  |                                       | 80     |                               |  |         |  |       | 37,868  |                                       |  | 37,948                       |  |          | 70     |       |  | 20,095  |  |  | 4,085   |  |  | 24,250  | 
|Short-term deposit                                                    |  |                                       |       |                               |  |         |  |       |        |                                       |  |                             |  |          |       |       |  |        |  |  | 50      |  |  | 50      | 
|Trade receivables                                                     |  |                                       |       |                               |  |         |  |       | 83,151  |                                       |  | 83,151                       |  |          | 2,060  |       |  |        |  |  | 73,398  |  |  | 75,458  | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|Other accounts receivable                                             |  |                                       |       |                               |  |         |  |       | 8,592   |                                       |  | 8,592                        |  |          | 320    |       |  |        |  |  | 12,210  |  |  | 12,530  | 
|Loan, long-term debt and capital note to
  affiliates                 |  |                                       |       |                               |  |         |  |       | 13,623  |                                       |  | 13,623                       |  |          |       |       |  |        |  |  | 25,900  |  |  | 25,900  | 
|Other receivables                                                     |  |                                       |       |                               |  |         |  |       | 885     |                                       |  | 885                          |  |          |       |       |  |        |  |  | 601     |  |  | 601     | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|                                                                      |  |                                       | 80     |                               |  |         |  |       | 144,119 |                                       |  | 144,199                      |  |          | 2,450  |       |  | 20,095  |  |  | 116,244 |  |  | 138,789 | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|Liabilities:                                                          |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|Short-term credit                                                     |  |                                       | 19,005 |                               |  | 163      |  |       | 370,562 |                                       |  | 389,730                      |  |          | 20,115 |       |  |        |  |  | 416,914 |  |  | 437,029 | 
|Trade payables                                                        |  |                                       | 7,331  |                               |  |         |  |       | 87,368  |                                       |  | 94,699                       |  |          | 28,362 |       |  |        |  |  | 75,920  |  |  | 104,282 | 
|Affiliate  current accounts                                          |  |                                       |       |                               |  |         |  |       | 17,690  |                                       |  | 17,690                       |  |          |        |       |  |         |  |  | 18,112  |  |  | 18,112  | 
|Other accounts payable                                                |  |                                       |       |                               |  | 83,418   |  |       | 54,930  |                                       |  | 138,348                      |  |          | 27,936 |       |  | 94,758  |  |  | 52,531  |  |  | 175,225 | 
|Loans from banks and other (including
  current maturities)           |  |                                       | 25,214 |                               |  | 147,862  |  |       |        |                                       |  | 173,076                      |  |          | 2,346  |       |  | 125,937 |  |  | 1,484   |  |  | 129,767 | 
|Debentures (including current maturities)                             |  |                                       |       |                               |  | 99,846   |  |       |        |                                       |  | 99,846                       |  |          |       |       |  | 67,206  |  |  |        |  |  | 67,206  | 
|Customers deposits for converters, net of
  accumulated amortization |  |                                       |       |                               |  | 25,675   |  |       |        |                                       |  | 25,675                       |  |          |       |       |  | 20,279  |  |  |        |  |  | 20,279  | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 
|                                                                      |  |                                       | 51,550 |                               |  | 356,964  |  |       | 530,550 |                                       |  | 939,064                      |  |          | 78,759 |       |  | 308,180 |  |  | 564,961 |  |  | 951,900 | 
|                                                                      |  |                                       |        |                               |  |          |  |       |         |                                       |  |                              |  |          |        |       |  |         |  |  |         |  |  |         | 

*) Mainly in
U.S. dollar.

- F80 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                        
|----------- | ---------------------------------------
|NOTE 18:   | LINKAGE TERMS OF MONETARY ITEMS (Cont.)

|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|--------------------------------------------------------------------- |  | ------------------------------------------ | ------ | ------------------------------- |  | -------- | -- | ----- | ------- | ------------------------------------------ |  | ------------------------------- | -- | -------- | ------ | ----- |  | ------- |  |  | ------- | -- |  | ------- | --
|                                                                      |  | The
  Company                              |       
|                                                                      |  |                                            |       
|                                                                      |  | December
  31, 2003                        |        | December
  31, 2004             | 
|                                                                      |  |                                            |        |                                 | 
|                                                                      |  | In or
  linked
  to foreign 
  currency**) |        | Linked to 
  the Israeli 
  CPI |  | Unlinked |    | Total |         | In or
  linked
  to foreign 
  currency**) |  | Linked to 
  the Israeli 
  CPI |    | Unlinked |        | Total | 
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       | 
|                                                                      |  | NIS in
  thousands                         |       
|                                                                      |  |                                            |       
|                                                                      |  | Adjusted                                   |        | Reported                        | 
|                                                                      |  |                                            |        |                                 | 
|Assets:                                                               |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|Cash and cash equivalents                                             |  |                                            | 80     |                                 |  |         |    |       | 35,799  |                                            |  | 35,879                          |    |          | 70     |       |  | 20,095  |  |  | 1,437   |    |  | 21,602  |   
|Trade receivables                                                     |  |                                            |       |                                 |  |         |    |       | 45,400  |                                            |  | 45,400                          |    |          |       |       |  |        |  |  | 37,398  |    |  | 37,398  |   
|Other accounts receivable                                             |  |                                            |       |                                 |  | 359,562  | *) |       | 7,009   |                                            |  | 366,571                         | *) |          | 320    |       |  | 352,600 |  |  | 5,518   |    |  | 358,438 |   
|Loan, long-term debt and capital note to
  affiliates                 |  |                                            |       |                                 |  |         |    |       | 13,623  |                                            |  | 13,623                          |    |          |       |       |  |        |  |  | 25,900  |    |  | 25,900  |   
|Other receivables                                                     |  |                                            |       |                                 |  |         |    |       | 885     |                                            |  | 885                             |    |          |       |       |  |        |  |  | 601     |    |  | 601     |   
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|                                                                      |  |                                            | 80     |                                 |  | 359,562  | *) |       | 102,716 |                                            |  | 462,358                         |    |          | 390    |       |  | 372,695 |  |  | 70,854  |    |  | 443,939 |   
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|Liabilities:                                                          |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|Short-term credit                                                     |  |                                            |       |                                 |  |         |    |       | 349,223 |                                            |  | 349,223                         |    |          | 1,245  |       |  |        |  |  | 395,437 |    |  | 396,682 |   
|Trade payables                                                        |  |                                            | 7,331  |                                 |  |         |    |       | 56,286  |                                            |  | 63,617                          |    |          | 22,490 |       |  |        |  |  | 52,427  |    |  | 74,917  |   
|Affiliate  current accounts                                          |  |                                            |       |                                 |  |         |    |       | 15,988  |                                            |  | 15,988                          |    |          |       |       |  |        |  |  | 18,619  |    |  | 18,619  |   
|Other accounts payable                                                |  |                                            |       |                                 |  | 43,418   |    |       | 81,560  |                                            |  | 124,978                         |    |          | 26,771 |       |  | 92,043  |  |  | 38,965  |    |  | 157,779 |   
|Loans from banks and other (including
  current maturities)           |  |                                            | 25,214 |                                 |  | 147,862  |    |       |        |                                            |  | 173,076                         |    |          | 2,346  |       |  | 125,937 |  |  | 1,484   |    |  | 129,767 |   
|Debentures (including current maturities)                             |  |                                            |       |                                 |  | 101,103  |    |       |        |                                            |  | 101,103                         |    |          |       |       |  | 68,010  |  |  |        |    |  | 68,010  |   
|Customers deposits for converters, net of
  accumulated amortization |  |                                            |       |                                 |  | 18,882   |    |       |        |                                            |  | 18,882                          |    |          |       |       |  | 14,901  |  |  |        |    |  | 14,901  |   
|Capital notes to subsidiaries                                         |  |                                            |       |                                 |  |         |    |       | 3,601   | *)                                         |  | 3,601                           | *) |          |       |       |  |        |  |  | 3,351   | *) |  | 3,351   | *)
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   
|                                                                      |  |                                            | 32,545 |                                 |  | 311,265  |    |       | 506,658 |                                            |  | 850,468                         |    |          | 52,852 |       |  | 300,891 |  |  | 510,283 |    |  | 864,026 |   
|                                                                      |  |                                            |        |                                 |  |          |    |       |         |                                            |  |                                 |    |          |        |       |  |         |  |  |         |    |  |         |   

|    |                         
|--- | ------------------------
|*)  | Reclassified.           
|    |                         
|**) | Mainly in
  U.S. dollar.

- F81 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                          
|----------- | ---------------------------------------------------------
|NOTE 19:   | SUPPLEMENTARY INFORMATION OF THE STATEMENTS OF OPERATIONS

| |    |                          
| | -- | -------------------------
| | a. | Other operating expenses:

| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| | -- | ---------------------------------------------------------------------------- |  | ----------------------- | ------- | ----------------------- |  | -------- | -- | -------- | ------- | ---- |  | ------- | - |  | ------- | -- |  | ------- | -
| |    |                                                                              |  | Consolidated            |         | The Company             | 
| |    |                                                                              |  |                         |         |                         | 
| |    |                                                                              |  | Year ended December 31, |         | Year ended December 31, | 
| |    |                                                                              |  |                         |         |                         | 
| |    |                                                                              |  | 2002                    |         | 2003                    |  | 2004     |    | 2002     |         | 2003 |  | 2004    |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |  
| |    |                                                                              |  | NIS in thousands        |        
| |    |                                                                              |  |                         |        
| |    |                                                                              |  | Adjusted                |         | Reported                |  | Adjusted |    | Reported |        
| |    |                                                                              |  |                         |         |                         |  |          |    |          |        
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | Payroll and related expenses                                                 |  |                         | 31,763  |                         |  | 32,131   |    |          | 34,550  |      |  | 19,203  |   |  | 18,840  |    |  | 18,894  |  
| |    | Royalties and other payments to the
  Government                             |  |                         | 20,631  |                         |  | 24,242   |    |          | 22,879  |      |  | 14,450  |   |  | 15,925  |    |  | 14,659  |  
| |    | Royalties in respect of films and
  programs  paid to Hot Vision            |  |                         | 61,763  |                         |  | 53,994   |    |          | 51,647  |      |  | 44,981  |   |  | 38,129  |    |  | 37,759  |  
| |    | Costs in respect of programs and other
  services provided                   |  |                         | 181,172 |                         |  | 141,500  | *) |          | 157,104 |      |  | 121,885 |   |  | 98,957  |    |  | 107,987 |  
| |    | Subscribers maintenance                                                     |  |                         | 17,619  |                         |  | 22,845   |    |          | 27,589  |      |  | 11,590  |   |  | 14,380  |    |  | 19,369  |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | Other                                                                        |  |                         | 32,493  |                         |  | 31,453   | *) |          | 33,817  |      |  | 17,808  |   |  | 20,974  |    |  | 24,964  |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         | 345,441 |                         |  | 306,165  |    |          | 327,586 |      |  | 229,917 |   |  | 207,205 |    |  | 223,632 |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| | b. | Selling, marketing, general and administrative
expenses:                     |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | Selling and marketing:                                                       |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | Payroll and related expenses                                                 |  |                         | 15,832  |                         |  | 15,539   |    |          | 19,121  |      |  | 11,191  |   |  | 10,446  |    |  | 9,631   |  
| |    | Advertising                                                                  |  |                         | 10,218  |                         |  | 14,698   |    |          | 32,791  |      |  | 8,952   |   |  | 8,457   |    |  | 19,444  |  
| |    | Sales promotion                                                              |  |                         | 14,593  |                         |  | 13,717   |    |          | 11,764  |      |  | 8,981   |   |  | 7,975   |    |  | 5,913   |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         | 40,643  |                         |  | 43,954   |    |          | 63,676  |      |  | 29,124  |   |  | 26,878  |    |  | 34,988  |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | General and administrative:                                                  |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | Payroll and related expenses                                                 |  |                         | 20,777  |                         |  | 16,596   |    |          | 19,309  |      |  | 10,735  |   |  | 12,718  |    |  | 13,792  |  
| |    | Office rent and maintenance                                                  |  |                         | 9,687   |                         |  | 7,894    |    |          | 9,635   |      |  | 7,687   |   |  | 4,692   |    |  | 5,318   |  
| |    | Professional fees                                                            |  |                         | 4,600   |                         |  | 5,445    | *) |          | 6,418   |      |  | 3,100   |   |  | 5,445   | *) |  | 6,235   |  
| |    | Legal fees                                                                   |  |                         | 2,383   |                         |  | 1,547    |    |          | 2,144   |      |  | 2,383   |   |  | 1,182   |    |  | 1,539   |  
| |    | Amortization of intangible asset                                             |  |                         | 1,420   |                         |  | 894      |    |          |        |      |  |        |   |  |        |    |  |        |  
| |    | Doubtful accounts and bad debts*)                                            |  |                         | 2,065   |                         |  | 5,300    |    |          | 1,928   |      |  | 1,452   |   |  | 3,590   |    |  | 1,256   |  
| |    | Other                                                                        |  |                         | 5,205   |                         |  | 4,983    | *) |          | 5,957   |      |  | 4,542   |   |  | 661     | *) |  | 2,200   |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         | 46,137  |                         |  | 42,659   |    |          | 45,391  |      |  | 29,899  |   |  | 28,288  |    |  | 30,340  |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    |                                                                              |  |                         | 86,780  |                         |  | 86,613   |    |          | 109,067 |      |  | 59,023  |   |  | 55,166  |    |  | 65,328  |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | *) The changes in allowance
  for doubtful accounts are composed as follows: |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | Balance at beginning of
  year                                               |  |                         | 4,575   |                         |  | 3,887    |    |          | 3,250   |      |  | 3,633   |   |  | 2,898   |    |  | 2,495   |  
| |    | Write-off of bad debt                                                        |  |                         | (2,753  | )                       |  | (5,937   | )  |          | (1,940  | )    |  | (2,187  | ) |  | (3,993  | )  |  | (1,205  | )
| |    | Increase during the year                                                     |  |                         | 2,065   |                         |  | 5,300    |    |          | 1,928   |      |  | 1,452   |   |  | 3,590   |    |  | 1,256   |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  
| |    | Balance at end of year                                                       |  |                         | 3,887   |                         |  | 3,250    |    |          | 3,238   |      |  | 2,898   |   |  | 2,495   |    |  | 2,546   |  
| |    |                                                                              |  |                         |         |                         |  |          |    |          |         |      |  |         |   |  |         |    |  |         |  

| |  |    |              
| |  | -- | -------------
| |  | *) | Reclassified.

- F82 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                   |                                    
|----------- | ----------------------------------------------------------------- | -----------------------------------
|NOTE 19:   | SUPPLEMENTARY INFORMATION OF THE STATEMENTS OF OPERATIONS (Cont.)
|            |                                                                  
|            | c.                                                                | Financial
  expenses (income), net:

| |                                                |  |                         |        |                         |  |          |  |          |        |         |  |        |  |  |        |  |  |        | 
| | ---------------------------------------------- |  | ----------------------- | ------ | ----------------------- |  | -------- |  | -------- | ------ | ------- |  | ------ |  |  | ------ |  |  | ------ | 
| |                                                |  | Consolidated            |        | The Company             | 
| |                                                |  |                         |        |                         | 
| |                                                |  | Year ended December 31, |        | Year ended December 31, | 
| |                                                |  |                         |        |                         | 
| |                                                |  | (* 2002                 |        | (* 2003                 |  | 2004     |  | (* 2002  |        | (* 2003 |  | 2004   | 
| |                                                |  |                         |        |                         |  |          |  |          |        |         |  |        | 
| |                                                |  | NIS in thousands        |       
| |                                                |  |                         |       
| |                                                |  | Adjusted                |        | Reported                |  | Adjusted |  | Reported |       
| |                                                |  |                         |        |                         |  |          |  |          |       
| |                                                |  |                         |        |                         |  |          |  |          |        |         |  |        |  |  |        |  |  |        | 
| | In respect of
  debentures and long-term loans |  |                         | 25,032 |                         |  | 11,214   |  |          | 15,068 |         |  | 24,092 |  |  | 11,214 |  |  | 15,068 | 
| |                                                |  |                         |        |                         |  |          |  |          |        |         |  |        |  |  |        |  |  |        | 
| | In respect of
  short-term credit              |  |                         | 10,328 |                         |  | 51,637   |  |          | 22,251 |         |  | 10,771 |  |  | 49,272 |  |  | 20,062 | 
| | Banks and
  credit card companies commissions  |  |                         | 6,595  |                         |  | 7,473    |  |          | 7,394  |         |  | 4,732  |  |  | 5,296  |  |  | 5,609  | 
| | Other, net                                     |  |                         | 6,134  |                         |  | 13,634   |  |          | 5,620  |         |  | 4,530  |  |  | 13,605 |  |  | 5,222  | 
| |                                                |  |                         |        |                         |  |          |  |          |        |         |  |        |  |  |        |  |  |        | 
| |                                                |  |                         |        |                         |  |          |  |          |        |         |  |        |  |  |        |  |  |        | 
| |                                                |  |                         | 48,089 |                         |  | 83,958   |  |          | 50,333 |         |  | 44,125 |  |  | 79,387 |  |  | 45,961 | 
| |                                                |  |                         |        |                         |  |          |  |          |        |         |  |        |  |  |        |  |  |        | 

| |    |                                 |                                                                                         
| | -- | ------------------------------- | ----------------------------------------------------------------------------------------
| |    | *)                              | In 2002 and
  2003, includes purchasing power gain or loss in respect of monetary items.
| |    |                                 |                                                                                         
| | d. | Other income
  (expenses), net:

| |                                                                            |  |  |         |   |  |        |     |  |         |   |  |         |   |  |        |   |  |         |  
| | -------------------------------------------------------------------------- |  |  | ------- | - |  | ------ | --- |  | ------- | - |  | ------- | - |  | ------ | - |  | ------- | -
| | Gain (losses)
  from:                                                      |  |  |         |   |  |        |     |  |         |   |  |         |   |  |        |   |  |         |  
| | Gain from sale
  of shares of affiliate                                    |  |  | 295,933 |   |  | 96,662 |     |  |        |   |  | 302,418 |   |  | 97,876 |   |  |        |  
| | Write-off of
  investment in other company                                 |  |  | (8,962  | ) |  |       |     |  | (16,241 | ) |  | (8,830  | ) |  |       |   |  | (16,241 | )
| | Gain (loss)
  from sale, net of write-off of property, plant and equipment |  |  | (44     | ) |  | (9,956 | )*) |  | 51      |   |  | (92     | ) |  | (7,638 | ) |  | 168     |  
| | Provision for
  claims and settlement of claims (see Note 15(b)(3))        |  |  | (235    | ) |  |       |     |  | (24,292 | ) |  | (235    | ) |  |       |   |  | (24,751 | )
| | Merger
  expenses related to the Cable Companies                           |  |  | (2,801  | ) |  | (4,487 | )   |  | (812    | ) |  | (2,801  | ) |  | (4,487 | ) |  | (812    | )
| | Adjustments of
  amortization of deposits for converters and other         |  |  | (5,356  | ) |  | (4,001 | )   |  |        |   |  | (3,434  | ) |  | (2,803 | ) |  |        |  
| | Retroactive
  refund of royalties                                          |  |  |        |   |  | 4,151  |     |  |        |   |  |        |   |  | 4,151  |   |  |        |  
| | Other                                                                      |  |  |        |   |  | (1,373 | )   |  | (1,386  | ) |  | (452    | ) |  | (2,158 | ) |  | (340    | )
| |                                                                            |  |  |         |   |  |        |     |  |         |   |  |         |   |  |        |   |  |         |  
| |                                                                            |  |  |         |   |  |        |     |  |         |   |  |         |   |  |        |   |  |         |  
| |                                                                            |  |  | 278,535 |   |  | 80,996 |     |  | (42,680 | ) |  | 286,574 |   |  | 84,941 |   |  | (41,976 | )
| |                                                                            |  |  |         |   |  |        |     |  |         |   |  |         |   |  |        |   |  |         |  

| |    |              
| | -- | -------------
| | *) | Reclassified.

- F83 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                                                    
|----------- | ---------------------------------------------------------------------------------------------------
|NOTE 20:   | NET EARNING (LOSS) PER SHARE                                                                       
|            |                                                                                                    
|            | Number of
  shares and income (loss) used in the calculation of income (loss) per
  ordinary share:

| |  |  |                                 |        |                             |  |                                 |      |                             |        |                                 |      |                            |    |  |         |   |  |        | 
| |  |  | ------------------------------- | ------ | --------------------------- |  | ------------------------------- | ---- | --------------------------- | ------ | ------------------------------- | ---- | -------------------------- | -- |  | ------- | - |  | ------ | 
| |  |  | Year ended
  December 31,       |       
| |  |  |                                 |       
| |  |  | 2002                            |        | 2003                        |  | 2004                            |     
| |  |  |                                 |        |                             |  |                                 |     
| |  |  | Net income                      |        |                             |  |                                 | Loss |                             |        |                                 | Loss |                            |    | 
| |  |  |                                 |        | Weighted                    |  |                                 |      | Weighted                    |        |                                 |      | Weighted                   |   
| |  |  | Adjusted 
  NIS in 
  thousands |        | average amount of 
  shares |  | Adjusted 
  NIS in 
  thousands |      | average amount of 
  shares |        | Reported 
  NIS in 
  thousands |      | averageamount of 
  shares |   
| |  |  |                                 |        |                             |  |                                 |      |                             |        |                                 |      |                            |    |  |         |   |  |        | 
| |  |  |                                 |        |                             |  |                                 |      |                             |        |                                 |      |                            |    |  |         |   |  |        | 
| |  |  |                                 | 33,824 |                             |  | 28,860                          | *)   |                             | (5,450 | )                               |      | 29,347                     | *) |  | (82,984 | ) |  | 29,360 | 
| |  |  |                                 |        |                             |  |                                 |      |                             |        |                                 |      |                            |    |  |         |   |  |        | 

|            | *)                | Subsequent
  to deduction of the shares held by a subsidiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | ----------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|NOTE 21:   | BUSINESS SEGMENTS
|            |                  
|            | a.                | The group
  companies operate in two principal business segments: cable television and
  Internet.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | b.                | All income
  and expenses are attributed directly to business segments. No material
  transactions among the segments were carried out.                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | c.                | Since a fee
  mechanism for the usage of the cable infrastructures and other services and
  facilities by the internet segment has not been determined yet, the Company
  does not charge Matav Infrastructure for these services. Accordingly, the
  results of the internet segment do not include any expenses for this usage
  and services and the depreciation of the cable infrastructure is fully
  recorded as part of the cable television segment results. The results of the
  internet segment include direct expenses only.
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | d.                | Segments
  assets include all operating assets used in the segment and mainly consist of
  trade receivables and property, plant and equipment. Most of the assets can
  be attributed to a certain segment. The amounts of certain assets that are
  used by both segments, are allocated between the segments on a reasonable
  basis.                                                                                                                                                                                                
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | e.                | The
  liabilities of a segment include all operating liabilities deriving from its
  operating activities and consist mainly of trade payables and other accounts
  payable. Assets and liabilities of the segment do not include income tax
  assets and liabilities.                                                                                                                                                                                                                                                                   

- F84 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                          
|----------- | -------------------------
|NOTE 21:   | BUSINESS SEGMENTS (Cont.)

| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | ------------------------------------------ |  | ------------------------------ | ------- | ------------------- |  | --------------------- | - |  | --------- | -
| |                                            |  | Year ended
  December 31, 2004 |        
| |                                            |  |                                |        
| |                                            |  | Internet                       |         | Cable 
  Television |  | Total 
  consolidated |  
| |                                            |  |                                |         |                     |  |                       |  
| |                                            |  | Reported
  NIS in thousands    |        
| |                                            |  |                                |        
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Sales to external customers                |  |                                | 65,659  |                     |  | 518,905               |   |  | 584,564   |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Total revenues                             |  |                                | 65,659  |                     |  | 518,905               |   |  | 584,564   |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Segments results (operating income (loss)) |  |                                | 28,457  |                     |  | (25,448               | ) |  | 3,009     |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Financial expenses, net                    |  |                                |         |                     |  |                       |   |  | (50,333   | )
| | Other income, net                          |  |                                |         |                     |  |                       |   |  | (42,680   | )
| | Taxes on income                            |  |                                |         |                     |  |                       |   |  | 7,281     |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Income (loss) after taxes on income        |  |                                |         |                     |  |                       |   |  | (97,285   | )
| | Equity in earnings of affiliates           |  |                                |         |                     |  |                       |   |  | 14,301    |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Loss                                       |  |                                |         |                     |  |                       |   |  | (82,984   | )
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Other information                          |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Segment assets                             |  |                                | 112,863 |                     |  | 839,401               |   |  | 952,264   |  
| | Unallocated assets                         |  |                                |         |                     |  |                       |   |  | 126,618   |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Total consolidated assets                  |  |                                |         |                     |  |                       |   |  | 1,078,882 |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Segment liabilities                        |  |                                | 17,445  |                     |  | 210,916               |   |  | 228,361   |  
| | Unallocated liabilities                    |  |                                |         |                     |  |                       |   |  | 752,740   |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Total consolidated liabilities             |  |                                |         |                     |  |                       |   |  | 981,101   |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Capital expenditure                        |  |                                | 8,165   |                     |  | 87,263                |   |  | 95,428    |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  
| | Depreciation and amortization              |  |                                | 6,871   |                     |  | 138,412               |   |  | 145,283   |  
| |                                            |  |                                |         |                     |  |                       |   |  |           |  

- F85 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|             |                          
|------------ | -------------------------
|NOTE 21:    | BUSINESS SEGMENTS (Cont.)

| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | ----------------------------------------- |  | ---------------------------- | ------ | ------------------ |  | -------------------- | -- |  | --------- | --
| |                                           |  | Year ended December 31, 2003 |       
| |                                           |  |                              |       
| |                                           |  | Internet                     |        | Cable
  Television |  | Total
  consolidated |   
| |                                           |  |                              |        |                    |  |                      |   
| |                                           |  | Adjusted NIS in thousands    |       
| |                                           |  |                              |       
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Sales to external customers               |  |                              | 34,403 |                    |  | 511,077              |    |  | 545,480   |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Total revenues                            |  |                              | 34,403 |                    |  | 511,077              |    |  | 545,480   |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Segment results (operating (loss) income) |  |                              | 10,436 |                    |  | (18,255              | )  |  | (7,819    | ) 
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Financial expenses, net                   |  |                              |        |                    |  |                      |    |  | (83,958   | ) 
| | Other income, net                         |  |                              |        |                    |  |                      |    |  | 80,996    |   
| | Taxes on income                           |  |                              |        |                    |  |                      |    |  | (35,576   | ) 
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Income (loss) after taxes on income       |  |                              |        |                    |  |                      |    |  | (46,357   | ) 
| | Equity in earnings (losses) of affiliates |  |                              |        |                    |  |                      |    |  | 40,907    |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Loss                                      |  |                              |        |                    |  |                      |    |  | (5,450    | ) 
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Other information                         |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Segment assets                            |  |                              | 78,090 |                    |  | 940,663              | *) |  | 1,018,753 | *)
| | Unallocated assets                        |  |                              |        |                    |  |                      |    |  | 123,799   | *)
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Total consolidated assets                 |  |                              |        |                    |  |                      |    |  | 1,142,552 |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Segment liabilities                       |  |                              | 15,963 |                    |  | 184,141              |    |  | 200,104   |   
| | Unallocated liabilities                   |  |                              |        |                    |  |                      |    |  | 761,700   |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Total consolidated liabilities            |  |                              |        |                    |  |                      |    |  | 961,804   |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Capital expenditure                       |  |                              | 38,131 |                    |  | 17,524               |    |  | 55,655    |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   
| | Depreciation and amortization             |  |                              | 6,792  |                    |  | 153,729              |    |  | 160,521   |   
| |                                           |  |                              |        |                    |  |                      |    |  |           |   

| |    |             
| | -- | ------------
| | *) | Reclassified

- F86 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                          
|----------- | -------------------------
|NOTE 21:   | BUSINESS SEGMENTS (Cont.)

| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | ---------------------------------- |  | ---------------------------- | ------ | ------------------ |  | -------------------- | -- |  | --------- | --
| |                                    |  | Year ended December 31, 2002 |       
| |                                    |  |                              |       
| |                                    |  | Internet                     |        | Cable
  Television |  | Total
  consolidated |   
| |                                    |  |                              |        |                    |  |                      |   
| |                                    |  | Adjusted NIS in thousands    |       
| |                                    |  |                              |       
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Sales to external customers        |  |                              | 9,124  |                    |  | 486,412              |    |  | 495,536   |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Total revenues                     |  |                              | 9,124  |                    |  | 486,412              |    |  | 495,536   |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Segment results (operating (loss)) |  |                              | (7,724 | )                  |  | (90,957              | )  |  | (98,681   | ) 
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Financial expenses, net            |  |                              |        |                    |  |                      |    |  | (48,089   | ) 
| | Other income, net                  |  |                              |        |                    |  |                      |    |  | 278,535   |   
| | Taxes on income                    |  |                              |        |                    |  |                      |    |  | (108,851  | ) 
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Income after taxes on income       |  |                              |        |                    |  |                      |    |  | 22,914    |   
| | Equity in earnings of affiliates   |  |                              |        |                    |  |                      |    |  | 10,910    |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Net income                         |  |                              |        |                    |  |                      |    |  | 33,824    |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Other information                  |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Segment assets                     |  |                              | 39,297 |                    |  | 1,042,360            | *) |  | 1,081,657 | *)
| | Unallocated assets                 |  |                              |        |                    |  |                      |    |  | 50,969    | *)
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Total consolidated assets          |  |                              |        |                    |  |                      |    |  | 1,132,626 |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Segment liabilities                |  |                              | 10,369 |                    |  | 145,761              |    |  | 156,130   |   
| | Unallocated liabilities            |  |                              |        |                    |  |                      |    |  | 829,424   |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Total consolidated liabilities     |  |                              |        |                    |  |                      |    |  | 985,554   |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Capital expenditure                |  |                              | 36,073 |                    |  | 80,768               |    |  | 116,841   |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   
| | Depreciation and amortization      |  |                              | 5,893  |                    |  | 156,103              |    |  | 161,996   |   
| |                                    |  |                              |        |                    |  |                      |    |  |           |   

| |    |             
| | -- | ------------
| | *) | Reclassified

- F87 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                     
|----------- | ------------------------------------
|NOTE 22:   | TRANSACTIONS WITH INTERESTED PARTIES

| |    |                                                        |                                |  |                              |       |          |        |       |  |        |       | 
| | -- | ------------------------------------------------------ | ------------------------------ |  | ---------------------------- | ----- | -------- | ------ | ----- |  | ------ | ----- | 
| |    |                                                        |                                |  | Consolidated and the Company |      
| |    |                                                        |                                |  |                              |      
| |    |                                                        |                                |  | Year ended December 31,      |      
| |    |                                                        |                                |  |                              |      
| |    |                                                        |                                |  | 2002                         |       | 2003     |        | 2004  | 
| |    |                                                        |                                |  |                              |       |          |        |       | 
| |    |                                                        |                                |  | NIS in thousands             |      
| |    |                                                        |                                |  |                              |      
| |    |                                                        |                                |  | Adjusted                     |       | Reported |       
| |    |                                                        |                                |  |                              |       |          |       
| | a. | Salaries and profit sharing grant:                     |                                |  |                              |       |          |        |       |  |        |      
| |    |                                                        |                                |  |                              |       |          |        |       |  |        |       | 
| |    | 1.                                                     | To unemployed directors:       |  |                              |       |          |        |       |  |        |       | 
| |    |                                                        |                                |  |                              |       |          |        |       |  |        |       | 
| |    |                                                        | Payments                       |  |                              | 194   |          |        | 142   |  |        | 142   | 
| |    |                                                        | Number of recipients           |  |                              | 3     |          |        | 3     |  |        | 5     | 
| |    |                                                        |                                |  |                              |       |          |        |       |  |        |       | 
| |    | 2.                                                     | Employed interested
  parties: |  |                              |       |          |        |       |  |        |       | 
| |    |                                                        |                                |  |                              |       |          |        |       |  |        |       | 
| |    |                                                        | Cost of salaries (1)           |  |                              | 1,251 |          |        | 1,116 |  |        | 2,481 | 
| |    |                                                        | Number of recipients           |  |                              | 1     |          |        | 1     |  |        | 2     | 
| |    |                                                        |                                |  |                              |       |          |        |       |  |        |       | 
| |    |                                                        |                                |  |                              |       |          |        |       |  |        |       | 
| | b. | Expenses:                                              |                                |  |                              |       |          |        |       |  |        |      
| |    |                                                        |                                |  |                              |       |          |        |       |  |        |      
| |    | Rental and services to shareholders
  affiliate        |                                |  | 286                          |       |          | 244    |       |  | 255    |      
| |    | Payment to supplier
  (infrastructure and maintenance) |                                |  | 15,127                       |       |          | 13,936 |       |  | 10,095 |      
| |    | Operating commissions                                  |                                |  | 2,902                        |       |          |       |       |  |       |      
| |    | Professional services                                  |                                |  | 295                          |       |          | 2,728  |       |  | 87     |      

| |     |                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------
| | (1) | For the year
  ended December 31, 2004, includes an amount of NIS 1,300 thousand in respect
  of a termination charge.

- F88 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ----------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 23:   | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            | a.                                        | Foreign
  exchange risk management:                                                                                                                                                                                                                                                                                                                                                                          
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | The Company
  enters into foreign exchange contracts to hedge itself against the risk of
  the possible fluctuation of the change in the dollar/NIS exchange rate,
  attributable to future dollar cash outflows.                                                                                                                                                                                            
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | As of
  December 31, 2004, the Company had call options to buy $24 million in
  consideration for NIS 108 million. The options, which are due to expire on
  December 12, 2005, are presented in the financial statements at market value
  (see c below). As of December 31, 2003, the Company had call options to buy
  $24 million and put options to sell $24 million in consideration for NIS
  amounts.
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | Those hedges
  were not designated as hedge transactions for accounting purposes; hence all
  changes in fair value were recorded in 2004, 2003 and 2002 as financial
  expenses in the amount of NIS 3,800 thousand, NIS 11,218 thousand and
  NIS 365 thousand, respectively.                                                                                                                              
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            | b.                                        | Concentrations
  of credit risks:                                                                                                                                                                                                                                                                                                                                                                            
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | At December
  31, 2004 and 2003, the Group held cash and cash equivalents which were
  deposited mainly with Israeli banks. The Group is of the opinion that the
  credit risk in respect of these balances is remote.                                                                                                                                                                                       
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | The Groups
  revenues are derived from a large number of customers in the licensed areas.
  Consequently, the exposure to concentration of credit risk relating to trade
  receivables is limited. The Group performs ongoing credit evaluations of its
  customers for the purpose of determining the appropriate allowance for
  doubtful accounts.                                                       
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            | c.                                        | Fair value
  of financial instruments:                                                                                                                                                                                                                                                                                                                                                                       
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | The fair
  value of the financial instruments included in working capital of the Group
  and of loans from banks is usually equal to or approximates their carrying
  value.                                                                                                                                                                                                                                 
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | The fair
  value of debentures as of December 31, 2004 and 2003 amounted to adjusted
  NIS 67 million and adjusted NIS 99 million, respectively, which
  represents the market value of the debentures on the TASE.                                                                                                                                                                                          
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | The fair
  value of the derivatives mentioned in a. above as of December 31, 2004 is a
  net asset of adjusted NIS 320 thousand.                                                                                                                                                                                                                                                                             
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                           | As to the
  fair value of the investment in Partner  see Note 5(b)2.                                                                                                                                                                                                                                                                                                                                        

- F89 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | ----------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 24:   | SUBSEQUENT EVENTS
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | a.                | On April 20,
  2005, the Company exercised its option to participate in the share buyback of
  Partner Communications Company Ltd. (Partner), together with Elbit Ltd.,
  Eurocom Communications Limited and Polar Communications Limited. At the
  closing of the transaction, the Company sold to Partner 7,783,444 ordinary
  shares of Partner for a total consideration of approximately NIS 250 million.
  The above mentioned transaction was subsequent to the removal of the pledge
  on Partner shares as described in Note 15(c)2. The Company expects to
  recognize on this sale in its financial statements prepared under Israeli
  GAAP a capital gain (net of tax effect) of approximately NIS 115 million.
  Subsequent to the above sale, the Company holds 1,884,926 Ordinary shares of
  Partner (constituting approximately 1.2% of the share capital of Partner),
  almost all of which are still subject to transfer restrictions under
  Partners communications license (see Note 5b(2)(b)).
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                   | As a result
  of a decrease in the interest held in Partner, effective as of April 2005,
  the investment in Partner shall be accounted for in the Companys financial
  statements, in accordance with generally accepted accounting principles in
  Israel, under the cost method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | b.                | The Controller approved the
  merger between Bezeq - Israeli Telecommunications Corporation Ltd. (Bezeq)
  and Yes subject to various conditions. Such merger shall increase Bezeqs
  holdings in Yes in excess of 50%.  The
  Cable Companies, including the Company, filed an appeal on the Controllers
  decision on March 14, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | c.                | On May 26,
  2005, the Company announced that it is delaying the implementation of its
  previously announced plan, as mentioned in Note 1(a)11, to terminate its SEC
  registration, NASDAQ listing and its American Depository Receipt (ADR)
  program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                   | The board of
  directors of the Company will re-examine the timing of such termination in
  the next few months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | d.                | On June 15,
  2005, Barak, Clalcom Ltd (which holds approximately 44% of the share capital
  of Barak and which is a subsidiary of Clal Industries and Investments Ltd.),
  Clal Industries and Investments Ltd. (together: Clal), Dial-the Israeli
  Company for International Communications Ltd. (Dial), and Matav entered
  into a Non-Binding Term Sheet in order to set out the terms for a proposed
  restructuring of Baraks capital and debt (the Term-Sheet), subject, inter
  alia, to the entry of Barak, certain holders of Senior Subordinated Discount
  Notes due 2007 of Barak (the Existing Notes) (the Note Holders), Clal and
  the current shareholders of Barak, into a definitive Restructuring Agreement.
  The Restructuring Agreement shall be effected through, amongst other, a plan
  under Section 350 of the Companies Law (the Plan).                                                                                                                                       

- F90 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 24:   | SUBSEQUENT EVENTS (Con.)
|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                          | Pursuant to
  the Plan, Barak shall pay the Note Holders, upon the Plan becoming effective
  (the Closing) a cash sum (the Cash Payment) of US$32.35 million in
  exchange for the full and final compromise of: (a) US$57.4 million of the
  principal face value of the Existing Notes; (b) default interest on the
  interest coupon due on the outstanding Existing Notes on November 15, 2004
  (the November Coupon), but excluding the November Coupon itself; and (c)
  all interest accrued on the outstanding Existing Notes including the interest
  coupon due on the outstanding Existing Notes on May 15, 2005 and all default
  interest thereon, but excluding (i) the November Coupon, and (ii) the
  interest due on the Residual Notes accruing from March 1, 2005 (The Debt
  Compromise).                                       
|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                          | Following
  the Debt Compromise, the principal amount of the Existing Notes shall be
  reduced to US$65 million (the Residual Notes). The Residual Notes shall
  bear interest at the rate of 10% per annum, accruing from March 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                          | In addition,
  within 3 business days of the date of the Restructuring Agreement, Barak
  shall pay to the Note holders, US$7.65 million (being the November Coupon)
  out of its cash funds. The payment of the November Coupon shall be in
  addition to the payment of the Cash Payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                          | The Cash
  Payment shall be funded by Clal in exchange for ordinary shares that will be
  issued to Clal by Barak, on terms to be agreed between Clal, Barak and the
  other current shareholders of Barak and subject to the prior approval by the
  Note Holders. Following Closing, Clal will own at least 95% of the share
  capital of Barak, subject to any participation by the current shareholders of
  Barak in the funding of the Cash Payment.                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                          | The
  Restructuring Agreement is subject to certain conditions and approvals which
  have not yet been met or received.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                          | The company
  is entitled, no later than June 30, 2006, to participate in the funding of
  the Cash Payment, in the amount of US$6 million in accordance with its
  proportional holdings in Barak at that time. In the event that the company
  shall elect to participate in the funding of the Cash Payment, its holdings
  in Barak shall be increased to approximately 18.5%. If the Company shall
  elect not to participate in the funding of the Cash Payment, its holdings in
  Barak shall be reduced to approximately 1.39%.                                                                                                                                                                                                                                                                                                                      
|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                          | In
  connection with the Companys participation right, as described above, the
  company entered into an agreement with Clal according to which upon its decision
  to participate in the cash payment together with Clal, the company will be
  entitled to appoint one board member out of a total five board members in
  Barak and will be granted, among other preemptive rights, a Put option to
  sell all of its shares in Barak to Clal at certain conditions as detailed in
  the agreement. In addition, it has been agreed by the parties that Clal will
  be granted, among certain rights as defined in the agreement, a Call option
  at certain conditions as agreed upon, to purchase all of the companys shares
  in Barak. According to the agreement the company had to inform Clal on its
  participation no later than June 30, 2005.
|            |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                          | During June
  28, 2005 the Companys Board of Directors approved the Companys
  participation in the funding of the Cash Payment, as described above..                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

- F91 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | ------------------------ | ------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 24:   | SUBSEQUENT EVENTS (Con.)
|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | e.                       | Contingent
  liabilities:
|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                          | 1.                        | Further to
  Note 5b(4) above, during a preliminary hearing of the amended petition
  against Hot Telecom, submitted by Bezeq, which was held on April 14, 2005,
  and in accordance with the Courts recommendation, Bezek withdrew the
  petition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                          | 2.                        | Further to
  Note 15b(2)(c), in April 11, 2005 the Israeli Records and Cassettes
  Federation (the Federation)
  filed in the District Court of Haifa a claim against the Company and the
  other Cable Companies as well as a request for payment of temporary
  royalties. The Federation seeks to represent the Israeli record companies as
  well as foreign record companies that impressed musical compositions on
  records and compact disks, which the Cable Companies broadcast.                                                                                                                                                                                                                                                                                   
|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                          |                           | The
  Federation noted that it reserves the right to request a preliminary
  injunction. The Federation further noted its consent that the Court shall
  render a judgment in way of granting the operative legal ruling without
  furnishing any reasoning. In addition the Federation informed the Court of
  its consent to arbitration proceedings. The Court is further requested to
  instruct the Cable Companies to pay the Federation interim royalties until a
  judgment is rendered. The Federation presented two main models in respect of
  the calculation of the royalties as follows: (a) payment in the amount of 0.26%
   0.3% of the income of the Cable Companies (plus VAT); (b) payment of yearly
  royalties in a fixed sum per subscriber (plus VAT).
|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                          |                           | The
  Federation requested the Court to oblige the Cable Companies to pay permanent
  royalties in the sum of $2 per each subscriber that does not receive the
  audio channels or $5 per each subscriber that receives the audio channels.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                          |                           | The Cable
  Companies submitted the response to the request for payment of temporary
  royalties and the statements of defense on June 6, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                          |                           | In the
  response, the Cable Companies claimed, inter alia, that the request made by
  the Federation for the payment of temporary royalties was not timely and was
  not submitted in good faith. In addition the Cable Companies claimed that the
  amount of the request was extremely unreasonable and it should be an amount
  of up to US$200,000, which is the contractual amount that has already been
  paid to the Federation. The date of the hearing was set on July 6, 2005.                                                                                                                                                                                                                                                                                      
|            |                          |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                          |                           | According to
  the opinion of the Companys management, based on the opinion of its legal
  counsels, it is not possible, at this stage, to estimate the chances of the
  claim. Nevertheless, the Companys management included in the financial
  statements a provision, which in its opinion reflects adequately the
  Companys exposure in respect of this claim.                                                                                                                                                                                                                                                                                                                                                                                                        

- F92 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                          |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                 
|----------- | ------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 24:   | SUBSEQUENT EVENTS (Con.)                                                
|            |                                                                          |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                 
|            |                                                                          | 3.                                                                                                                                                                                                                                                                         | The class
  action described in Note 15b(1)(d):                                                                                                                                                                                                 
|            |                                                                          |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                 
|            |                                                                          |                                                                                                                                                                                                                                                                            | On May 15,
  2005, the Tel Aviv-Jaffa district court approved the request filed by the
  parties and rendered a judgment according to which the claim was stricken.                                                                             
|            |                                                                          |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                 
|            |                                                                          | 4.                                                                                                                                                                                                                                                                         | Further to
  Note 15(b)2(f) above, during June 2005 Matav Investments signed an agreement
  with the tax authorities regarding the tax assessments for the years
  1998-2001. The agreement does not have an effect on the financial statements.
|            |                                                                         
|NOTE 25:   | CONDENSED FINANCIAL DATA IN NOMINAL HISTORICAL VALUES FOR TAX
  PURPOSES
|            |                                                                          |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                 
|            | a.                                                                       | The Company
  provides nominal historical data for income tax purposes only.                                                                                                                                                                                              
|            |                                                                          |                                                                                                                                                                                                                                                                           
|            | b.                                                                       | The
  financial statements have been prepared in accordance with generally accepted
  accounting principles in Israel, based on the historical cost convention,
  without taking into consideration the changes in the general purchasing power
  of the Israeli currency.
|            |                                                                          |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                 
|            | c.                                                                       | Balance
  sheets  the Company:                                                                                                                                                                                                                                           

| |                                                      |  |                    |           |      |  |           | 
| | ---------------------------------------------------- |  | ------------------ | --------- | ---- |  | --------- | 
| |                                                      |  | December
  31,     |          
| |                                                      |  |                    |          
| |                                                      |  | 2003               |           | 2004 | 
| |                                                      |  |                    |           |      | 
| |                                                      |  | NIS in
  thousands |          
| |                                                      |  |                    |          
| | ASSETS                                               |  |                    |           |      |  |           | 
| |                                                      |  |                    |           |      |  |           | 
| | CURRENT
  ASSETS:                                    |  |                    |           |      |  |           | 
| | Cash and cash equivalents                            |  |                    | 35,879    |      |  | 21,602    | 
| | Trade receivables                                    |  |                    | 45,400    |      |  | 37,398    | 
| | Other accounts receivable                            |  |                    | 19,431    |      |  | 15,321    | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    | 100,710   |      |  | 73,321    | 
| |                                                      |  |                    |           |      |  |           | 
| | INVESTMENTS AND LONG-TERM RECEIVABLES:               |  |                    |           |      |  |           | 
| | Investments in subsidiaries and long-term
  accounts |  |                    | 227,483   |      |  | 239,974   | 
| | Investments in affiliates                            |  |                    | 72,365    |      |  | 111,072   | 
| | Investment in non-marketable equity
  securities     |  |                    | 16,536    |      |  |          | 
| | Other receivables                                    |  |                    | 885       |      |  | 601       | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    | 317,269   |      |  | 351,647   | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    |           |      |  |           | 
| | PROPERTY, PLANT AND EQUIPMENT:                       |  |                    |           |      |  |           | 
| | Cost                                                 |  |                    | 1,090,654 |      |  | 1,134,888 | 
| | Less  accumulated depreciation                      |  |                    | 536,694   |      |  | 620,800   | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    | 553,960   |      |  | 514,088   | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    |           |      |  |           | 
| | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET          |  |                    | 1,134     |      |  | 525       | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    |           |      |  |           | 
| |                                                      |  |                    | 973,073   |      |  | 940,581   | 
| |                                                      |  |                    |           |      |  |           | 

- F93 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|           |                                                                                 
|---------- | --------------------------------------------------------------------------------
|NOTE 25:  | CONDENSED FINANCIAL DATA IN NOMINAL HISTORICAL VALUES FOR TAX PURPOSES
  (Cont.)

| |                                                                       |  |                    |          |      |  |          |  
| | --------------------------------------------------------------------- |  | ------------------ | -------- | ---- |  | -------- | -
| |                                                                       |  | December
  31,     |         
| |                                                                       |  |                    |         
| |                                                                       |  | 2003               |          | 2004 | 
| |                                                                       |  |                    |          |      | 
| |                                                                       |  | NIS in
  thousands |         
| |                                                                       |  |                    |         
| | LIABILITIES AND SHAREHOLDERS
EQUITY                                  |  |                    |          |      |  |          |  
| |                                                                       |  |                    |          |      |  |          |  
| | CURRENT LIABILITIES:                                                  |  |                    |          |      |  |          |  
| | Bank credit                                                           |  |                    | 394,896  |      |  | 424,992  |  
| | Current maturities of debentures                                      |  |                    | 33,701   |      |  | 34,005   |  
| | Trade payables                                                        |  |                    | 63,617   |      |  | 74,917   |  
| | Jointly controlled entity  current
account                           |  |                    | 15,988   |      |  | 18,619   |  
| | Other accounts payable                                                |  |                    | 139,027  |      |  | 183,167  |  
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    | 647,229  |      |  | 735,700  |  
| |                                                                       |  |                    |          |      |  |          |  
| | LONG-TERM LIABILITIES:                                                |  |                    |          |      |  |          |  
| | Loans and debentures (net of current
  maturities):                   |  |                    |          |      |  |          |  
| | Loans from bank and others                                            |  |                    | 127,403  |      |  | 101,457  |  
| | Debentures                                                            |  |                    | 67,402   |      |  | 34,005   |  
| | Losses over investments in
subsidiaries                               |  |                    | 12,393   |      |  | 16,759   |  
| | Customers deposits for converters, net
of
  accumulated amortization |  |                    | 18,882   |      |  | 14,901   |  
| | Accrued severance pay, net                                            |  |                    | 704      |      |  | 1,023    |  
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    | 226,784  |      |  | 168,145  |  
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    |          |      |  |          |  
| | SHAREHOLDERS EQUITY:                                                 |  |                    |          |      |  |          |  
| | Share capital                                                         |  |                    | 30,204   |      |  | 30,220   |  
| | Additional paid-in capital                                            |  |                    | 295,439  |      |  | 295,439  |  
| | Accumulated deficit                                                   |  |                    | (226,583 | )    |  | (288,923 | )
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    | 99,060   |      |  | 36,736   |  
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    |          |      |  |          |  
| |                                                                       |  |                    | 973,073  |      |  | 940,581  |  
| |                                                                       |  |                    |          |      |  |          |  

- F94 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                                  |                                          
|----------- | -------------------------------------------------------------------------------- | -----------------------------------------
|NOTE 25:   | CONDENSED FINANCIAL DATA IN NOMINAL HISTORICAL VALUES FOR TAX
  PURPOSES (Cont.)
|            |                                                                                  |                                          
|            | d.                                                                               | Statements
  of operations  the Company:

| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | ----------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | ------- | - |  | ------- | -
| |                                                                   |  | Year ended
  December 31, |        
| |                                                                   |  |                           |        
| |                                                                   |  | 2002                      |         | 2003 |  | 2004    |  
| |                                                                   |  |                           |         |      |  |         |  
| |                                                                   |  | NIS in
  thousands        |        
| |                                                                   |  |                           |        
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | Revenues                                                          |  |                           | 346,094 |      |  | 372,202 |   |  | 370,275 |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | Operating expenses                                                |  |                           | 323,537 |      |  | 304,573 |   |  | 312,627 |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | Gross profit                                                      |  |                           | 22,557  |      |  | 67,629  |   |  | 57,648  |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | Selling, marketing, general and
  administrative expenses:        |  |                           |         |      |  |         |   |  |         |  
| | Selling and marketing                                             |  |                           | 29,159  |      |  | 27,236  |   |  | 34,988  |  
| | General and administrative                                        |  |                           | 29,934  |      |  | 28,664  |   |  | 30,340  |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           | 59,093  |      |  | 55,900  |   |  | 65,328  |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | Operating income (loss)                                           |  |                           | (36,536 | )    |  | 11,729  |   |  | (7,680  | )
| | Financial expenses, net                                           |  |                           | (70,832 | )    |  | (71,181 | ) |  | (40,787 | )
| | Other income (expenses), net                                      |  |                           | 285,130 |      |  | 88,516  |   |  | (42,201 | )
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | Income (loss) before taxes on income                              |  |                           | 177,762 |      |  | 29,064  |   |  | (90,668 | )
| | Taxes on income                                                   |  |                           | 110,720 |      |  | 36,530  |   |  | 4,516   |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | Income (loss) after taxes on income                               |  |                           | 67,042  |      |  | (7,466  | ) |  | (95,184 | )
| | Equity in earnings (losses) of affiliates
  and subsidiaries, net |  |                           | (61,228 | )    |  | 62,734  |   |  | 32,844  |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| |                                                                   |  |                           |         |      |  |         |   |  |         |  
| | Net income (loss) for the year                                    |  |                           | 5,814   |      |  | 55,268  |   |  | (62,340 | )
| |                                                                   |  |                           |         |      |  |         |   |  |         |  

- F95 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                                  |                                                
|----------- | -------------------------------------------------------------------------------- | -----------------------------------------------
|NOTE 25:   | CONDENSED FINANCIAL DATA IN NOMINAL HISTORICAL VALUES FOR TAX
  PURPOSES (Cont.)
|            |                                                                                 
|            | e.                                                                               | Statements
  of changes in shareholders equity

| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  
| | ----------------------------------------- |  | ------------------ | ------ | ------------------------------ |  | --------------------------------------------- | - | ------------------------------------------------- | -------- | ----- |  | ------- | - |  | ------- | -
| |                                           |  | Share
  capital    |        | Additional
  paid-in
  capital |  | Retained
  earnings
  (accumulated
  deficit) |   | Cost of
  Company
  shares held
  by
  subsidiary |          | Total | 
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       | 
| |                                           |  | NIS in
  thousands |       
| |                                           |  |                    |       
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  
| | Balance
  at January 1, 2002              |  |                    | 30,204 |                                |  | 318,727                                       |   |                                                   | (287,665 | )     |  | (63,603 | ) |  | (2,337  | )
| | Net income for the year                   |  |                    |       |                                |  |                                              |   |                                                   | 5,814    |       |  |        |   |  | 5,814   |  
| | Sale of Company shares held by
subsidiary |  |                    |       |                                |  | (377                                          | ) |                                                   |         |       |  | 1,309   |   |  | 932     |  
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  
| | Balance
  at December 31, 2002            |  |                    | 30,204 |                                |  | 318,350                                       |   |                                                   | (281,851 | )     |  | (62,294 | ) |  | 4,409   |  
| | Net income for the year                   |  |                    |       |                                |  |                                              |   |                                                   | 55,268   |       |  |        |   |  | 55,268  |  
| | Sale of Company shares held by
subsidiary |  |                    |       |                                |  | (22,911                                       | ) |                                                   |         |       |  | 62,294  |   |  | 39,383  |  
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  
| | Balance
  at December 31, 2003            |  |                    | 30,204 |                                |  | 295,439                                       |   |                                                   | (226,583 | )     |  |        |   |  | 99,060  |  
| | Net loss for the year                     |  |                    |       |                                |  |                                              |   |                                                   | (62,340  | )     |  |        |   |  | (62,340 | )
| | Exercise of stock options by employees    |  |                    | 16     |                                |  |                                              |   |                                                   |         |       |  |        |   |  | 16      |  
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  
| | Balance
  at December 31, 2004            |  |                    | 30,220 |                                |  | 295,439                                       |   |                                                   | (288,923 | )     |  |        |   |  | 36,736  |  
| |                                           |  |                    |        |                                |  |                                               |   |                                                   |          |       |  |         |   |  |         |  

- F96 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                                                                                                                                 
|            |                                                                                                                                                                                                                                                                         
|            | The
  financial statements are prepared in accordance with generally accepted
  accounting principles in Israel (Israeli GAAP). Israeli GAAP vary in
  certain respects from generally accepted accounting principles in the U.S.
  (U.S. GAAP), as described below:
|            |                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|            | a.                                                                                                                                                                                                                                                                       | Effect of
  inflation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                          | As described
  in Note 2b, the Company, in accordance with the Israeli GAAP, comprehensively
  included the effects of price level changes in the accompanying financial
  statement until December 31, 2003, when the adjustment of financial
  statements for the effects of inflation in Israel was discontinued. Such
  Israeli accounting principles measured the effects of the price level changes
  in the inflationary Israeli economy and, as such, this is considered a more
  meaningful presentation than financial reporting based on historical cost for
  Israeli and U.S. accounting purposes. As explained in Note 2b above, the
  amounts adjusted for the effects of inflation in Israel, presented in the
  financial statements as of December 31, 2003 (thereafter  the transition
  date), were used as the opening balances for the nominal financial reporting
  in the following periods. As a result, amounts reported in 2004 for
  non-monetary items that originated before the transition date are based on
  their adjusted December 2003 shekel balance. U.S. GAAP does not generally
  provide for the adjustment of financial statements for the impact of
  inflation for entities which do not operate in an hyperinflationary economy.
  As permitted by the Untied States Securities and Exchange Commission rules
  for foreign private issuers whose financial statements comprehensively
  include the effects of inflation, price level adjustments have not been
  reversed in the accompanying reconciliation of Israeli GAAP to U.S. GAAP.
|            |                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | b.                                                                                                                                                                                                                                                                       | Proportionate
  consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                          | Under
  Israeli GAAP, a jointly controlled entity is included in the Companys
  consolidated financial statements according to the proportionate
  consolidation method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                          | Under U.S.
  GAAP, investments in jointly controlled entities are accounted for by the
  equity method. Pursuant to the Securities and Exchange Commission
  requirements applicable to foreign private issuers, the Company is not
  required to disclose the differences in classification that result from using
  proportionate consolidation provided all of equity holders contractually
  participate in the operations of the joint venture. For the Companys share
  in assets, liabilities, revenues, expenses and cash flows of the jointly
  controlled entity consolidated by the proportionate consolidation method, see
  Note 5(d).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | c.                                                                                                                                                                                                                                                                       | Investment
  in Partner:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                          | Under US
  GAAP, the investment in Partners shares is accounted for as an investment in
  available-for-sale marketable securities pursuant to Statement of Accounting
  Standard No. 115, Accounting for Certain Investments in Debt and Equity
  Securities (SFAS 115).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

- F97 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|            |                                                                                                                                                
|            |                                                                                                                                                 | Accordingly,
  the securities are measured at fair value, with unrealized gains and losses
  reported net-of-tax in accumulated other comprehensive income, a separate
  component of shareholders equity. Realized gains on the sale of Partner
  shares are included in the consolidated statement of operations. When
  computing realized gain or loss, cost, determined on an average basis, is
  based upon the carrying amount of the investment in Partners shares, at the
  date on which the company ceased to account for such investment under the
  equity method under U.S. GAAP (April 2002), due to realization of a
  significant part of the investment in Partner shares and as a result loss of
  the ability to exercise significant influence over Partner. At that date, the
  carrying amount of the investment in Partner was nil.
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 | Under
  Israeli GAAP, the investment in Partners shares is accounted for under the
  equity method, since the Company is considered to have the ability to
  exercise significant influence over the financial and operating policies of
  Partner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 | In 2002, the
  Company realized 7.7% of Partners outstanding shares. Due to the difference
  between the carrying amount of the investment in Partner under Israeli GAAP
  to such amount under U.S. GAAP, the gain realized under U.S. GAAP (net of
  taxes) amounted to NIS 305,860 thousand, and exceeded the realized gain
  under Israeli GAAP by NIS 9,155 thousand (net of taxes).                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 | On November
  3, 2003, the Company realized an additional 2.15% of Partners issued and
  outstanding share capital in consideration for adjusted NIS 114.4 million. As
  a result, the Company recognized a gain under U.S. GAAP of approximately
  adjusted NIS 73.2 million, net of taxes on income, which exceeded the gain,
  net of taxes, recognized under Israeli GAAP by adjusted NIS 10.9 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 | During the
  years 2004, 2003 and 2002, the Company recorded under US GAAP as other
  comprehensive income unrealized gains, net of tax of approximately NIS 16.9
  million, adjusted NIS 143.2 million and adjusted NIS 150.4 million,
  respectively. As of December 31, 2004 and December 31, 2003, the accumulated
  other comprehensive income totaled approximately NIS 237.2 million and
  adjusted NIS 220.3 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 | The Company
  recorded under Israeli GAAP equity earnings, net of tax effect, in respect of
  the investment in Partner in the amount of NIS 17,610 thousand, NIS 42,270
  thousand and NIS 14,181 thousand in 2004, 2003 and 2002, respectively.
  These equity earnings were cancelled under U.S. GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 | As described
  in Note 24a, subsequent to balance sheet date, the Company sold 7,783,444 of
  Partner shares. As a result, the Company expects to record in 2005 under U.S.
  GAAP in its statement of operations a realized gain of approximately NIS
  164.3 million, net of taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

- F98 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|            |                                                                                                                                                
|            | d.                                                                                                                                              | Effect of
  change in tax rate:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 | As described
  in Note 17(b) in June 2004, an amendment to the Income Tax Ordinance was
  approved by the Israeli parliament which determined, among others, that the
  corporate tax rate is to be gradually reduced to 30% in 2007, beginning in
  2004. According to U.S. GAAP, the effect of tax rate changes is reflected as
  a component of tax expense from continuing operations. Thus, the effect of
  the tax rate change on the deferred taxes relating to Partner shares, which
  were initially charged to other comprehensive income, was recognized as an
  adjustment to income tax expense and amounted to a tax benefit of NIS 6.1
  million.                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | e.                                                                                                                                              | Compensation
  expense in respect of employee stock options (see also Note 16b):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 | Under
  Israeli GAAP, no compensation expenses are recorded in respect of employee
  stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 | Under U.S. GAAP as permitted by
Statement of Financial Accounting Standards (FAS) No. 123 of the Financial
Accounting Standards Board of the United States (FASB), Accounting for
Stock-Based Compensation, the Company accounts for its employee stock option
plans using the provisions prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25). According to APB
25, compensation expense is measured under the intrinsic value method, whereby
compensation expense is equal to the excess, if any, of the quoted market price
of the stock over the exercise price at the grant date of the award or if
applicable at a subsequent measurement date. Compensation cost is recorded over
the vesting period. The Companys plans are considered to be variable plans and
accordingly compensation expense is measured as the intrinsic value of the
options at the end of each reporting period. The data for each employee stock
option plan is as follows:
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

- F99 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                                                                                                 |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|            |                                                                                                                                                
|            | 2.                                                                                                                                              | The 2003
  plan:
|            |                                                                                                                                                 |                 
|            |                                                                                                                                                 | a.               | The
  difference between the fair value of the shares as of December 31, 2004
  (NIS 33.2; $ 7.7) and the exercise price of such options (adjusted NIS
  26.816; $ 6.12 for the first allotted portion, adjusted NIS 30.43; $ 7.25 for
  the second allotted portion and NIS 29.9; $ 6.9 for the third allotted
  portions*) is recognized as compensation expense over the vesting period
  (December 29, 2003 to January 30, 2006). Expenses are recorded against
  additional paid-in capital.
|            |                                                                                                                                                 |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                 |                  | The fair
  value of each option at the date of grant, computed by the Black-Scholes
  formula, was adjusted NIS 13.096-14.474. The assumptions used in this
  calculation were: dividend yield of 0%, risk-free U.S. dollar interest rate
  of 4%, expected average life of 3.08-5.08 years and volatility at date of
  grant of 33.89%.                                                                                                                                                         
|            |                                                                                                                                                 |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                 | b.               | As for the
  options which were granted on November 29, 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                 |                  | As of
  December 31, 2004, the fair value of the shares (NIS 33.2; $ 7.7) is
  below the exercise price of such options (NIS 38) and, therefore, no
  compensation expenses have yet been recorded.                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                 |                  | The fair
  value of each option at the date of grant, computed by the Black-Scholes
  formula, was NIS 10.77. The assumptions used in this calculation were:
  dividend yield of 0%, risk-free U.S. dollar interest rate of 3.5%, expected
  average life of 3 years and volatility at date of grant of 43.12%.                                                                                                                                                                                  
|            |                                                                                                                                                 |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                 | *)               | The exercise
  prices for the third allotted portions were calculated based on 90% of the
  share price as of December 31, 2004. See also Note 16b(2).                                                                                                                                                                                                                                                                                                                                           

- F100 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                
|                                

|            |                                                                                                                                                 |                                                                                   | 
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | 
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|            |                                                                                                                                                
|            |                                                                                                                                                 | A summary of
  the Companys share option activity under the plans is as follows:

| |                                            |  |                           |          |                                             |  |                     |  |                                                  |          |                     |  |                                                  |  |  |           |   |  |       | 
| | ------------------------------------------ |  | ------------------------- | -------- | ------------------------------------------- |  | ------------------- |  | ------------------------------------------------ | -------- | ------------------- |  | ------------------------------------------------ |  |  | --------- | - |  | ----- | 
| |                                            |  | Year ended
  December 31, |         
| |                                            |  |                           |         
| |                                            |  | 2002                      |          | 2003                                        |  | 2004                | 
| |                                            |  |                           |          |                                             |  |                     | 
| |                                            |  | Amount of
  options       |          | Weighted
  average
  exercise
  price (NIS) |  | Amount of
  options |  | Weighted
  average
  exercise
  price
  (NIS (1) |          | Amount of
  options |  | Weighted
  average
  exercise
  price
  (NIS (1) | 
| |                                            |  |                           |          |                                             |  |                     |  |                                                  |          |                     |  |                                                  |  |  |           |   |  |       | 
| |                                            |  |                           |          |                                             |  |                     |  |                                                  |          |                     |  |                                                  |  |  |           |   |  |       | 
| | Outstanding  beginning of the year        |  |                           | 812,000  |                                             |  | 47.46               |  |                                                  | 711,000  |                     |  | 48.87                                            |  |  | 841,468   |   |  | 31.28 | 
| | Granted                                    |  |                           |         |                                             |  |                    |  |                                                  | 770,000  |                     |  | 30.09                                            |  |  | 302,205   |   |  | 38.00 | 
| | Exercised                                  |  |                           |         |                                             |  |                    |  |                                                  |         |                     |  |                                                 |  |  | (73,718   | ) |  | 39.54 | 
| | Canceled or expired                        |  |                           |         |                                             |  |                    |  |                                                  | (608,300 | )                   |  | 49.26                                            |  |  | (34,233   | ) |  | 52.00 | 
| | Forfeited                                  |  |                           | (101,000 | )                                           |  | 37.57               |  |                                                  | (31,232  | )                   |  | 52.00                                            |  |  | (11,000   | ) |  | 30.17 | 
| |                                            |  |                           |          |                                             |  |                     |  |                                                  |          |                     |  |                                                  |  |  |           |   |  |       | 
| |                                            |  |                           |          |                                             |  |                     |  |                                                  |          |                     |  |                                                  |  |  |           |   |  |       | 
| | Outstanding  end of the year              |  |                           | 711,000  |                                             |  | 48.87               |  |                                                  | 841,468  |                     |  | 31.28                                            |  |  | 1,024,722 |   |  | 32.30 | 
| |                                            |  |                           |          |                                             |  |                     |  |                                                  |          |                     |  |                                                  |  |  |           |   |  |       | 
| |                                            |  |                           |          |                                             |  |                     |  |                                                  |          |                     |  |                                                  |  |  |           |   |  |       | 
| | Options exercisable at the end of the year |  |                           | 206,333  |                                             |  | 41.20               |  |                                                  | 71,468   |                     |  | 44.11                                            |  |  | 228,578   |   |  | 27.23 | 
| |                                            |  |                           |          |                                             |  |                     |  |                                                  |          |                     |  |                                                  |  |  |           |   |  |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | 1) | Average exercise price of
  the third allotted portion of the 2003 plan was calculated based on the
  assumption that the exercise price of the third allotted portion is 90% of
  the share price, as of December 31, 2004. As of December 31, 2003, the
  average exercise price for the second and third allotted portions of the 2003
  plan were calculated based on the assumption that the exercise price of the
  second and third allotted portions are 90% of the share price as of December
  31, 2003.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The options
  as of December 31, 2004 have been separated into ranges of exercise price, as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                            

| |                          |  |                                                     |           |                                                           |  |                                             |    |                                                |       |                                                                      |  |         |  |  |       | 
| | ------------------------ |  | --------------------------------------------------- | --------- | --------------------------------------------------------- |  | ------------------------------------------- | -- | ---------------------------------------------- | ----- | -------------------------------------------------------------------- |  | ------- |  |  | ----- | 
| | Exercise
  price
  (NIS) |  | Options
  outstanding as
  of
  December 31,
  2004 |           | Weighted
  average
  remaining contractual life
  (Years) |  | Weighted
  average
  exercise
  price (NIS) |    | Options
  exercisable at
  December 31,
  2004 |       | Weighted
  average
  exercise price of
  exercisable
  options (NIS) | 
| |                          |  |                                                     |           |                                                           |  |                                             |    |                                                |       |                                                                      | 
|
| | 26.8230.43              |  |                                                     | 722,517   |                                                           |  | 3.08                                        |    |                                                | 30.22 |                                                                      |  | 220,184 |  |  | 26.82 | 
| | 38.00                    |  |                                                     | 302,205   |                                                           |  | unlimited                                   | *) |                                                | 38.00 |                                                                      |  | 8,394   |  |  | 38.00 | 
| |                          |  |                                                     |           |                                                           |  |                                             |    |                                                |       |                                                                      |  |         |  |  |       | 
| |                          |  |                                                     |           |                                                           |  |                                             |    |                                                |       |                                                                      |  |         |  |  |       | 
| |                          |  |                                                     | 1,024,722 |                                                           |  | 3.03                                        |    |                                                | 32.51 |                                                                      |  | 228,578 |  |  | 27.23 | 
| |                          |  |                                                     |           |                                                           |  |                                             |    |                                                |       |                                                                      |  |         |  |  |       | 

| |  |    |                                                                                                                                                            | 
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | *) | As long as
  employment is not terminated. In case of employment termination, the options
  expire within the timeframe set forth in the option agreement.

- F101 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                                                                                                 |  |                                                                                                                 
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|            |                                                                                                                                                 |  |                                                                                                                 
|            |                                                                                                                                                 |  | The weighted
  average values of options granted during the years ended December 31, 2002,
  2003 and 2004 were:

| |                                           |  |                                              |   |                           |  |      |  |      |       |      |  |      |  |  |       |  |  |   | 
| | ----------------------------------------- |  | -------------------------------------------- | - | ------------------------- |  | ---- |  | ---- | ----- | ---- |  | ---- |  |  | ----- |  |  | - | 
| |                                           |  | For
  exercise price on the grant date that: |  
| |                                           |  |                                              |  
| |                                           |  | Exceeds
  market price                       |   | Less than
  market price  | 
| |                                           |  |                                              |   |                           | 
| |                                           |  | Year ended
  December 31,                    |   | Year ended
  December 31, | 
| |                                           |  |                                              |   |                           | 
| |                                           |  | 2002                                         |   | 2003                      |  | 2004 |  | 2002 |       | 2003 |  | 2004 | 
| |                                           |  |                                              |   |                           |  |      |  |      |       |      |  |      | 
| |                                           |  |                                              |   |                           |  |      |  |      |       |      |  |      |  |  |       |  |  |   | 
| | Weighted average exercise prices          |  |                                              |  |                           |  |     |  |      | 38.00 |      |  |     |  |  | 30.09 |  |  |  | 
| |                                           |  |                                              |   |                           |  |      |  |      |       |      |  |      |  |  |       |  |  |   | 
| |                                           |  |                                              |   |                           |  |      |  |      |       |      |  |      |  |  |       |  |  |   | 
| | Weighted average fair value on grant date |  |                                              |  |                           |  |     |  |      | 10.77 |      |  |     |  |  | 13.88 |  |  |  | 
| |                                           |  |                                              |   |                           |  |      |  |      |       |      |  |      |  |  |       |  |  |   | 

| |  |  |                                                                                                                                                                                                                                                                                                                                        
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Had
  compensation cost for the Companys plan been determined based on the fair
  value at the measurement date for the above awards consistent with the method
  of FAS 123, the Companys net income (loss) and earnings (loss) per ordinary
  share and per ADS would have been reduced to the pro forma amounts indicated
  below:

| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| | ----------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- |  | ------- | - |  | -------- | -
| |                                                                                                                         |  | Year ended
  December 31, |       
| |                                                                                                                         |  |                           |       
| |                                                                                                                         |  | 2002                      |        | 2003 |  | 2004    |  
| |                                                                                                                         |  |                           |        |      |  |         |  
| |                                                                                                                         |  | NIS in
  thousands        |       
| |                                                                                                                         |  |                           |       
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| | Net income (loss), as reported                                                                                          |  |                           | 27,451 |      |  | (38,093 | ) |  | (98,434  | )
| | Add: Stock-based employee compensation
  expense included in reported net income (loss)                                 |  |                           | 65     |      |  | 197     |   |  | 2,491    |  
| | Deduct: Total stock-based employee
  compensation expense determined under the fair value based method for all
  awards |  |                           | 2,896  |      |  | 982     |   |  | 7,254    |  
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| | Pro forma net income (loss)                                                                                             |  |                           | 24,620 |      |  | (38,878 | ) |  | (103,197 | )
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| | Earnings (loss) per Ordinary share:                                                                                     |  |                           |        |      |  |         |   |  |          |  
| | Basic and diluted  as reported                                                                                         |  |                           | 0.95   |      |  | (1.30   | ) |  | (3.26    | )
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| | Basic and diluted  pro forma                                                                                           |  |                           | 0.85   |      |  | (1.32   | ) |  | (3.43    | )
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| | Earnings (loss) per ADS:                                                                                                |  |                           |        |      |  |         |   |  |          |  
| | Basic and diluted  as reported                                                                                         |  |                           | 1.90   |      |  | (2.60   | ) |  | (6.52    | )
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  
| | Basic and diluted  pro forma                                                                                           |  |                           | 1.70   |      |  | (2.64   | ) |  | (6.86    | )
| |                                                                                                                         |  |                           |        |      |  |         |   |  |          |  

| |  |  |                                                                                                                                                                                                                                                                                     
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | For pro
  forma purposes, options issued in the 2003 plan in exchange for options from
  the 2001 plan were accounted for as a modification of options whereby the
  additional value resulting from the modification on the date of exchange is
  recorded as compensation expense.

- F102 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                     | 
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|            |                                                                                                                                                
|            | f.                                                                                                                                              | Debentures
  issued with detachable warrants:                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | Under U.S.
  GAAP, the proceeds derived from issuance of debentures and detachable
  warrants in a public offering, were allocated between the securities based on
  their relative fair value. The aforementioned allocation resulted in a
  discount on the debentures, which is amortized over the debentures
  contractual life under the effective interest method.                          
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | Under
  Israeli GAAP, all the proceeds were attributed to the debentures, as the
  warrants were issued in accordance with the prospectus for no consideration.                                                                                                                                                                                                                                    
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            | g.                                                                                                                                              | Accrued
  severance pay:                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | According to
  U.S. GAAP, accrued severance pay and related funded amounts are presented in
  the balance sheet separately as a liability and asset, respectively. Income
  from earnings on amounts funded is added to severance pay funds.                                                                                                                                                       
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | According to
  Israeli GAAP, accrued severance pay is included in the balance sheet net of
  any related funded amounts, including the income from earnings on amounts
  funded.                                                                                                                                                                                                                   
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | See Note 12
  for the presentation in the Companys balance sheet prepared under Israeli
  GAAP.                                                                                                                                                                                                                                                                                                   
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            | h.                                                                                                                                              | Company
  shares held by subsidiary (treasury stock):                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | Under
  Israeli GAAP, the losses incurred during 2003 from sale of treasury stock, in
  the amount of adjusted NIS 25,791 thousand, were charged to additional paid
  in capital.                                                                                                                                                                                                                  
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | Under U.S.
  GAAP, such losses should be charged to additional paid in capital to the
  extent that previous net gains from sales of treasury stock were included
  therein, otherwise it should be charged to retained earnings. Since there
  were no gains from previous sales of such stock the aforementioned losses were
  charged to accumulated deficit.                                   
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            | i.                                                                                                                                              | Comprehensive
  income:                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | Under U.S.
  GAAP, it is required to present a statement of comprehensive income.
  Comprehensive income consists of net income and other gains affecting
  shareholders equity that under generally accepted accounting principles are
  excluded from the net income. For the Company, such items consist of
  unrealized gains on available for sale securities (see also paragraph c.
  above).
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                 | Under
  Israeli GAAP, no such statement is recognized.                                                                                                                                                                                                                                                                                                                                             

- F103 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|            |                                                                                                                                                
|            | j.                                                                                                                                              | Classification
  of certain expenses and income:                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 | 1.                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 | 2.                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 | 3.                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 | 4.                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 | 5.                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 | 6.                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            | k.                                                                                                                                              | Long term
  liabilities to banks in respect of borrowed debt securities                                                                                                                                                                                                                                                                 
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 | Under
  Israeli GAAP debt to banks that represents borrowing of debt securities (i.e.
  short sale of debt securities), for which the Company has an intent and it is
  probable that the Company will repay only at 
  maturity of these debt securities, is accreted to the redemption value
  based on the effective interest method.
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                 | Under U.S
  GAAP such liabilities are recorded at fair value with changes in fair value
  recorded in earnings.                                                                                                                                                                                                                         

- F104 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|            |                                                                                                                                                
|            | l.                                                                                                                                              | Impairment
  of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 | On
  January 1, 2003, the Company adopted Accounting Standard No. 15,
  Impairment of Assets. According to this Standard, if the carrying amount of
  an asset exceeds its recoverable amount, an impairment loss should be
  recognized for the amount by which the carrying amount of the asset exceeds
  its recoverable amount. Recoverable amount is defined as the higher of an
  assets selling price and its value in use. Value in use is the present value
  of estimated future cash flows expected to arise from the continuing use of
  an asset and from its disposal at the end of its useful life.
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 | According to
  U.S. GAAP (SFAS 144 - Accounting for the Impairment or Disposal of
  Long-Lived Assets) an impairment loss is recognized only if the carrying amount of an
  asset is not recoverable. The carrying amount is not recoverable if it
  exceeds the estimated undiscounted future cash flows expected to result from
  the use of the asset. If the carrying amount is not recoverable, an
  impairment loss should be recorded for the amount by which the carrying value
  of the asset exceeds its fair value.                                                                                     
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 | Under
  Israeli GAAP an impairment loss previously recognized should be reversed when
  there has been a change in the estimates used to determine the assets
  recoverable amount since the impairment was recognized.                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 | Under U.S.
  GAAP restoration of a previously recognized impairment loss is prohibited.
  The adjusted carrying amount of the asset impaired is its new cost basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                 | The
  abovementioned difference between Israeli GAAP and U.S. GAAP did not have an
  effect on the Companys financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

- F105 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL
  STATEMENTS 
|                                

|            |                                                                                                                                                
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)

| |    |                                                                                                                                  |                               
| | -- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
| | m. | The effects
  on the financial statements of the abovementioned differences between U.S.
  GAAP and Israeli GAAP are as follows:
| |    |                                                                                                                                  |                               
| |    | 1.                                                                                                                               | Consolidated
  balance sheets:

|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|---------------------------------------------------------- |  | ------------------ | -------- | ------------ |  | ------------ | - | ------------- | -------- | -------------- |  | ---------- | - | ------------ | -------- | - |  | -------- | - |  | -------- | -
|                                                           |  | December
  31,     |          |              |  |             
|                                                           |  |                    |          |              | 
|                                                           |  | 2003               |          | 2004         |  |              |  
|                                                           |  |                    |          |              |  | Convenience  |  
|                                                           |  | As reported        |          | Effect of    |  |              |   | As reported   |          |                |  |            |   | translation  |         
|                                                           |  | under Israeli      |          | U.S.         |  | Under U.S.   |   | under Israeli |          | Effect of U.S. |  | Under U.S. |   |              |         
|                                                           |  | GAAP               |          | GAAP         |  | GAAP         |   | GAAP          |          | GAAP           |  | GAAP       |   | December 31, |         
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   | 2004         |         
|                                                           |  | Adjusted           |          | Reported     |  |              |  
|                                                           |  |                    |          |              |  | U.S. dollars |  
|                                                           |  | NIS in
  thousands |          | in thousands | 
|                                                           |  |                    |          |              | 
|                                                           |  |                    |          |              | 
|Investment in affiliates (1)                               |  |                    | 66,807   |              |  | (65,373      | ) |               | 1,434    |                |  | 101,736    |   |              | (91,334  | ) |  | 10,402   |   |  | 2,415    |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Investment in available-for-sale marketable securities
(1) |  |                    |         |              |  | 331,928      |   |               | 331,928  |                |  |           |   |              | 357,897  |   |  | 357,897  |   |  | 83,077   |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Severance pay fund (2)                                     |  |                    |         |              |  | 16,126       |   |               | 16,126   |                |  |           |   |              | 17,911   |   |  | 17,911   |   |  | 4,158    |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Deferred taxes (3)                                         |  |                    | (15,630  | )            |  | (95,960      | ) |               | (111,590 | )              |  | (23,981    | ) |              | (90,637  | ) |  | (114,618 | ) |  | (26,605  | )
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Accrued severance pay (2)                                  |  |                    | (2,106   | )            |  | (16,126      | ) |               | (18,232  | )              |  | (2,483     | ) |              | (17,911  | ) |  | (20,394  | ) |  | (4,734   | )
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Long  term loans from banks (4)                           |  |                    |         |              |  |             |   |               |         |                |  | (101,457   | ) |              | (741     | ) |  | (102,198 | ) |  | (23,723  | )
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Debentures (including current maturities) (5)              |  |                    | (99,846  | )            |  | 1,258        |   |               | (98,588  | )              |  | (67,206    | ) |              | 583      |   |  | (66,623  | ) |  | (15,465  | )
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Shareholders equity:                                      |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Additional paid-in capital (6)                             |  |                    | (375,538 | )            |  | (98,703      | ) |               | (474,241 | )              |  | (375,538   | ) |              | (101,194 | ) |  | (476,732 | ) |  | (110,662 | )
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Accumulated deficit (7)                                    |  |                    | 243,672  |              |  | 147,188      |   |               | 390,860  |                |  | 326,656    |   |              | 162,638  |   |  | 489,294  |   |  | 113,578  |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  
|Accumulated other comprehensive income (8)                 |  |                    |         |              |  | (220,338     | ) |               | (220,338 | )              |  |           |   |              | (237,212 | ) |  | (237,212 | ) |  | (55,063  | )
|                                                           |  |                    |          |              |  |              |   |               |          |                |  |            |   |              |          |   |  |          |   |  |          |  

|    |                                                                      
|--- | ---------------------------------------------------------------------
|(1) | Effect of
  differences described in c. above.                       
|(2) | Effect of
  differences described in g. above.                       
|(3) | Effect of
  differences described in c and d. above.                 
|(4) | Effect of
  differences described in k. above.                       
|(5) | Effect of
  differences described in f. above.                       
|(6) | Effect of
  differences described in e, f and h. above.              
|(7) | Effect of
  differences described in c., d., e., f., h. and k. above.
|(8) | Effect of
  differences described in c. and i. above.                

- F106 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL
  STATEMENTS 
|                                

|             |                                                                                                                                                  
|------------ | -------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE  26:   | EFFECT ON
  THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED
  STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)

| |  |    |                                         
| |  | -- | ----------------------------------------
| |  | 2. | Consolidated
  statements of operations:

| |                                                                                                                |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | -------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | -------------- |  | ------------ | - | ------------ | ------- | - | ------------------------ | ------- | -
| |                                                                                                                |  |                          |         |                |  |              |   |              |         |   |                          |        
| |                                                                                                                |  |                          |         |                |  |              |   |              |         |   | Convenience  translation |        
| |                                                                                                                |  | Year ended  December 31, |         |                | 
| |                                                                                                                |  |                          |         | Year ended     | 
| |                                                                                                                |  | 2002                     |         | 2003           |  | 2004         |   | December 31, |        
| |                                                                                                                |  |                          |         |                |  |              |   | 2004         |        
| |                                                                                                                |  | Adjusted                 |         | Reported       |  |              |  
| |                                                                                                                |  |                          |         |                |  | U.S. dollars |  
| |                                                                                                                |  | NIS in
  thousands       |         | in
  thousands | 
| |                                                                                                                |  |                          |         |                | 
| | Net income (loss), as reported in
  consolidated statements of operations under Israeli GAAP                   |  |                          | 33,824  |                |  | (5,450       | ) |              | (82,984 | ) |                          | (19,263 | )
| | Impact of applying U.S. GAAP:                                                                                  |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Compensation expense in respect of employee
  stock options (see e. above)                                     |  |                          | (65     | )              |  | (197         | ) |              | (2,491  | ) |                          | (578    | )
| | Gain from sale of shares of an affiliate,
  net of taxes on income (see c. above)                              |  |                          | 9,155   |                |  |             |   |              |        |   |                          |        |  
| | Amortization of discount relating to
  debentures (see f. above)                                               |  |                          | (1,282  | )              |  | (1,103       | ) |              | (675    | ) |                          | (157    | )
| | Effect of recording long term liability in
  respect of borrowed debt securities at fair value (see k. above)  |  |                          |        |                |  |             |   |              | (741    | ) |                          | (172    | )
| | Gain from sale of investment in available
  for sale marketable securities, net of income taxes (see c. above) |  |                          |        |                |  | 10,927       |   |              |        |   |                          |        |  
| | Cancellation of equity in earnings of
  affiliate, net of taxes on income (see c. above)                       |  |                          | (14,181 | )              |  | (42,270      | ) |              | (17,610 | ) |                          | (4,088  | )
| | Effect of change in tax rate (on deferred
  taxes) (see d. above)                                              |  |                          |        |                |  |             |   |              | 6,067   |   |                          | 1,409   |  
| |                                                                                                                |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| |                                                                                                                |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Net income (loss) under U.S. GAAP                                                                              |  |                          | 27,451  |                |  | (38,093      | ) |              | (98,434 | ) |                          | (22,849 | )
| |                                                                                                                |  |                          |         |                |  |              |   |              |         |   |                          |         |  

| |  |    |                                     
| |  | -- | ------------------------------------
| |  | 3. | Total
  comprehensive income (loss):

| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | ---------------------------------------------------------------------- |  | ------------------------ | ------- | -------------- |  | ------------ | - | ------------ | ------- | - | ------------------------ | ------- | -
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |        
| |                                                                        |  |                          |         |                |  |              |   |              |         |   | Convenience  translation |        
| |                                                                        |  | Year ended  December 31, |         |                | 
| |                                                                        |  |                          |         | Year ended     | 
| |                                                                        |  | 2002                     |         | 2003           |  | 2004         |   | December 31, |        
| |                                                                        |  |                          |         |                |  |              |   | 2004         |        
| |                                                                        |  | Adjusted                 |         | Reported       |  |              |  
| |                                                                        |  |                          |         |                |  | U.S. dollars |  
| |                                                                        |  | NIS in
  thousands       |         | in
  thousands | 
| |                                                                        |  |                          |         |                | 
| | Other comprehensive income (loss):                                     |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Unrealized gains on available for sale
  securities                    |  |                          | 222,612 |                |  | 223,756      |   |              | 25,969  |   |                          | 6,028   |  
| | Tax effect on unrealized gain                                          |  |                          | (72,236 | )              |  | (80,552      | ) |              | (9,095  | ) |                          | (2,111  | )
| | Reclassification adjustment for gain
  realized included in net income |  |                          |        |                |  | (114,440     | ) |              |        |   |                          |        |  
| | Tax effect of reclassification
adjustments                             |  |                          |        |                |  | 41,198       |   |              |        |   |                          |        |  
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Total other comprehensive income                                       |  |                          | 150,376 |                |  | 69,962       |   |              | 16,874  |   |                          | 3,917   |  
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Net income (loss)                                                      |  |                          | 27,451  |                |  | (38,093      | ) |              | (98,434 | ) |                          | (22,849 | )
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Total comprehensive income (loss)                                      |  |                          | 177,827 |                |  | 31,869       |   |              | (81,560 | ) |                          | (18,932 | )
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Accumulated other comprehensive income:                                |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Balance at beginning of the year                                       |  |                          |        |                |  | 150,376      |   |              | 220,338 |   |                          | 51,146  |  
| | Other comprehensive income, net of tax for
  the year                  |  |                          | 150,376 |                |  | 69,962       |   |              | 16,874  |   |                          | 3,917   |  
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  
| | Balance at end of year                                                 |  |                          | 150,376 |                |  | 220,338      |   |              | 237,212 |   |                          | 55,063  |  
| |                                                                        |  |                          |         |                |  |              |   |              |         |   |                          |         |  

- F107 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL
  STATEMENTS 
|                                

|            |                                                                                                                                                
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | n. | Earnings
  (loss) per Ordinary share and per ADS (EPS):                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Israeli GAAP
  relating to computation of EPS are described in Note 2q.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The EPS
  computation according to U.S. GAAP presented below is in accordance with FAS
  128, Earnings per Share.                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | According to
  Israeli GAAP, the dilutive effect of convertible securities is included in
  the computation of basic earnings (loss) per share if their exercise or
  conversion is considered to be probable, even if their effect is
  antidilutive. According to U.S. GAAP, basic earnings (loss) per share exclude
  all convertible securities. In addition, the calculation of the dilutive
  effect of stock options under U.S. GAAP differs from such calculation under
  Israeli GAAP.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The above
  differences did not have an effect on the computation of earnings (loss) per
  share for the periods presented.                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The
  calculation of EPS under U.S. GAAP is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                      |  |                                                                     |        |          |  |         |   |  |         |  
| | ---------------------------------------------------- |  | ------------------------------------------------------------------- | ------ | -------- |  | ------- | - |  | ------- | -
| |                                                      |  | Year ended
  December 31,                                           |       
| |                                                      |  |                                                                     |       
| |                                                      |  | 2002                                                                |        | 2003     |  | 2004    |  
| |                                                      |  |                                                                     |        |          |  |         |  
| |                                                      |  | Adjusted                                                            |        | Reported | 
| |                                                      |  |                                                                     |        |          | 
| |                                                      |  | NIS in
  thousands
  (except per Ordinary share
  and per ADS data) |       
| |                                                      |  |                                                                     |       
|
| | Net
  income (loss) under U.S. GAAP (see k(2) above) |  |                                                                     | 27,451 |          |  | (38,093 | ) |  | (98,434 | )
| |                                                      |  |                                                                     |        |          |  |         |  
| |                                                      |  |                                                                     |        |          |  |         |   |  |         |  
| | EPS
  under U.S. GAAP (*):                           |  |                                                                     |        |          |  |         |   |  |         |  
| |                                                      |  |                                                                     |        |          |  |         |   |  |         |  
| | Basic and diluted earnings (loss) per Ordinary share |  |                                                                     | 0.95   |          |  | (1.30   | ) |  | (3.26   | )
| |                                                      |  |                                                                     |        |          |  |         |  
| |                                                      |  |                                                                     |        |          |  |         |   |  |         |  
| | Basic and diluted earnings (loss) per ADS            |  |                                                                     | 1.90   |          |  | (2.60   | ) |  | (6.52   | )
| |                                                      |  |                                                                     |        |          |  |         |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                      
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | (*)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Number of Ordinary shares
  and ADS used for computation of earnings (loss) per share under U.S. GAAP
  does not differ from such number used for the computation under Israeli GAAP.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                      
| | o. | Impact of
  recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                      
| |    | On December
  16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
  (revised 2004), Share-Based Payment (SFAS 123(R)), which is a revision of
  SFAS 123. Generally, the approach in SFAS 123(R) is similar to the approach
  described in SFAS 123. However, SFAS 123 permitted, but did not require
  share-based payments to employees to be recognized based on their fair values
  while SFAS 123(R) requires all share-based payments to employees to be
  recognized based on their fair values. SFAS 123(R) also revises, clarifies
  and expands guidance in several areas, including measuring fair value,
  classifying an award as equity or as a liability and attributing compensation
  cost to reporting periods. The Company expects to adopt SFAS 123(R) on
  January 1, 2006.

- F108 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|NOTES TO FINANCIAL
  STATEMENTS 
|                                

|            |                                                                                                                                                
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 26:   | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS 123(R)
  permits companies to adopt its requirements using one of the following two
  methods:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | The Company
  is still evaluating the method of adoption of FAS 123(R).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | The adoption
  of the SFAS 123(R) fair value method will have an impact on the Companys
  results of operations, although it will have no impact on the Companys
  overall financial position. The impact of the adoption of SFAS 123(R) cannot
  be predicted at this time, as it depends on levels of share-based payments
  for future grant. However, had the Company adopted SFAS 123(R) in prior
  periods, the impact of that Standard would have approximated the impact of
  SFAS 123, as described in the disclosure of the pro forma information above.                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | In March
  2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share-Based
  Payment (SAB 107). SAB 107 provides the SEC staffs position regarding the
  application of FAS 123(R) and contains interpretive guidance related to the
  interaction between FAS 123(R) and certain SEC rules and regulations, and
  also provides the SEC staffs views regarding the valuation of share-based
  payment arrangements for public companies. SAB 107 highlights the importance
  of disclosures made relating to the accounting for share-based payment
  transactions. The Company is currently reviewing the effect of SAB 107,
  however it does not believe that SAB 107 will have a material effect on its
  financial position, results of operations or cash flows.

- F109 -

---

---



|                                
|--------------------------------
|MATAV - CABLE SYSTEMS MEDIA LTD.
|                                
|APPENDIX TO FINANCIAL STATEMENTS
|                                

SCHEDULE OF PRINCIPAL INVESTEE COMPANIES

|                                                 |  |                                                       |      |     |  |                               
|------------------------------------------------ |  | ----------------------------------------------------- | ---- | --- |  | ------------------------------
|Name of company                                  |  | Ownership and 
  control as of 
  December 31,
  2004 |      |    
|                                                 |  |                                                       |      |    
|                                                 |  |                                                       |      |     |  |                               
|Cable System Media Haifa-Hadera Ltd.             |  |                                                       | 100  | %   |  | Subsidiary                    
|                                                 |  |                                                       |      |     |  |                               
|Matav Investments Ltd.                           |  |                                                       | 100  | %   |  | Subsidiary                    
|                                                 |  |                                                       |      |     |  |                               
|Matav Infrastructures 2001  Limited Partnership |  |                                                       | 100  | %   |  | Subsidiary                    
|                                                 |  |                                                       |      |     |  |                               
|Matav Properties Ltd.                            |  |                                                       | 100  | %   |  | Subsidiary                    
|                                                 |  |                                                       |      |     |  |                               
|Partner Communication Company Ltd.               |  |                                                       | 5.25 | %*) |  | Affiliate                     
|                                                 |  |                                                       |      |     |  |                               
|Hot Vision Ltd.                                  |  |                                                       | 26.6 | %   |  | Proportionately
  consolidated
|                                                 |  |                                                       |      |     |  |                               
|Nonstop Ventures Ltd.                            |  |                                                       | 50   | %   |  | Affiliate                     
|                                                 |  |                                                       |      |     |  |                               
|Hot Telecom  Limited Partnership                |  |                                                       | 26.5 | %   |  | Affiliate                     

*)  See also Note 24a.

- F110 -

---

---

|                             | 
|---------------------------- | 
|                             | 
|Certified Public Accountants | 
|                             | 

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# HOT VISION LTD.

We have audited the balance sheets of
Hot Vision Ltd. (the Company) as of December 31, 2004 and
2003 (including the Appendix), and the related statements of income, changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2004 (not presented separately herein). These financial statements are
the responsibility of the Board of Directors and management of the Company. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in Israel, including those prescribed by the
Israeli Auditors Regulations (Auditors Mode of Performance), 1973 and in
accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by the Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial
statements (including the Appendix) referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004 and 2003, and
the results of its operations, changes in its shareholders equity and its cash flows
for each of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in Israel, which differ in certain respects from
accounting principles generally accepted in the United States to the extent summarized in
the Appendix to the financial statements attached hereto.

As described in Note 2, the
financial statements as of the dates and for the reported periods subsequent to
December 31, 2003, are presented in reported amounts, in conformity with Accounting
Standards of the Israel Accounting Standards Board. The financial statements as of the
dates and for the reported periods until the aforementioned date are presented in values
that were adjusted until that date according to the changes in the general purchasing
power of the Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.

| |  | /s/ Fahn Kanne & Co.
Fahn Kanne & Co.
Certified Public Accountants (Isr.)
| |  | -------------------------------------------------------------------------

Tel-Aviv, March 2, 2005



---

---

MATAV  CABLE SYSTEMS MEDIA LTD.

ANNUAL REPORT ON FORM 20-F

FOR THE YEAR ENDED DECEMBER
31, 2004

EXHIBITS

130

---

---



EXHIBITS

The
exhibits filed with or incorporated by reference into this annual report are
listed on the index of exhibits below.

|                  |  |                                                                                                                                                                                                                                                   
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  Number  |  | Description                                                                                                                                                                                                                                       
|                  |  |                                                                                                                                                                                                                                                   
|                  |  |                                                                                                                                                                                                                                                   
|***1.1            |  | Matavs
  Articles of Association, as adopted on December 31, 2000 and amended on
  October 31, 2002                                                                                                                                              
|                  |  |                                                                                                                                                                                                                                                   
|*1.2              |  | English
  translation of Matavs Memorandum of Association                                                                                                                                                                                        
|                  |  |                                                                                                                                                                                                                                                   
|*2(a)             |  | Specimen
  Certificate for American Depository Shares                                                                                                                                                                                             
|                  |  |                                                                                                                                                                                                                                                   
|**4(a)(i)-A       |  | English
  summary of Merger Arrangement dated December 31, 2001                                                                                                                                                                                   
|                  |  |                                                                                                                                                                                                                                                   
|***4(a)(i)-B      |  | English
  summary of final version of Merger Agreement dated February 2003                                                                                                                                                                        
|                  |  |                                                                                                                                                                                                                                                   
|****4(a)(i)-C     |  | English
  summary of Limited Partnership Agreement for HOT Telecom L.P., dated October
  2003, as amended in November 2003.                                                                                                                       
|                  |  |                                                                                                                                                                                                                                                   
|****4(a)(i)-D     |  | English
  summary of Agreement relating to the establishment of HOT Telecom Ltd., dated
  October 2003.                                                                                                                                           
|                  |  |                                                                                                                                                                                                                                                   
|4
  (b)(ii)(b)-A |  | English
  translation of Cable Broadcast License dated April 30, 2002, as amended,
  granted to Matav Cable Systems Media Ltd., and Cable Broadcast License dated
  April 30 2002, as amended, granted to Cable Systems Media Haifa  Hadera Ltd.
|                  |  |                                                                                                                                                                                                                                                   
|**4(b)(ii)(b)-C   |  | English
  summary of Broadcasting HeadEnd License dated May 2, 2002 granted to Cable
  Systems Media Haifa  Hadera Ltd.                                                                                                                          
|                  |  |                                                                                                                                                                                                                                                   
|****4(b)(ii)(b)-D |  | English
  translation of Telecommunications Infrastructure Licensed dated November 25,
  2003 granted to HOT Telecom L.P.                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|***4(c)(1)        |  | English
  translation of 2001 Senior Employee Option Plan                                                                                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|****4(c)(2)       |  | English
  summary of principal terms of 2003 Option Plan                                                                                                                                                                                          
|                  |  |                                                                                                                                                                                                                                                   
|6                 |  | See Note
  2(q) to our financial statements for information explaining how net loss per
  share information was calculated                                                                                                                        
|                  |  |                                                                                                                                                                                                                                                   
|8                 |  | List of
  Subsidiaries                                                                                                                                                                                                                            
|                  |  |                                                                                                                                                                                                                                                   
|10.1              |  | Consent of
  Independent Auditors                                                                                                                                                                                                                 
|                  |  |                                                                                                                                                                                                                                                   
|12.1              |  | Certification
  by CEO pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|12.2              |  | Certification
  by CFO pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|13.1              |  | Certification
  of CEO pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
  Sarbanes-Oxley Act of 2002                                                                                                                               
|                  |  |                                                                                                                                                                                                                                                   
|13.2              |  | Certification
  of CFO pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
  Sarbanes-Oxley Act of 2002                                                                                                                               

|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
| 
|* | Incorporated
  herein by reference to our registration statement on Form F-1 (No. 333-4822).

131

---

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**   | Incorporated
  herein by reference to Matavs Annual Report on Form 20-F for the fiscal year
  ending December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|***  | Incorporated
  herein by reference to Matavs Annual Report on Form 20-F for the fiscal year
  ending December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|**** | Incorporated
  herein by reference to Matavs Annual Report on Form 20-F for the fiscal year
  ending December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The terms of
  the Cable Broadcast License granted to Cable Systems Media Haifa  Hadera
  Ltd. are substantially identical to the terms of the Cable Broadcast License
  granted to Cable Systems Media Ltd.
  In accordance with Rule 12b-31, only the latter is exhibited hereto
  (Exhibit 4 (b)(ii)(b)-A).  The only
  substantial differences between the two licenses are in relation to fees and
  license areas.  An English translation
  of the annexes of the licenses relating to these issues is exhibited hereto
  separately for each license.

132

---

---